The Ohio Legacy Trust – a new method of protecting your assets

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.

The Gray Sheep

What's a "gray sheep?"

You all know what a "black sheep" is, in the metaphorical sense: the black sheep is the child or grandchild who has turned out wrong, done something stupid or illegal or immoral (or some combination thereof) that has brought shame and disgrace to the family.  When it comes time to do the estate planning, the black sheep is the one who doesn't get anything--or, at best, gets some token distribution on the condition that they don't contest the will or the trust.

A gray sheep is a beneficiary who isn't quite bad enough to be a black sheep. He may have done something stupid or illegal or immoral (or some combination thereof), but whatever it was it wasn't quite bad enough to justify cutting him out completely.  There's a second breed of gray sheep, the one who has a chemical dependency problem, massive debts, a spouse that can't be trusted, or a simple lack of good sense.  The client I'm drafting the documents for still wants to give something to the gray sheep, but not directly, not in a way that puts them in control of the wealth.

As you might have guessed, gifts to gray sheep are going to be held in trust. The exact terms will vary based on the circumstances, including the amount of money or property at stake, and how gray (metaphorically) the gray sheep is and how she got that way.  Some of the terms used in gray sheep trusts include:

• Holding the principal in trust until some advanced age (50, 55, 60, 65 even) or for the gray sheep's life.  (A lifetime trust with remainder to grandchildren presents some issues with the generation-skipping transfers tax that we will go into in a future installment).
• Making distributions out of the trust discretionary subject to an "ascertainable standard" such as "health, maintenance, education, and support."
• Making distributions "wholly discretionary."  Under the Ohio Trust Code, a "wholly discretionary" trust is not subject to the claims of the gray sheep's creditors-making wholly discretionary trusts extremely useful for gray sheep with creditor problems.
• The discretionary distributions may be further subject to the approval of a trust advisor.
• The distributions, even though they may be discretionary or even wholly discretionary, may be capped off at a certain amount per year, or limited to expenditures for certain purposes only.
• If the gray sheep's problem is one of motivation, the trustee could be directed to make distributions in an amount determined with reference to the gray sheep's earned income.  The harder you work, the more the trust gives you.
• Distributions could be made contingent on certain accomplishments, or on refraining from certain specified bad behavior.  I have drafted at least two trusts where the beneficiary's right to further distributions was contingent upon passing random drug tests.  If the beneficiary failed, the trustee was restricted to making distributions only to pay for rehab treatment.

Changes in Delaware Trust Law

Clients with complex estate planning needs, including those with significant liability exposure who need to take "asset protection" measures, will often set up their trusts in the state of Delaware, which is the home of some of the nations oldest trust companies and has a highly developed law of trusts. 

Delaware has made some significant changes to its trust laws which take effect this coming Monday, August 1, 2011.  The changes include improved protection from creditors for assets held in trust, and revisions to the "decanting" statute which allows a trustee to create another trust and transfer assets to it.  You can read or download a detailed summary of the changes here.