The Use of Domestic Asset Protection Trusts to Protect Assets from Creditors
Many people who establish trusts want to do so in order to protect assets for their loved ones. But there are many types of trusts, and not all of them protect against the same types of risks. All trusts keep assets out of probate. Depending on how they are structured, trusts can be used to reduce taxes, provide for loved ones with disabilities or special needs, benefit a favorite charity, and more. But if you are looking to protect assets from your beneficiaries’ creditors, you may need a domestic asset protection trust (DAPT).
Made possible by the Ohio Asset Management Modernization Act (OMMA) of 2012, the Ohio Legacy Trust Act (OLTA) became law in 2013. permitting the creation of domestic asset protection trusts (also called “Ohio Legacy Trusts” in Ohio. People who live in states that do not allow DAPTs can still create one in a state that does, if the trust complies with that state’s laws. Of the states that do allow DAPTs, Ohio consistently ranks among the most favorable. It’s worth learning about whether an asset protection trust is right for you.
What is Asset Protection?
What exactly do we mean by “asset protection?” In the context of a trust, we mean keeping trust assets out of the reach of creditors of the trustmaker or settlor of the trust. A creditor could be a credit card company, medical provider, or other person or company to which the person owes money. If the debt isn’t paid, the creditor may sue the debtor and get a judgment in court, and attempt to satisfy it by making a claim against the debtor’s assets. If the debtor is a beneficiary of most types of trusts, the creditor can lay claim to any trust assets to which the beneficiary is entitled.
Companies collecting unpaid bills are not the only potential creditors to worry about. A domestic asset protection trust can keep assets safe in the event you have other lawsuit judgments against you. For example, attorneys and doctors often have considerable assets and a high risk of being sued for malpractice. DAPTs may be an ideal way to protect the assets for which they have worked so hard.
If you and your loved ones pay bills on time and don’t have a high risk of being sued due to your profession, you may not see the benefit of an asset protection trust. Even so, assets could be at risk in a divorce or if you are sued for causing an accident. A properly drafted DAPT could keep those assets out of creditors’ reach for all trust beneficiaries — which can include the settlor (creator) of the trust.
How Do Domestic Asset Protection Trusts Work?
Domestic asset protection trusts are self-settled irrevocable spendthrift trusts. What exactly does that mean?
- “Self-settled” means that the trust is funded with the trustmaker's own assets, such as real estate, stocks, bank accounts, artwork, and vehicles.
- “Irrevocable” means that once the settlor creates the trust, he or she can’t revoke it or take back the assets in it without the trustee's consent.
- “Spendthrift” means the trust is structured so that beneficiaries (including the trustmaker) has limited access to trust funds and cannot sell, assign, transfer, or give away their interest in the trust. Because a judgment creditor can only reach assets to which the debtor has a right, the beneficiary’s limited right to trust assets means a creditor can only get those assets to which the debtor-beneficiary has access.
You can use a DAPT to protect your intended beneficiaries and yourself from most types of creditors. Be warned, however: you CANNOT use a domestic asset protection trust to evade current or likely creditors. The trust only provides asset protection against creditors whose claims have not yet materialized.
In order to establish a DAPT, you must execute something called a “qualified affidavit.” The qualified affidavit is a sworn statement in which you, as settlor, must affirm that:
- You are the owner of the assets being transferred into the trust;
- Your transfer of the assets into the trust is not intended to defraud any creditor;
- You are not aware of any pending lawsuits against you, or the threat of any legal action;
- Transferring assets into the trust will not render you insolvent.
In addition to executing an affidavit when you create the trust, Ohio requires you to execute one each time you make a transfer into the trust (with limited exceptions). That may be inconvenient, but it decreases the likelihood that a creditor will be able to successfully attack the trust.
Creating an Ohio Domestic Asset Protection Trust
Domestic asset protection trusts are complicated, and errors in drafting or funding the trust could destroy the protections it was intended to offer. Bear in mind that Ohio has had these trusts for less than ten years. Furthermore, HB 464 is making a number of technical changes and corrections to the Ohio Legacy Trust Act, including provisions regarding decanting of trusts.
Done properly, these trusts can provide great peace of mind for you and your loved ones. If you are interested in the protections of a DAPT, it is essential that you work with an attorney who is experienced with Ohio Legacy Trusts and who is aware of the evolving law in this area.