Individuals with concerns about preserving their assets from claims of possible future creditors no longer need to move their assets to Delaware, Alaska or offshore in order to protect them. With the enactment of the Ohio Asset Management Modernization Act of 2012 (“AMMA”), Ohio trust law, property law and debtor-creditor laws have been amended to move Ohio to the forefront of asset protection jurisdictions.
A significant portion of AMMA is devoted to the creation of a domestic asset protection trust statute known as the Ohio Legacy Trust Act. This article will focus on the Ohio Legacy Trust Act, but I will highlight a few of the other important provisions of AMMA as well.
Ohio Legacy Trust Act
Prior to the enactment of AMMA, an Ohio resident could create a trust agreement for the benefit of a third party and the trust assets could be protected from the claims of the third party’s creditors, but the individual could not create an Ohio trust to protect his or her own assets from future creditors. With an increasingly litigious society, this left individuals with few options for protecting their assets from potential future litigation claims other than taking assets to jurisdictions outside of Ohio with stronger asset protection laws. Beginning on March 27, 2013, an Ohio resident or a nonresident with sufficient connections to the state of Ohio can transfer a portion of his or her assets to an irrevocable trust held in Ohio and restrict future creditors' access to the trust assets while still remaining a beneficiary of the trust. By transferring these assets to an Ohio trustee, the individual may also avoid the increased trustee fees associated with out-of-state domestic asset protection trusts.
Assets transferred to a legacy trust can be protected from the majority of a settlor’s future creditors. Generally, a future creditor’s sole remedy will be pursuing the trust assets if and when they are distributed to the settlor of the trust. As discussed below, the Legacy Trust Act allows a trustee to pay the expenses of a beneficiary directly in lieu of making a distribution to that beneficiary, so there will be little need for a trustee to make a distribution to a beneficiary during such times that a creditor is attempting to recover from the trust assets.
As in many other states, the Legacy Trust Act allows certain “exception creditors” to attach the trust assets. These exception creditors are limited to persons owed for or claiming child support, spousal support, alimony, or a marital division of property or creditors claiming a fraudulent transfer to the trust. With respect to spouses, this exception only covers individuals who were married to a settlor on or before the date the property was transferred to the trust. If a settlor marries after the legacy trust is funded, the trust is not subject to the claims of his or her future spouse. With respect to creditors claiming a fraudulent transfer, the creditor must prove that the transfer was made “with the specific intent to defraud the specific creditor bringing the action.” Despite these limitations, the Legacy Trust Act allows physicians, attorneys, business owners and others with asset protection concerns to protect a portion of their assets from the majority of their future creditors.
The settlor of the legacy trust must appoint a third party as the trustee of his or her trust. While many individuals are concerned about the loss of control associated with the creation of an irrevocable trust with a third party as trustee, the Legacy Trust Act allows a settlor to retain considerable rights, powers and interests over the legacy trust, including the right to veto distributions; to hold limited powers of appointment to change the interests of the trust beneficiaries; to receive income and principal distributions from the trust; and to remove and replace advisors and trustees.
With the enactment of the Legacy Trust Act, business owners, physicians, attorneys and others with asset protection concerns have access to a preeminent asset protection statute which will allow them to protect their hard-earned assets from future litigation claims while maintaining access to these assets and keeping the assets in Ohio.
Additional Protections Afforded by AMMA
In addition to creating the Legacy Trust Act, AMMA also increased Ohio’s homestead exemption. Prior to the enactment of AMMA, Ohio’s homestead exemption was only $21,625 per debtor. AMMA has increased this exemption to $125,000 per debtor. This amount is subject to triennial inflation adjustments. This exemption amount is also stackable, meaning that a married couple has a homestead exemption of $250,000.
AMMA also restricted standing for future creditors under the Ohio Uniform Fraudulent Transfer Act. Under pre-AMMA law, a future creditor alleging that a transfer was made with the actual intent to hinder, delay or defraud the creditor could bring its claim at any time because the law never cut off the rights of these creditors. Under AMMA, a future creditor must bring its claim within four years after the transfer in question or the claim is barred.
Additionally, AMMA made significant changes to the Ohio Trust Code, including amending the code to deprive creditors of any recourse against a trustee who pays a beneficiary’s expenses in lieu of making a distribution directly to the beneficiary; allowing for the appointment of a trust protector or advisor with the power to direct the modification or termination of the trust; and allowing for the appointment of administrative trustees whose duties are limited to administrative matters.
Finally, AMMA created a new statute which facilitates loan transactions involving trust agreements. After the 2008 real estate downturn, banks began requiring as a condition of any loan that real estate be titled in an individual’s name and not in the name of a trustee. AMMA provides that if property is transferred out of a trust to a beneficiary for the purposes of securing a loan and the property is retitled into the name of the trust following the closing of the loan, then the transfer to the beneficiary is disregarded, and the date of the transfer back to the trust relates back to the original transfer. This is important because this prevents the beginning of a new limitations period with respect to the transfer. A transfer purely for the purposes of securing a loan will not cause expired claims to revive.
These additional provisions enacted by AMMA afford individuals with increased certainty regarding their ability to protect a nest egg from future creditors.
For more information about AMMA, please contact a member of Dinsmore's Estate Planning Team