Ohio Legacy Trust Can Be A Good Prenuptial Tool

Ohio Revised Code §5816.03 (C) provides that certain creditors can defeat the spendthrift provisions of an Ohio Legacy Trust.  This includes claims for child support and alimony.  But the applicable provisions of the Ohio statute only apply to a “spouse or former spouse.”

This means that if an Ohio Legacy Trust is formed before you get married, the assets in that trust should not be subject to the claims of a future spouse.  So the legacy trust can be used for prenuptial planning (without the consent of the future spouse to any of its provisions). 

Each situation must be examined separately.  But if you are planning to get married in the near future and you are considering a prenuptial agreement, you should also consider the possible advantages of an Ohio Legacy Trust.

Alimony and Child Support Excluded from Protection of Ohio Legacy Trust Act

The Ohio Legacy Trust Act, which will become effective in March of 2013, cannot be used to avoid child support or alimony payments.  The new statute (part of Ohio House Bill 479) provides creditor protection under certain circumstances for assets contributed to a legacy trust (also commonly known as a domestic asset protection trust).  But new Ohio Revised Code Section 5816.03 excludes child support and alimony payments from the protection of the statute.  This is consistent with DAPT statutes in many other states.

Certain payments and obligations to a former spouse can be limited by an antenuptial agreement that is entered into prior to the marriage.  The new Ohio Legacy Trust Act should not be considered a substitute for a pre-nuptial agreement. 

Mortensen Case Highlights Fraudulent Conveyance Issues

A recent decision by the United States Bankruptcy Court for the District of Alaska (In Re: Thomas Mortensen, Case No. A09-00565-DMD) is clearly worth reading -- for a discussion of fraudulent conveyances, Alaska asset protection trusts, applicable statutes of limitations, and a variety of other asset protection topics.  I will likely comment on this recent case in several different posts, but here is a quick initial summary.

U.S. Bankruptcy Judge Donald MacDonald IV held that a transfer by Thomas Mortensen of real estate into an Alaska asset protection trust was a fraudulent conveyance.  The Judge found that there was persuasive evidence of an intent to hinder, delay and defraud present and future creditors. The Bankruptcy Judge voided the transfer of real estate to the trust as a fraudulent conveyance.

There are numerous lessons to be taken from this court decision and here are just two of them --

  • Transferring assets when you are insolvent is likely to constitute a fraudulent conveyance.  While Mortensen was found to be solvent at the time of the real estate transfer, his own testimony from a child support action was used against him in the bankruptcy proceeding. In a child support proceeding against his ex-wife, Mortensen took the position that his divorce had thrown him into heavy debt.  This is simply a reminder that whatever you say in one court case can obviously be used against you in another!
  • Think carefully about choosing the trustee of a trust.  Mortensen named his brother and a personal friend as trustees of his Alaska asset protection trust, and named his mother as a "trust protector."  All of these individuals were named as defendants by the Chapter 7 Bankruptcy Trustee in his adversary action against Mortensen.  While it is perfectly appropriate in many instances to name family members as trustees or trust protectors, you need to consider that these individuals can sometimes be dragged into litigation.

Many court decisions are difficult to read, but the Mortensen case is fairly easy to follow.  It is useful reading for anyone interested in some of the more technical aspects of fraudulent conveyances and other asset protection issues.


Prenuptial Agreements

It is probably just a sign of the times, but my law firm seems to assist more and more people each year with prenuptial agreements.  These agreements are important from an asset protection standpoint.  Many of the assets accumulated during your marriage will be subject to claims of your spouse if you get divorced.  A prenuptial agreement can identify separate property and keep it separate.  It can insulate that property in the event of a future divorce.

Prior to any marriage in which either party already has significant net worth, consideration should be given to a prenuptial agreement.  This is particularly true in the case of a party who has already been divorced, who has inherited substantial family wealth, or otherwise has assets he or she wants to keep separate.

Whether or not to enter into a prenuptial agreement is a personal decision and must be based on the particular facts and circumstances of each case.  Each party to a marriage brings many things to the marriage (some good and some not so good!).  But if you want to keep certain assets protected in the event of a divorce, you need to consider a prenuptial agreement.