Two or More APTs May Be Advisable In Some Situations

In Ohio (as in other states that have enacted a Domestic Asset Protection Trust Statute), it may be advisable to have two or more trusts as part of an overall asset protection plan.

For example, a husband and wife may each want to have their own, separate Ohio Legacy Trust.  Not only can this help to keep certain assets separate, but the respective trusts can then co-own other assets -- like interests in an LLC.  In many states, a multi-member LLC provides better protection than a single member LLC. 

Keep in mind that this kind of planning -- like all asset protection planning -- requires careful attention to a wide variety of factors, including tax considerations.  Many variables often need to be considered before deciding on a particular plan. 

In any event, using more than one DAPT (just like using more than one LLC or other business entity) may be advisable in many situations.

Ohio Legacy Trust Not Likely To Affect Your Income Taxes

Clients frequently ask about potential income tax aspects of an Ohio Legacy Trust. 

An Ohio Legacy Trust will likely have no effect at all on your income tax situation.  The trust will be structured so that it is a grantor trust pursuant to §677 of the Internal Revenue Code.  It meets the requirements of this Code section because trust income may be distributed to the Grantor without the approval of any adverse party.  In less technical terms -- any income from the trust will simply be reported on your personal income tax return. 

An Ohio Legacy Trust can also hold S Corporation stock because it is a grantor trust.  There are certain limitations on what kind of entity can be an S Corporation shareholder.  A grantor trust is one of the entities that can own S Corporation stock.

There are many considerations that go into setting up an Ohio Legacy Trust (or a domestic asset protection trust in any other state that allows one).  But as long as the trust is properly drafted, you should not have to worry about its impact on your personal income tax situation.

Ohio is Currently One of the Best States for Asset Protection

Some states offer better asset protection alternatives than others.  There are numerous factors to consider in deciding how good (or bad) a state is from an asset protection standpoint.  These factors include:

·         Whether or not the state has a Domestic Asset Protection Trust Statute

·         Provisions of the state’s LLC statute

·         The state’s homestead exemption and various other exemptions

·         State court decisions, particularly those relating to the respective rights of debtors and creditors.

Since there are many different ways to measure how favorable or unfavorable a state is from an asset protection standpoint, commentators can disagree about which states are the best. 

                Ohio’s new Legacy Trust Statute, the provisions of its LLC statute, and various other state laws and policies offer excellent opportunities for protecting assets.  This currently puts Ohio near the top of the list when it comes to state asset protection rankings.

Second Annual Ohio Asset Protection and Legacy Trust Institute

Yesterday I attended the Second Annual Ohio Asset Protection and Legacy Trust Institute.  The Institute was a full day continuing legal education program of the Ohio State Bar Association.  It was sponsored by a trust company and several major banks, as well as a large accounting firm.  It was presented via live simulcast at seven locations throughout Ohio.  One of the speakers who provided introductory remarks was an Ohio state senator.

I mention all of this because it shows how “mainstream” asset protection is becoming.  That is, Ohio and many other states have various laws that specifically allow both businesses and individuals to protect their assets.  Yet there are many businesses and individuals who fail to take advantage of what the law allows them to do.

Recent changes to Ohio law (particularly the new Ohio Legacy Trust Statute and changes to the LLC statute) make Ohio an excellent state for asset protection.  So this is an excellent time for anyone concerned about protecting their individual or business assets to at least consider some of the alternatives that are currently available. 

Trust Protector Can Provide Added Flexibility For An Irrevocable Trust

A recent article in the New York Times by John F. Wasik provides an excellent discussion of trust protectors.  Many states now allow for trust protectors - - someone other than the trustee who essentially provides some checks and balances in a trust arrangement.

A trust protector is a bit like a watchdog.  He or she is not the trustee, but rather someone who keeps an eye on the trust (and the trustee) to be sure it is operating the way it was intended to.

A trust protector also might be able to make certain changes in an irrevocable trust arrangement in response to changes in the law.  Since asset protection statutes, tax laws, and trust laws are changing so rapidly these days, it is advisable to build as much flexibility as possible into an irrevocable trust.

A trust protector may be given the power to replace the trustee under certain circumstances, which obviously provides a very significant check on the power of the trustee. 

The role of a trust protector should be discussed with your asset protection attorney and/or your estate planning attorney whenever you set up an irrevocable trust.

