Domestic Asset Protection Trusts: An Important Planning Opportunity for Physicians and Others

Protecting Personal Wealth in a High-Liability Profession

Physicians spend years building successful medical practices, accumulating investment assets, and providing financial security for their families. Unfortunately, medical professionals also face unique liability risks that can place personal wealth at risk, even when adequate malpractice insurance is maintained.

For physicians and other high-net-worth professionals, a Domestic Asset Protection Trust (DAPT), known as a Qualified Dispositions Trust Act (QDIT), may be a valuable planning tool to help protect assets from future creditor claims while preserving significant flexibility and access to those assets. Michigan authorized these trusts through the Qualified Dispositions in Trust Act, which became effective in 2017.

What is a Domestic Asset Protection Trust?

Traditionally, a person could not transfer assets into a trust for his or her own benefit and simultaneously protect those assets from creditors. Michigan changed that rule by enacting QDIT permitting self-settled asset protection trusts that satisfy specific statutory requirements.

A DAPT is an irrevocable trust into which an individual transfers assets. Although the trust is irrevocable, the creator of the trust may retain certain rights and interests, including the ability to:

• Receive discretionary distributions of trust income and principal;
• Direct investment decisions;
• Remove and replace trustees;
• Veto certain distributions; and
• Determine how trust assets will be distributed upon death.

If properly established and funded, the trust assets may be protected from many future creditor claims.

Why Should Anyone Consider a DAPT?

Those who work in high-risk professions for litigation, such as physicians, may wish to consider a DAPT. While malpractice insurance plays a critical role in risk management, insurance does not always eliminate exposure. Excess judgments, personal guarantees, business liabilities, and other unforeseen claims can threaten accumulated wealth.

A DAPT can serve as an additional layer of protection by separating personal assets from future creditor exposure. Assets commonly transferred to a DAPT include:

• Investment accounts;
• Marketable securities;
• Interests in closely held businesses;
• Vacation properties; and
• Other non-qualified assets not already protected by law.

Importantly, asset protection planning is most effective when undertaken well before any claim arises. A DAPT is a proactive planning strategy, not a reactive solution once litigation is on the horizon.

Enhanced Protection Under Michigan Law

Michigan strengthened its asset protection trust framework through subsequent legislative changes that harmonized the DAPT statute with Michigan's Uniform Voidable Transactions Act (UVTA). As a result, creditors seeking to challenge a qualified transfer generally face significant procedural hurdles, including shortened limitation periods and heightened evidentiary burdens.

To establish a valid DAPT, the transferor must generally sign an affidavit confirming, among other things, that:

• The transfer will not render the transferor insolvent;
• The transfer is not intended to hinder, delay, or defraud creditors; and
• The transferor is not aware of pending or threatened litigation.

A key feature of a DAPT is the two-year limitations period applicable to creditor claims. Generally, if assets are transferred to a properly established DAPT and all statutory requirements are satisfied, a creditor must challenge the transfer within two years of the date the assets are contributed to the trust. After the expiration of that two-year period, the transferred assets are generally protected from future creditor claims, making advance planning critical. Because the protection is prospective rather than retroactive, a DAPT is most effective when established well before any claim, lawsuit, or other creditor issue arises. Asset protection planning must occur before problems arise.

Is a DAPT Right for You?

The appropriateness of a DAPT depends on an individual’s asset profile, liability exposure, existing insurance coverage, business interests, and overall estate planning objectives.

However, for health professionals and others who have worked hard to build substantial wealth and who face ongoing professional liability risks, a DAPT may provide significant peace of mind and an additional layer of protection that traditional planning techniques cannot offer.

How We Can Help

Our Estate and Succession Planning Team works with health professionals, medical practice owners, and other professionals to develop customized asset protection strategies. We can evaluate whether a Domestic Asset Protection Trust should be considered as part of your overall estate and wealth preservation plan and coordinate that planning with your business, tax, and succession objectives.

If you would like to discuss whether a Domestic Asset Protection Trust is appropriate for your circumstances, please contact the authors or your Butzel attorney. 

Robert Schwartz
248.258.2611
schwartzrh@butzel.com

Josephine Parrinello
248.258.1427
parrinello@butzel.com