Summary of the Ohio Legacy Trust Act

Summary of the Ohio Legacy Trust Act 2/3/13

A. WHAT IS THE OHIO LEGACY TRUST ACT? Ohio passed a new law effective March 27, 2013, called the OHIO LEGACY TRUST ACT. The Ohio legacy trust act permits a domestic asset protection trust that allows a person to set up a trust in Ohio that is irrevocable and protects the person setting up the trust and beneficiaries of the trust from most creditor claims and still allows the beneficiary and transferor to receive benefits from the trust. (For purposes of this outline the word "transferor" is used rather than "settlor". "Transferor" means the person who sets up the trust and transfers assets to the trust.) The law is set forth in Chapter 5816 of the Ohio Revised Code and is called the Ohio legacy trust act. Section 5816.01 of the Ohio Revised Code ("ORC").

B. WHAT IS THE PURPOSE? A domestic asset protection trust allows individuals to protect their assets from most creditors while still having access to the money much the same way as offshore trusts. Also, with the right planning the assets in the domestic asset protection trust could be removed from the federal estate tax. For example, a properly drafted domestic asset protection trust could use up to the $5.25 million exemption in 2013 and still allow the transferor to receive benefits from the trust but have all the assets in the trust including any appreciation exempt from any additional Federal estate tax. See IRS Private Letter Ruling 200944002.

C. WHAT IS A LEGACY TRUST? Section 5816.02(K) of the ORC. A legacy trust must satisfy the following rules:

1. Appoint at least one qualified trustee defined in Section 5816.01(S) of the ORC as a person who is a resident of Ohio or a bank or trust company operating in Ohio. The trustee must maintain in Ohio some of the property or otherwise materially participate in the administration of the trust. You are entitled to have a nonqualified trustee. Section 5816.01(K)(2). The transferor cannot be the trustee. Section 5816.01(S)

2. Be written, state that Ohio law applies and be irrevocable.

3. Have a spendthrift provision.

C. SPENDTHRIFT PROVISION. Section 5816.03 provides that the trust must prohibit voluntary and involuntary transfers of the beneficiary's interest. The Ohio revised code provides that the language set forth in section 5805.01(A) is sufficient for this purpose. That section provides the following:

"A term of a trust providing that the interest of a beneficiary is held subject to a "spendthrift trust," or words of similar import, is sufficient to restrain both voluntary and involuntary transfer of the beneficiary's interest."

Except for certain limited exceptions an Ohio legacy trust must restrain both voluntary and involuntary transfer of the transferor's interest in the trust. Section 5816.03(B) of the ORC.

If the trust has this language in it, the legislation makes it clear that the terms of the trust will be enforceable under the US bankruptcy laws. Section 5816.03(B) of the ORC.


* If the qualified disposition is made to the trust, the assets in the trust will be exempt from most creditor claims. A creditor is prohibited from bringing any action against any person who made or received a qualified disposition, or against property involved in a qualified disposition or the trustee of a legacy trust unless the action is based upon an argument that the disposition was with the specific intent to defraud the specific creditor bringing the action. Section 5816.07(A) of the ORC. A qualified disposition is merely a disposition by the transferor to a trust that is, was or becomes a legacy trust. Section 5816.02(R) of the ORC. Certain creditor claims can pierce a legacy trust as described in Paragraph E below.

* Additionally, the transferor's interest in the trust will not be subject to any claim for a forced inheritance. This would mean that any claims that someone would have that they are entitled to an inheritance from the transferor could not be asserted. Section 5816.03(D) of the ORC. I believe this might mean the right of the spouse who elects against the terms of will or some states such as Louisiana which require that children or a spouse inherit a certain percentage of the estate.

* The transferor's interest in the trust will not be subject to a distributive award (this means an award in a divorce action) to someone other than the spouse or former spouse under both Ohio law and the law of another estate. Section 5816.03(E) of the ORC. This means that nonmarital assets can be transferred to a legacy trust and be protected against a court disposition of assets except for claims by a spouse or former spouse. It is important to note that the definition of spouse or former spouse means someone who was married to you before the transfer to the legacy trust. Section 5816.02(U) of the ORC. Therefore if assets are transferred before marriage the future spouse or if divorced from such future spouse, such former spouse has no rights to the assets because they were married to you.

