Ohio did it. A year or so ago, one of our compliance lawyers gave me an article describing how Ohio’s legislature was looking to make Ohio like the Cayman Islands. Effective March 27 of this year, Ohioans can create their own legacy trusts including spendthrift trusts. Oh, you say? So what does that mean? Before I read that article, a year ago I had no idea either.
Prior to Ohio’s Legacy Trust Act, a person or persons could put assets into a revocable trust and have complete control over the assets as the grantor. The trouble is that such a trust is easily reached by creditors. Under Ohio law, it offers little by way of protection from being attached by creditors to satisfy a debt. Certainly, a person or persons could create an irrevocable trust and transfer assets into that and assuming no fraudulent transfers, the assets would not be attachable by creditors. However, the grantors creating the trust would also divest themselves of ownership of the assets and be subject to the whims of the trustee.
Ohio’s Legacy Trust Act changes all that. Now, a person can set up a trust for his or her own benefit and while it needs to have a qualified trustee, the grantor can receive income from the trust and even take some of the principal out of the trust, as much as 5% per year.
Let’s look at an example. Benny Bumbles buys a house for $200,000 and gets a 12 year first mortgage from Anthrax Research Federal Credit Union in 2011. In February of 2013, Benny inherits $500,000 from his Uncle (Milty). In April of 2013, Benny establishes the Bumbles Family Trust and funds it with the money he inherited, naming ABC bank as Trustee. Things go swimmingly for a few years until Benny is let go from his job as virus containment specialist at the local research center. All is not lost however as Benny still makes about $25,000 a year from the investments held by his trust. However, Benny, last year, also financed a Corvette from the credit union as well as a Harley Davidson motorcycle six months later. After a few months of realizing that $25,000 a year doesn’t go as far as it used to, Benny stops paying ARFCU on all three loans. When the collector calls Benny, he tells her: you can’t do a darn thing to me because Ohio has my back! To emphasize this to her, Benny rides his motorcycle to the credit union and does wheelies in the parking lot until he is arrested by the Anthrax County Sheriff.
Assuming ARFCU gets the Harley from the Sheriff and picks up the Corvette, sends the proper notices and sells them at auction, it presumably will have a deficiency balance. Let’s say this comes to $25,000. The credit union also forecloses on the house and because Benny decides to move in with his mother, he does nothing to stop it and the credit union ends up with a deficiency balance on the house of $60,000. Can the credit union do anything to attach the $500,000 in the Bumbles Family Trust to collect Benny’s debt?
You might think that because the mortgage pre-dates the trust, that the credit union could do something, but that’s not the way the new statute works. An existing creditor has 18 months to bring an action to avoid a transfer into the trust from the time the asset is transferred to the trust or 6 months after the creditor could have discovered the transfer to the trust (and Ohio has a recording requirement that constitutes constructive notice) or the creditor may extend this by 3 years by sending a demand letter alleging a fraudulent transfer in funding the trust (and I am paraphrasing). See ORC 5816.07 for the exact language.
Thus the answer is no. The credit union can liquidate Benny’s property and proceed against Benny personally, but the statute of limitations has expired with respect to the trust.
Will credit unions start seeing these types of trusts? Possibly. There is some question as to whether this is worthwhile for smaller amounts of money given that you still need a qualified trustee. But it is hard to say. In any event, Ohio is now in the asset protection business. If nothing else, this means more trust work for the banks. I wonder if a trust CUSO in Ohio catering to this sort of thing would be viable?