Creditor Protection Trust (also known as an Ohio Legacy Trust)
Prior to 2013, if you created a Trust for your benefit (meaning you could still use the money or property) your creditors could reach the Trust assets. Effective on March 27, 2013, you will now be able to create a Trust, for your benefit, that is protected from creditors. In Ohio, this is known as an Irrevocable Legacy Trust; other states have referred to it as a Self-Settled Trust.
The Trust allows you to insulate a portion of your assets from creditors. This is important for professionals who have a large amount of potential liability (including doctors, dentists, chiropractors, financial advisors, accountants, attorneys, and professional athletes). This type of creditor protection trust could also be useful for individuals who would like to shelter assets from future medical and nursing home expenses; specifically for Medicaid planning.
How much of the Trust can you access?
If you put assets into a Legacy Trust, there are limitations on the use of those assets. For liquid, financial assets you can only use:
(1) The current income from the Trust assets and
(2) Up to 5% of the principal (annually)
The Trust assets can be used to pay the income tax attributable to the assets. In addition, the Trust can be used to pay debts, expenses, or taxes of your Estate after your life. At all times, an Ohio Legacy Trust would be managed by a third party (not the person who set it up). But, as the creator of the Trust, you can replace the Trustee at any time (provided you cannot appoint yourself).*
Does a Legacy Trust protect against all creditors?
The purpose of this type of Trust is to reward those who plan; not those who wait. There is a Fraudulent Transfer Statute in Ohio which prevents a person from giving away assets with the specific intent to avoid payment of known creditors. Thus, it is important to plan before the creditor protection is necessary.
If the Legacy Trust is created prior to a marriage, it is possible to limit the assets exposure to a potential property distribution in a divorce. This type of planning should be done along with a prenuptial agreement.
For purposes of public policy, this creditor protection cannot be used to avoid payment of child support or alimony.
For more information on Estate Planning in Cincinnati, Ohio contact Attorney Elliott Stapleton. Elliott is a partner with CMRK Law and provides Estate and Probate services to clients in Cincinnati. Elliott also represents startup companies and established businesses throughout the State of Ohio with LLC formation, Trademark and Copyright registration.
*A Legacy Trust also allows you to make a donation to a charity and retain an interest (which could pay you income for life remainder to the charity) or create a place your primary residence into the Trust and leave the remainder to your children.