E. WHAT CREDITORS CAN BREAK A LEGACY TRUST? Section 5816.03(C) of the ORC provides that the trust would be subject to debts of the person transferring the assets pursuant to an agreement or court order of the following:

• The payment of child or spousal support or alimony to the transferor's spouse, former spouse, child or any governmental agency that collects such payments. Note that a spouse or former spouse is determined at the time of the qualifying disposition. Therefore there could be no claims by a new spouse as to assets transferred to the trust prior to the marriage. See section 5816.02(U) of the ORC. Thus alimony claims and property divisions upon divorce only apply as to a spouse married to the transferor before the date of the transfer of the assets.

• The division of property in favor of the transferor's spouse or former spouse.

The Ohio Bar Association initially proposed a specific protection for creditors if the transferor owes someone as a result of death, personal injury or property damage suffered by a person on or before the time of the transfer to the trust if caused by acts or omissions of the transferor or someone for whom the transferor would be liable. This was not included in the final legislation adopted by the House. Does that mean that the assets are protected? Of course the fraudulent transfer provisions of the Ohio revised code still apply.

Other creditors will be subject to limited abilities to pierce the trust as described below.

F. WHAT POWERS CAN THE TRANSFEROR RETAIN AND STILL RETAIN ASSET PROTECTION? - Sections 5816.04 and 5816.05 of the ORC address this issue. To qualify as a legacy trust the transferor shall have no greater rights or powers other than as set forth in section 5816.05 of the ORC. Obviously the trust can provide fewer rights. ANY OTHER WRITTEN OR ORAL AGREEMENT, WHETHER EXPRESS OR IMPLIED, THAT PURPORTS TO GRANT GREATER RIGHTS IS DEEMED VOID. Section 5816.04. This provision is intended to make sure that any implied agreement or side agreement will not adversely impact the legacy trust. Any provision that is voided will not impact the rest the document. Section 5816.05 of the ORC provides that following allowed rights will not cause the trust to lose its status as a legacy trust:

• A provision that upon the happening of a certain events results in the termination of the transferor's right to mandatory income or principal.

• A power of the transferor to veto a distribution from the trust. This is probably the most important right.

• A power of appointment by will or other written instrument effective upon the death of the transferor or during the lifetime of the transferor changing the distribution of assets other than the power to appoint to the transferor, creditor of the transferor, the estate of the transferor or the creditor of the transferor's estate. This allows the transferor to change the wishes of who inherits the assets and when even though the trust is irrevocable.

• The right of the transferor to receive trust income as set forth the trust agreement. This means the transferor is not giving up the benefits of the trust assets.

• Both of the following (i) the transferor's potential or actual receipt of income or principal from charitable remainder trust and (ii) the transferor's right at any time to release the transferor's retained interest in a charitable remainder trust in whole or part in favor of a charitable organization that receives the remainder benefit.

• A transferor's power to invade up to 5% of the trust principal every year. This would be subject to creditors' claims.

• A transferor's potential or actual receipt of the use of principal or income of the trust if the use or receipt would be the results of any the following that applies to one or more "qualified trustees":

(i) a qualified trustee acting in its discretion. The trustee has discretion unless such discretion is expressly denied by the trust agreement.

(ii) a qualified trustee acting pursuant to a standard in the trust instrument that covers the distribution of principal or income.

(iii) a qualified trustee acting at the direction of advisor who is acting in such advisors discretion or pursuant to a standard in the trust agreement that governs the distribution or use of a principal or income. Just as with the trustee, the trust advisor can use its discretion unless prohibited in the document.

• A transferor's right to remove an advisor and appoint a new advisor who satisfies certain eligibility criteria described below.

• A transferor's right to remove any trustee and appoint a new trustee.

• A transferor's potential or actual use of real property or tangible personal property including property held under qualified personal residence trust or a transferor's possession and enjoyment of the qualified interest as defined under section 2702(b) of the Internal Revenue Code e.g. a GRAT or GRUT.

• Any provision allowing use of trust income or principal pay some or all the income taxes due on the income of the trust including allowing a qualified trustee or a trust advisor to act in their discretion of make such decision.

• The ability of the qualified trustee in their discretion or pursuant to the document or at the direction of the trust advisor to pay death taxes or the transferor's debts existing prior to death or expenses for administering the transferor's estate, estate, gift, generation skipping or inheritance taxes.

