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Ohio Legacy Trusts: A New “Protective” Trust Law?



Volume XXI, Number 2 – February/March 2013


Ohio has joined the growing list of states which have enacted asset protection trust legislation. Chapter 5816, Revised Code of Ohio, enacts the Ohio Legacy Trust Act (the “Act”), which, on and after March 27, 2013, permits the creation of self-settled spendthrift trusts called “Legacy Trusts”.


A Legacy Trust must be evidenced by a written trust instrument which appoints a “qualified trustee”, states that it is governed by Ohio law as to its validity, construction and administration, states that it is irrevocable, and contains a spendthrift provision applicable to the interests of all beneficiaries, including the settlor. A qualified trustee is a person other than the settlor, who is an individual Ohio resident or a company authorized to conduct trust business in Ohio, who maintains or arranges for at least “some” trust property to be custodied in Ohio, and who maintains records of and files tax returns for, or otherwise materially participates in the administration of, the Legacy Trust.


The Act contains the usual state asset protection trust law exceptions for child or spousal support, alimony, or division/distribution of property to a spouse or former spouse pursuant to an agreement or court order.


The Act contains an interesting, if not convoluted, fraudulent transfer section which purports to provide the exclusive remedy (except for pre-recorded liens) for a creditor seeking to “undo” transfers to the Legacy Trust. The complaining creditor must prove by clear and convincing evidence that the subject transfer was made with the specific intent to defraud the specific creditor bringing the action. Compare this with typical fraudulent transfer rules: Any creditor can assert that a transfer was made to defraud any creditor and prove it by the “preponderance of the evidence” standard (a lower standard of proof). The Act’s elevated level of proof and the “specific” intent and creditor requirements would seem to make bringing a successful fraudulent transfer action a bit more difficult and available to a narrower group than would be the case under the state’s “standard” fraudulent transfer statute.


A claimant who was a creditor of the settlor before the transfer must bring the fraudulent transfer action within the later of two periods: 18 months after the transfer or 6 months after the transfer was, or reasonably could have been, discovered. The latter stated period only applies if the preexisting creditor files a non-fraudulent transfer suit or makes a written demand within 3 years of the transfer. This would appear to leave the statute of limitations for filing the fraudulent transfer claim somewhat open-ended. The limitations period for a subsequent creditor is clear: the claim is extinguished unless brought within 18 months after the transfer (Yes, subsequent creditors can get the Legacy Trust!). In determining the transfer date of property held in the Legacy Trust for purposes of applying the foregoing rules, a “LIFO” rule is applied: Money distributed out of the Legacy Trust is deemed to be sourced from funds most recently contributed to the trust (unless proven to the contrary beyond a reasonable doubt), thus enhancing the “aging” process of money remaining in the trust (a clear and convincing rule applies for other fungible assets). We have always included such a LIFO provision in our asset protection trusts.


A Flight provision is language in a trust instrument which “relocates” a trust to another jurisdiction under specified circumstances. Here’s how this works in Ohio: The qualified (Ohio) trustee is automatically removed by the Act if the Legacy Trust or a qualified trustee is involved in any legal action in which the court declines to apply Ohio law. Under this circumstance, the removed qualified trustee can only convey trust property to the successor trustee, and has no other authority. If an offshore trustee was already serving as a co-trustee, then, upon the automatic removal of the qualified trustee, the trust will have been “moved” offshore. Trust assets must also be relocated, however, andthat may present certain practical issues. Unless the trust instrument is carefully drafted to properly integrate with the statutory flight provision, it is unclear what, if any, protection will be afforded the trust assets.


Finally, as has been the case in some other state asset protection statutes (See, e.g., A Review and Critique of the Asset Protection Aspects of the 2003 Utah Trust Law Amendments), the law protects professionals involved in establishing and administering a Legacy Trust by prohibiting the filing of a suit (relating to a transfer of property to the trust) against “any trustee or advisor of a legacy trust or against any person involved in the counseling in connection with, or the drafting, preparation, execution, administration, or funding of, a legacy trust.” The foregoing provision includes such professional services rendered with respect to entities owned by the Legacy Trust.


The Act attempts to remediate the erosions of traditional trust protection resulting from public policy court decisions and statutes occurring over the past several hundred years. In summary, the protective efficacy of the Ohio statute remains to be seen; however, as is the case with any United States based protective planning, it will ultimately depend upon a United States court upholding the planning in the settlor’s favor and the inapplicability of the full faith and credit clause of the United States Constitution.

This newsletter is not intended to provide legal or investment advice on the matters discussed herein, such advice should only be obtained from a qualified attorney. Copies of previous issues are available upon request.

Donlevy-Rosen & Rosen, P.A. is a law firm with a focus on asset protection planning and offshore trusts. Attorneys Howard Rosen and Patricia Donlevy-Rosen co-founded the firm in 1991, and have since become recognized authorities in the field of asset protection planning. Let us explain the significant difference our experience can make when protecting your assets. Call 305-447-0061 or simply visit our contact page