On March 27, 2013, Ohio became one of the few states where the law allows you to create a trust for your own benefit which is protected from most creditors when the Ohio Legacy Trust Act took effect.
Under this new law, you may create an irrevocable “Legacy Trust” to hold your assets for your benefit or the benefit of members of your family. You can retain the right to receive income or discretionary distributions, make withdrawals of up to 5% of the trust assets each year, the right to use real property held by the trust such as a house, the power to change trustees, a veto power over distributions, and the right to control the investment of trust assets.
There are several technical requirements you have to meet when creating a legacy trust. The trustee must be an individual Ohio resident or a trust company doing business in Ohio, and you cannot be the trustee or a co-trustee—though you can be an advisor to the trustee. When you create the trust, you must sign an affidavit verifying under oath that:
- · the assets being transferred to the trust are not the proceeds of unlawful activity;
- · you have the right to transfer these assets;
- · by placing them in the trust, you will not become unable to pay your debts as they become due;
- · you have no intention of defrauding your creditors; and,
- · you do not intend to file bankruptcy.
If there are any lawsuits or administrative actions pending against you at the time you create the trust, you have to disclose these in the affidavit; if there are none, the affidavit has to so state.
If you’ve followed all the rules in creating the Legacy Trust, the assets in the trust will not be subject to most creditor claims. (The only exceptions are claims for child support, or of a former spouse who was married to you when the trust was created.) Your creditors have a period of time (usually 18 months from the creation of the trust) to file a lawsuit to undo the transfer of assets the Legacy Trust, and in order to do so they have to be able to prove that you created the Legacy Trust and transferred the assets in question specifically to defraud that creditor. As a practical matter, that will be a difficult case to make—and any creditor whose claim arises more than 18 months after the trust is created will be unable to attack it at all.
The Legacy Trust will be of particular benefit to clients whose personal assets may otherwise be subject to future business risks, such as doctors practicing in a high-risk specialty or entrepreneurs starting a new business. They can also be used along with a prenuptial agreement to protect family assets from the risks of a second marriage.