By Public Act 330 of 2016, the Michigan Legislature has enacted a special statute protecting the Settlor of a Special Asset Protection Trust from creditor claims. The term “Settlor” means the person establishing the Trust and transferring assets to the Trust.
By this statute, effective March 8, 2016, Michigan has joined the ranks of several other states that have specific legislation to protect property transferred to an Irrevocable Asset Protection Trust. This changes long standing law in Michigan (and many other states) that a Settlor of a Trust who retains any interest in the Trust cannot shield Trust assets from the claims of creditors. These Trusts are sometimes called “Self Settled” Trusts, meaning that the Settlor remains an eligible beneficiary of the Trust created with his or her own assets.
This statute contains many limitations. The Settlor can retain some power of appointment rights, but cannot have any legally exercisable right to income or principal. Distributions to the Settlor have to be in the discretion of the Trustee.
Moreover the Trustee must be a resident of Michigan if an individual, or a corporation authorized to transact Trust business in Michigan. The Michigan Probate Court retains jurisdiction should disputes arise.
Clients who desire to protect assets are typically in businesses or activities that create potential liabilities such as doctors or architects. The statute purports to create protection so long as there is no active or potential creditor claim at the time the Trust is established. PA 331 of 2016 also creates a specific amendment to the Uniform Fraudulent Transfer Act, which allows creditors to pierce transfers of property deemed to be in fraud of creditors. The current law requires that there be an actual intent to defraud creditors in order to pierce a new qualified Trust.
Overriding state legislation in these matters are actions by Federal Bankruptcy Courts which tend to be very restrictive in their interpretations. These courts have been known to permit creditors access to Trusts or property transfers where the Court can presume an intent to defraud
creditors by protecting property. In one case, for example, a Bankruptcy Court determined that the mere creation of this type of Trust showed intent to defraud creditors. That being said there may be some clients in dangerous occupations that may decide to proceed with one of these
special Trusts which would, at a minimum, be a formidable obstacle to a judgement creditor. In all such cases, the Settlor has to retain sufficient assets to maintain their standard of living.