The Ohio Legacy Trust: A New Asset Protection Trust

Ohio has joined the growing list of states, which have enacted domestic asset protection trust legislation. The "Ohio Legacy Trust Act" (the “Act”), takes effect on March 27, 2013, and permits, for the first time, statutory protection for the creation of self-settled spendthrift trusts called “legacy trusts”. One of the purported reasons for the Act is to enhance the attractiveness of Ohio as a jurisdiction in which to remain after retirement, rather than encouraging residents to move to other states that better protect assets. There are eleven states that now have domestic asset protection trust statutes, i.e., Alaska, Delaware, South Dakota, Nevada, Missouri, Tennessee, Wyoming, Oklahoma, Rhode Island, Utah and New Hampshire, and other states, such as Florida, have greater homestead protection than the State of Ohio.

The case for the necessity of an asset protection trust in Ohio was capably made by The Estate Planning, Trust and Probate Law Section of the Ohio Bar Association:

We live in a litigious society and adequate insurance may not be reasonably obtained at an affordable price to protect an insured from most claims. Some claims will exceed the available limits, in other cases coverage may be denied or the insurance company might fail. 

As an example: an executive was working from his home one weekend and had a business delivery at his house. The UPS delivery person slipped on his son’s skateboard and broke his back. The company insurance did not cover the accident, because it occurred off business premises. Both the homeowner’s insurance and the executive’s umbrella insurance policy declined coverage because it was a business delivery. Instead, the executive was personally liable for the entire judgment amount. 

Under the Act, creditors are generally prohibited from bringing any action: (1) against any person who makes or receives a qualified disposition of trust assets from a legacy trust; (2) against any property held in a legacy trust, or; (3)  against any trustee of a legacy trust. “Qualified disposition” means a disposition by or from a transferor to any trustee of a trust that is, was, or becomes a legacy trust. 

A creditor can, however, bring an action to avoid a qualified disposition on the grounds that the disposition was made with specific intent to defraud the specific creditor bringing the action.  A creditor must prove by clear and convincing evidence (rather than simply by a preponderance of the evidence) that the subject transfer was made with the specific intent to defraud the specific creditor bringing the action.  The elevated level of proof and the “specific” intent and creditor requirements would seem to make a successful fraudulent transfer action against a legacy trust more difficult  than would be the case under the state’s “standard” fraudulent transfer statute.  In other words, when in doubt, use of the legacy trust is warranted.

There is also a relatively short statute of limitations for such claims brought by creditors existing at the time of a transfer, but a more open-ended limitation for those brought by future creditors.  For existing creditors, the creditor's action must be brought by the later of eighteen (18) months after the qualified disposition, or six (6) months after the qualified disposition is or could reasonably have been discovered, provided the creditor files a suit or makes a written demand for payment within three (3) years after the qualified disposition. If the creditor becomes a creditor after the qualified disposition, the action must be brought within 18 months.  

The limitation for a subsequent creditor is clear: the claim is extinguished unless brought within 18 months after the transfer. The limitations period for existing creditors is less certain, but in any event, requires written demand for payment submitted, or a lawsuit filed within three years from the transfer of assets, after which a claim against the trust must be made within six months. 

In determining the transfer date of property held in the legacy trust, for purposes of applying the foregoing rules, a “LIFO” rule is applied: Money distributed out of the Legacy Trust is deemed to be sourced from funds most recently contributed to the trust (unless proven to the contrary beyond a reasonable doubt), thus enhancing the “aging” process of money remaining in the trust (a clear and convincing rule applies for other fungible assets). Most asset protection trusts include  such a LIFO provision.

The burden is on the creditor to prove it's claim by a preponderance of evidence.  Moreover, the court must award attorney’s fees and costs to the prevailing party, which alone might discourage creditors from enforcing questionable claims, while simultaneously encouraging trustees to recognize obviously valid claims. Protection from liability is provided both for trustees and attorneys involved in the creation and administration of a legacy trust.

A legacy trust must be a written trust instrument which: appoints a “qualified trustee;” states that it is governed by Ohio law as to its validity, construction and administration; states that it is irrevocable; and contains a spendthrift provision applicable to the interests of all beneficiaries, including the settlor.

A "qualified trustee" is defined as a person other than the settlor, who is an individual Ohio resident or a company authorized to conduct trust business in Ohio, who maintains or arranges for at least “some” trust property to be owned and maintained in Ohio, and who maintains records of and files tax returns for, or otherwise materially participates in the administration of, the Legacy Trust.

Any person can serve as an advisor of a legacy trust, except that a transferor can act as an advisor only in connection with investment decisions. Advisors are considered fiduciaries under the Act.  Persons with titles other than "advisor," such as trust protectors, are treated as trust advisors under the Act.  

The transferor/settlor may retain the right to veto distributions from the trust, remove and appoint advisors or trustees, hold a special testamentary power of appointment and be a discretionary income or principal beneficiary.  These retained rights should give a person considering a legacy trust a great deal of comfort regarding turning control of the assets over to a another party, comfort not generally available in non-statutory forms of asset protection trusts.

The Act also codifies how a "flight provision" works.   A flight provision is language in a trust that “relocates” a trust to another jurisdiction under specified circumstances. Under the Act,  the qualified Ohio trustee is automatically removed if the legacy trust or a qualified trustee is involved in any legal action in which the court declines to apply Ohio law. Under this circumstance, the removed qualified trustee can only convey trust property to the successor trustee, and has no other authority. If an offshore trustee was already serving as a co-trustee, for example, then upon the automatic removal of the qualified trustee, the trust will have been “moved” offshore. Trust assets must also be relocated, however, and that may present certain practical limitations.  Unless the trust instrument is carefully drafted to properly integrate with the statutory flight provision, it is unclear what, if any, protection will be afforded the trust assets in the event a court refuses to apply Ohio law.

Finally, regardless of whether a beneficiary is subject to creditors’ claims, a trustee can pay any expense of a beneficiary permitted by a trust instrument. Even if the payments exhaust the trust funds, the trustee will not be liable to a beneficiary’s creditors.

The Act provides a welcome asset protection tool for Ohio residents and Ohio planners.  Now, more than ever, a complete estate, financial, or business succession plan should consider and implement asset protection.

One final note: Consumers should be aware that there are in the marketplace various forms of proprietary trusts that are called, "Legacy Trusts." These existing trusts, whether or not marketed as "asset protection trusts," are not Ohio statutory legacy trusts, and cannot, therefore, offer the same level of protection.  If you are interested in a legacy trust, you should consult with an Ohio elder law or estate planning attorney.