Ohio to join fourteen asset protection trust states on March 27

Domestic asset protection trusts are irrevocable trusts that a person creates to protect assets from future creditors. They are termed "domestic" to distinguish them from offshore trusts.

Asset protection trusts do not offer income tax protection as all income of the trust is deemed income of the settlor. They are designed to protect the settlor against future creditors but not against those who are creditors at the time of transfer to the trust or shortly thereafter.

How long is "shortly"? It depends on the jurisdiction. It varies from two years to four years from trust funding, from half a year to one year from discovery by the creditor, or six years from execution of a contract.

The domestic asset protection trust jurisdictions (in order of effectiveness ranking by Attorney Steve Oshins of Las Vegas, Nevada) currently include Nevada, South Dakota, Alaska, Delaware, Tennessee, Rhode Island, New Hampshire, Hawaii, Wyoming, Missouri, Utah, Virginia, Oklahoma and Colorado.

Generally these trusts must be irrevocable, have a spendthrift provision, have at least one state individual resident trustee or one corporate Trustee subject to the authority of the state, and have some possession and some administration of the trust in the associated state. All of these conditions apply to Ohio "legacy trusts" as the new Ohio code section 5816 calls them.

A spendthrift provision prevents someone from using a future inheritance or trust distribution as collateral for a current loan or selling or assigning their interest in the trust. This makes sense because if a person wants protection of assets from creditors, the assets shouldn't be available as an item to be pledged or sold.

State laws govern permissible trust provisions. However, regardless of state law, two conditions always exist: 1) states will not recognize laws of sister states that violate their own public policy, and 2) trusts holding real property will be governed by the law of jurisdiction in which the real property sits. Finally, the full faith and credit clause of the U.S. Constitution is supposed to override state law conflict.

The Ohio law requires an affidavit be signed when the trust is created. It must state that: 1) the assets being transferred are not generated by unlawful activity, 2) the transferor has the legal right to transfer the assets, 3) the transfer won't make the transferor insolvent, 4) the transferor has no intent to defraud his creditors, 5) any court actions involving the transferor are identified in the affidavit, and 6) the transferor does not intend to file for bankruptcy.

Once these conditions are met, the transferor has the following rights:

  • to veto distributions from the trust,
  • to withdraw up to five percent of the assets each year in addition to specific distributions listed in the trust,
  • to direct trust investment,
  • to remove and replace trustees,
  • to continue to live in a residence held in the trust, and
  • to direct distribution of trust assets to anyone except the transferor, the creditors of the transferor, the transferor's estate, or the creditors of the transferors estate (just like a limited power of appointment).

As you would expect, child support can be collected from the trust. If assets are placed in the trust after the transferor marries, the spouse or former spouse can collect alimony, support and property from the trust. This is not so if the trust is established and funded before marriage.

Asset protection or claims trusts only work if created and funded before liability arises. They are not a safe harbor for debts or claims that arise before or "shortly" after trust creations.

"Shortly," in Ohio, will mean "that action is brought by a creditor of a transferor who meets one of the following requirements: (1) The creditor is a creditor of the transferor before the relevant qualified disposition, and the action is brought within the later of the following periods: (a) Eighteen months after the qualified disposition; (b) Six months after the qualified disposition is or reasonably could have been discovered by the creditor if the creditor files a suit against the transferor...."

Ohio will probably make the top third of Steve Oshins' list, but certainly not surpass his home state of Nevada.