Asset Protection Trust Should Have Provision Allowing Trustee to Change Situs

Earlier this year Ohio joined a number of other states that allow creation of a domestic asset protection trust.  In Ohio, it is called an Ohio Legacy Trust.

Ohio law (just like the law of every other state) can change at any time.  We currently anticipate no significant change in the new Ohio domestic asset protection trust statute in the near future.  And even if there was a change in Ohio law, it is possible that existing legacy trusts would be “grandfathered.”

But since there can be no assurance that Ohio law will always remain as favorable as it is right now, we include a provision in our Ohio legacy trust to cover a change in Ohio law or policy.  We provide that the trust can essentially be moved to another jurisdiction if necessary - - where hopefully there would be better protection at that time.  We aim to provide the trustee and/or the trust protector with maximum flexibility to protect trust assets.  

Ohio Legacy Trust Allows Settlors to Retain Many Powers

The Ohio Management Modernization Act, which became effective on March 27, 2013, now allows Ohioans to put assets in a trust (of which they are a beneficiary) and protect those assets from creditors.  This newly permitted trust is called an Ohio Legacy Trust. 

An Ohio Legacy Trust must be irrevocable and the settlor (the person setting up the trust) cannot be the trustee.  So the settlor has to surrender a certain degree of control over the assets placed in such a trust. 

The new Ohio statute, however, allows the settlor to retain various powers.  For example, the settlor can retain the power to veto distributions, remove and replace trustees, and essentially direct trust investments.  In setting up a legacy trust, you have to give up some control - - but certainly not complete control - - over the assets placed in the trust.

Ohio is now one of the most debtor-friendly jurisdictions in the country.  It offers various opportunities to protect your assets.  And you certainly do not have to surrender complete control of assets in order to protect them. 

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.

Affidavit of Solvency is a Reminder to Plan Before You Have Creditor Problems

Ohio Revised Code §5816.06 requires an affidavit of solvency each time you transfer assets to an Ohio Legacy Trust.  This is a fairly standard provision for transfers to Domestic Asset Protection Trusts in other states as well.  In Ohio, failure to timely file such an affidavit may be used as a basis for an action to set aside the transfer. 

The affidavit of solvency required by Ohio Revised Code §5816.06 must state that:

        ·         The transferor is not made insolvent by the transfer

        ·         The transferor is not contemplating bankruptcy

        ·         There are no pending court actions other than those listed in the affidavit

It is often impossible to sign such an affidavit once you have serious creditor problems.  So this statutory requirement is another reminder to do your asset protection planning before you have any significant creditor issues.

Trusts Require Flexibility

Asset protection planning (and estate planning) frequently involves the use of one or more trusts. Possibilities include an offshore trust, Domestic Asset Protection Trust, irrevocable life insurance trust and various other kinds of trusts. 

Most of these trusts are designed to last for many years. It is therefore important to give the trustee the flexibility to adjust to changing circumstances. Many things can change during the life of a trust. Among the many changes that a trustee may be faced with are:

·         Beneficiary’s creditor problems

·         Changes in family circumstances (including divorce)

·         Cost of living

·         Legal changes

A person setting up a trust is often inclined to impose very specific requirements on the trustee (for example, making specific distributions to beneficiaries each year). But one or more of the changes mentioned above could make a particular distribution problematic. Giving your trustee flexibility and discretion often makes the most sense. This is why I frequently remind my clients that who you choose as trustee of a trust can be just as important as the trust documentation.

In any event, it is important to keep in mind that no matter what kind of trust you establish, you are going to have to give your trustee a certain amount of flexibility to react to future changes.

Who Needs an Ohio Legacy Trust?

Here are some of the people who should at least consider setting up an Ohio Legacy Trust:

  • Business owners
  • CEOs and Directors
  • Physicians
  • Accountants
  • Attorneys
  • People considering marriage
  • Others who are willing to part with total control of a portion of their assets

The following chart (prepared by my partner, Paul Fidler) provides some general guidelines about whether you might benefit from an Ohio legacy trust. The chart would also be applicable to domestic asset protection trusts in other states as well. 

 

 

Information About Ohio Legacy Trusts

The link below provides some general information about Ohio legacy trusts. The material is from a presentation given by my firm on March 26, 2013 (the day before the Ohio Legacy Trust Statute took effect). 

www.ssrl.com/attachments/download/106/Ohio%20Asset%20Management%20Modernization%20Act.pdf

This new kind of trust is not for everyone. But for some Ohio residents, it could be a valuable way to protect a portion of your assets.