Reposted from TheTrustAdvisor.com
Many states have recently enacted or introduced decanting legislation and several states have recently enacted or introduced directed trust legislation. As part of continuing efforts for states to stay competitive, domestic asset protection may be the next trend.
Virginia recently enacted asset protection legislation, which will become effective July 1, 2012. Now Ohio becomes the latest state in which asset protection legislation has been introduced. One of the reasons for the introduction of detailed legislation in Ohio on May 23, 2012 is reportedly to enhance the attractiveness of Ohio as a jurisdiction in which to remain, rather than having residents move to other states to protect their wealth.
Included in the Ohio proposal is the Ohio Legacy Trust Act, which contains detailed asset protection provisions.
Ohio Legacy Trust Act – Domestic Asset Protection Proposal
The proposal allows for the creation of a “legacy trust” by which a ”transferor” is given the ability to make a “qualified disposition” of assets and remain a beneficiary through actions of a “qualified trustee.” The transferor must sign a notarized “qualified affidavit” before or contemporaneously with the qualified disposition and provide that the transferor will not be rendered insolvent, does not intend to defraud creditors, has no pending/threatened court actions and does not contemplate bankruptcy.
Creditors would generally be prohibited from bringing any action against any person who made or received a qualified disposition, against any property held in a legacy trust or against any trustee of a legacy trust. A creditor can 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.
If the creditor was a creditor before the qualified disposition, the action must be brought by the later of (1) 18 months after the qualified disposition or (2) 6 months after the qualified disposition is or could reasonably have been discovered if the creditor files a suit or makes a written demand for payment within 3 years after the qualified disposition. If the creditor became a creditor after the qualified disposition, the action must be brought within 18 months. The burden is on the creditor to prove the matter by a preponderance of evidence. The court must award attorney’s fees and costs to the prevailing party. Protection is provided for trustees and attorneys involved in the creation and administration of a 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.
The transferor 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.
The trust must (1) have at least one trustee who resides in Ohio or is an entity authorized to act as trustee in Ohio who materially participates in the administration of the trust, (2) expressly incorporate Ohio law to wholly or partially govern its construction and administration, (3) expressly state it is irrevocable and (4) include a spendthrift provision. The new law would apply to all qualified dispositions made on or after the legislation’s effective date.
In addition to the Legacy Trust Act, other significant changes to Ohio law are proposed, including the following:
Increase in Homestead Exemption
The interest in a residence that is exempt from creditors would increase from $20,200 to $500,000.
529 Plan Exemption
The current exemption for certain payments or rights to assets in accounts, such as IRAs, would be expanded to 529 Plans.
Reimbursement of Income Taxes to Grantors of Intentionally Defective Grantor Trusts
Whether or not the trust contains a spendthrift provision, a trustee’s discretionary authority to pay directly or reimburse the settlor amounts for income taxes payable on trust income will not subject those amounts to the claims of the settlor’s creditors.
As you may recall from previous emails, a similar provision was recently enacted in Virginia (effective as of July 1) and another (modeled on current New York law) is pending in New Jersey, but has not yet passed either house.
Payment of Beneficiary’s Expenses Permitted
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.
Administrative Fiduciaries Have No Other Responsibilities
If a fiduciary is appointed to handle only administrative duties, the fiduciary will have no duties other than administrative duties specifically described and will have no obligation to perform investment reviews or make investment recommendations if there is an investment director.
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Source: Sharon L. Klein, Lazard Wealth Management & TheTrustAdvisor.com