Asset protection techniques are a vital part of any wealth preservation plan.  With the enactment of the Ohio Asset Management Modernization Act, effective March 27, 2013, Ohio joined the ranks of the nation’s top asset protection jurisdictions.  A key feature of the Act is the Ohio Legacy Trust, which allows an individual to create a trust of which they are a beneficiary while at the same time protecting the trust assets from potential future creditors.

Important features.  The person setting up a Legacy Trust is able to retain many benefits from the assets transferred to the trust, including:  

  • The ability to receive income and principal distributions
  • The ability to withdraw 5 percent of the trust principal each year
  • The right to live rent-free in any residence owned by the trust
  • The right to direct the Trustee to distribute trust assets to or for the benefit of another
  • The ability to remove the Trustee or any Advisor to the Trustee and to select their replacements

Requirements

  • A Legacy Trust must be in writing
  • It must be irrevocable
  • It must contain specified creditor protection provisions
  • Assets must be transferred to the Trustee who may not be the trust’s creator
  • The person setting up the trust must attest that they will remain solvent after the transfer and are not attempting to avoid the claims of current or foreseeable creditors

Who can serve as trustee?

  • Ohio residents
  • Ohio financial institutions

Who will want to consider setting up a Legacy Trust?

  • Any person seeking protection from future creditors
  • Owners of closely held businesses
  • Those in occupations/professions with a significant level of risk
  • An individual who is contemplating marriage and wishes an added level of divorce protection from the claims of a future spouse

Tax and estate planning considerations

  • Most Legacy Trusts will be structured as “incomplete (nontaxable) gifts”
  • Generally, the income earned on the assets placed into the trust will continue to be taxed to the person setting up the trust
  • After the death of the person setting up the trust, the trust assets will be taxed as part of his or her estate

Asset protection as part of a larger wealth preservation plan

Effective asset protection requires thoughtful planning which is designed to protect assets from future creditors, deter litigation and provide an incentive for quick and favorable settlement if it does arise.  Certainly, a Legacy Trust will be most effective when considered in the context of an individual’s overall wealth preservation plan. Ohio’s recent legislation expands the available asset protection strategies in a number of important regards, which when taken together make Ohio truly a top wealth preservation jurisdiction.  Among the important changes are:

  • Increased home equity exemption
  • Protection for inherited IRAs and §529 plans
  • Limitations upon the ability of future creditors to challenge asset transfers, such as those to a Legacy Trust (new time limitations and optional recording of asset transfers, designed to put creditors on notice and thwart allegations of fraud)
  • Ability to bifurcate Trustee responsibilities, as permitted internationally
  • Disclaimers now available as a planning tool without the risk of a fraudulent transfer
  • Trustees may pay a beneficiary’s expenses directly with no recourse by creditors

These changes are in addition to the 2012 revisions to the Ohio Limited Liability Company (LLC) statute which greatly limit a creditor’s access to the LLC assets.