Asset Protection Opportunity

Although not much has been written in the mass media about the Ohio Legacy Trust Act (“Act”), the new law is a significant development in the ever changing world of asset protection law and allows Ohio to step to the forefront in this ever changing area.

Perhaps the most important provisions of the Act center around the ability of an individual to transfer personal assets into “self-settled” trusts, of which the individual can be a beneficiary.  Such trusts may permit the grantor (e.g., creator) of the trust to receive income or principal from the trust (including a right to withdraw up to five percent of the value of the trust principal each year, in addition to other permitted distributions specified in the terms of the document).  A grantor may also retain the right to:  (1) veto a distribution from the trust; (2) exercise a power of appointment to remainder beneficiaries; (3) remove any advisors to the trust; and (4) remove any trustee.  Thus, the grantor can retain significant influence over his or her interest within the trust, subject to the spendthrift provisions which prevent a creditor from attaching the grantor’s interests.

As stated above, the Act generally prohibits a creditor from bringing an action against any person who transfers assets into the trust, as long as the creditor did not have a claim prior to the creation and funding of the trust.  Under the Act, the grantor must execute an affidavit which specifies the following:  (1) the transferor does not contemplate filing for relief under the bankruptcy code at the time; (2) the transferor is not involved in any administrative proceeding; (3) the property being transferred into the trust was not derived from an unlawful activity; (4) the transferor has full right and authority to transfer the property into the trust; (5) the transferor will not be rendered insolvent after the transfer; (6) the transferor does not intend to defraud any creditor; and (7) there are no threatened or pending court actions against the transferor (other than identified in the affidavit).

By forming and funding the trust, and executing the aforementioned affidavit, creditors of the grantor are generally precluded from attaching trust assets.  Exceptions to this general proposition include child support obligations to be collected from the trust and alimony and support to be paid from trust property consisting of assets placed into the trust after marriage.  However, if the trust was funded prior to the grantor’s marriage, assets may be protected from claims of a spouse or former spouse.  Thus, this trust may be a useful tool for planning prior to marriage.

In addition to the “Legacy Trust” provisions set forth in the Act, it should be noted that Ohio has increased its “homestead exemption” for bankruptcy purposes from $21,625 per debtor to $125,000.  The Act has also clarified that IRAs and Section 529 Plans will be exempt from bankruptcy proceedings in the future. Both of these are significant developments which help protect Ohioans’ assets.

Given the significance of the Act, it is important for individuals seeking asset protection to meet with their estate planning counsel and discuss the opportunities that the new law permits.  The Act marks an exciting time and opportunity for such individuals to shelter assets from creditor claims without having to form trusts out of state or offshore.