(Published in the Spring 2014 issue of The Bankers Statement).

Ohio House Bill 479, which became effective on March 20, 2013, enacted Sections 5816.01-14 of the Ohio Legacy Trust Act, allowing and enabling individuals who properly create a Legacy Trust under the provisions of the Act to shield assets conveyed to the Legacy Trust from creditors.  What this means is that there must be sound processes and procedures in place in order to determine, among other things, if: 

  • You are dealing with a Legacy Trust
  • If the Legacy Trust has been properly established
  • What assets are subject to the Legacy Trust
  • When assets were transferred to the Legacy Trust
  • Does a subsequent transfer of collateral to a Legacy Trust by a borrower or guarantor cut off the bank’s secured interest in the collateral?

A Legacy Trust under the Ohio Legacy Trust Act must:

  1. Be evidenced by a written instrument
  2. Have at least one Qualified Trustee for, or in connection with, the property that is the subject of a qualified disposition
  3. Be governed by Ohio law 
  4. Expressly state that it is irrevocable
  5. Have a spendthrift provision

A "Qualified Trustee" under the Ohio Legacy Trust Act is defined as a person who is not the transferor, is an Ohio resident or regulated bank and maintains or arranges for custody in Ohio of some or all of the property that is subject to a qualified disposition, arrearages for tax returns and materially participates in the administration of the Legacy Trust.

The transferor of the property has various rights relative to the Legacy Trust, including:

  1. To receive income
  2. To receive up to 5 percent of the corpus each year
  3. To remove and appoint new trustees
  4. To use a house transferred to the Legacy Trust for the transferor’s residence

The transferor must sign a "qualified affidavit" at the time of the qualified disposition of assets.  The "qualified affidavit" must state, among other things, that:

  1. The transfer will not render the transferor insolvent
  2. The transfer is not intended to defraud creditors
  3. There are no pending or threatened actions, except as listed in the affidavit
  4. The transferor does not contemplate filing for bankruptcy

Legacy Trusts add another level to due diligence concerns related to collateral securing loans, the transfer of that collateral, and determining when the borrower or guarantor lists a trust or trusts on his or her financial statement if the trust is actually a Legacy Trust.  Common due diligence issues and questions include:

Click here to view table.

ORC Section 5816.07 provides that a creditor cannot bring action against a Legacy Trust, except that it may bring an action to avoid a qualified disposition with intent to defraud the specific creditor if:

  1. The creditor was a creditor before the qualified disposition and (i) action is brought within the later of 18 months after the disposition, or (ii) within six months after the qualified disposition reasonably could have been discovered by the creditor, the creditor makes a demand for payment, and an action is filed within three years after the qualified disposition.
  2. The creditor becomes a creditor after the disposition and action is brought within 18 months of the disposition.
  3. The creditor must prove its case by “clear and convincing evidence.”
  4. In the event of a conflict of Act with Chapter 1336 (Fraudulent Transfers) of the ORC, the Legacy Trust Act controls.

In summary, it is not enough just to obtain a personal financial statement. If a trust is described on the personal financial statement, further due diligence should be conducted to determine if the trust is a Legacy Trust and, if so, whether the Legacy Trust was properly established, what assets are subject to the Legacy Trust, and when the assets were transferred to the Legacy Trust. If subsequent financial reporting is required under the loan, the same due diligence must be conducted if additional trusts are listed within subsequent financial reporting.