For some business owners, debt is a necessary evil. When everything is going well, the business owner will regularly pay the debt. However, changes in business, the economy and life circumstances can come up which may prevent the owner from paying their creditors and place them at risk of losing their property. For other business owners, the problem is not debt – it is being in an occupation that is “high risk” for lawsuits (think doctor, real estate developer, or other occupations that may be worried about lawsuits). Fortunately, by using a Michigan Michigan Domestic Asset Protection Trust, DAPT(DAPT), you may be able to protect your property from creditor action.
What is a Michigan DAPT?
In essence, a DAPT is an irrevocable trust which allows an individual to move their property into the trust for their own benefit while getting payment from the trust. The DAPT will have an appointed trustee (not the trust creator) who will administer the trust assets. A Michigan DAPT must appoint a trustee in the state. The timing of creating a DAPT is essential because to protect the assets from creditors. The trust must be established before a creditor claim arises. However, provided the DAPT is in place before the creditor takes action, all trust assets are protected from creditors beginning when the assets are transferred into the trust, subject to certain rights and limitations on creditors to pursue assets in the trust.
Benefits of a Michigan DAPT
One of the main benefits of a DAPT is that it allows the creator to continue to benefit from the trust assets while keeping them safe from creditors. In addition to being able to receive income from the trust, the trust creator also retains significant control over the trust such as being able to remove the trustee, directing how investments are made, getting principal from the trust, vetoing allocations, and, with some exceptions, being able to direct how assets will be distributed upon their death.
Having a Michigan DAPT can be a valuable means to protect your assets from creditors. However, it is important to note that fraudulently transferred assets will not be protected in a DAPT. Additionally, filing for bankruptcy can affect the protections afforded by the trust.
Here are some situations where a DAPT would make sense:
You operated a business and gifted some of the shares to your adult children, then later sold the business for a significant sum. You are concerned that your children’s assets would be at risk (one is a physician and one is in a rocky marriage), and both you and your children don’t want the money from the sale of a business to be available in the event of lawsuits or divorce. You can create a DAPT and move the sale proceeds to the DAPT. Your children can access the trust if they need money, but otherwise, those assets will be protected from creditors or divorce.
A surgeon has a thriving surgical practice and is worried about lawsuits. The DAPT is set up to allow distributions to the surgeon, his spouse, and other family members. If a lawsuit arises (assuming the trust was set up with no intent to defraud creditors), the DAPT will provide great protection for the surgeon and his family.
Sally is considering marriage. Over the years she has built a substantial net worth and she wants to protect it. Can’t she just have a prenuptial agreement? Sure – but she’s worried about how her fiancé would react and says “prenuptial agreements are so unromantic”. Instead, Sally can create a DAPT and move assets to the trust prior to the marriage. If Sally and her husband later divorce, the assets in the DAPT are not considered “marital property”, and those assets would not be part of the divorce.
To fully benefit from a DAPT it is critical that the trust is correctly created and managed. Without the right direction and planning, you risk building a trust which will not protect your assets. To that end, setting up a Michigan DAPT requires a thorough knowledge of Michigan law and its applicable rules and procedures. Having the advice of an experienced attorney can help you ensure your trust is established in a manner which allows it to achieve its intended purpose.
We have attorneys who are knowledgeable about Michigan trust laws and DAPT trust planning who can help you plan to protect your assets. Please contact us online or by phone if we may be of assistance. https://www.michiganestateplans.com/contact/