• Any provision that pours back after the death of the transferor all or part of the trust property to the transferor's estate or any trust.

• Any other provisions permitted under the Ohio Legacy Trust Act.

G. QUALIFIED AFFIDAVIT. The transferor must sign a qualified affidavit before or approximately at the same time of making a qualified disposition. Section 5816.06 of the ORC. The affidavit is not required if the transferor is not a beneficiary of the trust.

The qualified affidavit must be notarized and contain all of the following statements:

1. The property being transferred is not derived from an unlawful activity.

2. The transferor has full right, title and authority to transfer the property to the trust.

3. The transferor will not be rendered insolvent immediately after the transfer the property.

4. The transferor does not intend to defraud any creditor by the transfer.

5. There are no pending or threatened court actions against the transferor unless identified in the affidavit.

6 There are no administrative proceedings involving the transferor unless identified in the affidavit.

7. The transferor does not contemplate at the time of the transfer the filing for bankruptcy.

A qualified affidavit will be considered defective if it materially fails to meet the requirements set forth above. However non-substantive variances or additional statements in the affidavit that are not inconsistent with the above will not invalidate the affidavit. Failure to execute the affidavit does not invalidate the trust or any transfer to the trust, but the failure may be used as evidence in any attempt to invalidate the transfer. Section 5816.06(E) of the ORC.

H. WHO CAN BE A TRUSTEE OF A LEGACY TRUST? Section 5816.02(S). A legacy trust must have at least one qualified trustee. A qualified trustee means someone other than the transferor in which both of the following applies:

• If the trust is a natural person, he or she is a resident of Ohio or the trustee is a trust company or a bank authorized by Ohio law to be a trustee or regulated by the Ohio superintendent of banks or by the FDIC or other federal agencies.

• The trustee maintains custody in Ohio of some or all the property maintains records in Ohio either exclusively or nonexclusively, prepares or arranges for the preparation of income tax returns or otherwise materially participates in administration of the trust.

I. WHO CAN BE AN ADVISOR TO A LEGACY TRUST? Section 5816.02(A) and 5816.11 define what an advisor is. An advisor is any person even the transferor to whom the following apply:

1. The advisor is considered a fiduciary unless the document states otherwise;

2. The transferor can only be an advisor in connection with investment decisions.

3. The advisor is given the authority under the trust to remove or appoint one or more trustees or to direct, consent or disapprove of a trustees actual or proposed investments or distributions or other decisions.

J. HOW CAN A CREDITOR BREAK A LEGACY TRUST? Section 5816.07(A) of the ORC. A creditor is prohibited from bringing any action against any person who made (i.e. the transferor) or received (i.e. the trustee or the trust) a qualified disposition, or against property involved in a qualified disposition or the trustee of a legacy trust unless the action is based upon an argument that the disposition was with the specific intent to defraud the specific creditor bringing the action. This standard is much tougher than existing law which allowed creditors to claim that the debtor was trying not only to defraud, but to hinder and delay. Also existing law allows transfers for less than fair value to be recovered if the transferor was insolvent after the transfer, (Written testimony before the Ohio House of Delegates of Jeffrey Ferriell, Professor of Law at Capital University Law School)

K. WHEN MUST THE CREDITOR SUE FOR THE ASSET? The creditor is a creditor before the qualified disposition and the action is brought within the later of (i) 18 months after the qualified disposition or (ii) six months after the qualified disposition reasonably could have been discovered by the creditor and a suit is filed or written demand is delivered to the transferor within three years after the qualified disposition. If the creditor becomes a creditor after the qualified disposition, then the action must be brought within 18 months of the disposition. Section 5816.07 of the ORC.

L. LIABILITY OF LAWYERS, ACCOUNTANTS AND FINANCIAL ADVISORS. The law makes clear that the creditor has no claim against the trustee, the advisor, the attorney or anyone else involved in the legacy trust or related documents. Section 5816.07(D), (E) and (G) of the ORC.

Copyright Solomon, Steiner & Peck, Ltd., 2013.

This summary is intended to provide general and practical information to assist the public in understanding legal issues. Legal advice should only be given when the lawyer and client have an opportunity to explore fully the factual circumstances related to the client's situation and the legal options, as explained by the lawyer to the client.