Many Michigan families own a cottage or cabin up north for vacations and weekend getaways as well as family retreats and reunions. Often, the property is faithfully protected as part of the family legacy and is passed down from generation to generation.
As a family celebrates births and marriages — and grows in number — sometimes tension can arise among family members about matters such as who can use the cottage at specific times and who is responsible for various expenses. Of even greater concern, if an individual family member encounters financial problems or goes through a divorce, a creditor or spouse might try to force sale of the property.
There are several different ways to address these potential problems. Options now include a powerful estate planning tool has only been available in Michigan since March 2017, when a new law went into effect. Depending on your circumstances, the best way to protect your treasured retreat from claims and to preserve the family peace might be to create a Domestic Asset Protection Trust — also referred to as a DAPT — and transfer the vacation property into the trust.
What Is a Domestic Asset Protection Trust / DAPT?
In Michigan, a DAPT can be created under Qualified Dispositions in Trust Act, which was adopted by the Michigan legislature in 2016 and took effect on March 8, 2017. Shortly before the effective date of the act, our BRMM trust and estate planning lawyers published an article titled Domestic Asset Protections Trusts Are Now Legal in Michigan, which gives an excellent overview of the law.
A DAPT is a special type of irrevocable trust under which the person setting up the trust — referred to as the settlor —transfers assets to the trust but can still benefit from the trust. The person creating the trust typically is a lifetime beneficiary of the trust and can retain some decision-making authority in the administration of the trust. Real estate is one type of asset that can be placed in a DAPT.
DAPTs are often used to protect assets from creditors, but there can be other reasons to create one as well. The rules that apply to creating this type of asset protection trust are complex. There are specific requirements and limitations, including provisions that prevent using the trust to defraud creditors or shield assets from a divorce property settlement. Setting up a DAPT should only be accomplished by a Michigan attorney with extensive knowledge and experience in trust law and estate planning.
How Would a DAPT Protect Your Family’s Vacation Home?
Every Domestic Asset Protection Trust is established through a trust document, which sets up the trust, designates the trustee(s), and specifies all the rules under which the trust will be administered. Each trust must be specifically created and drafted to fully accommodate the circumstances, needs, and goals of the individual or family creating the trust.
For a vacation home, the trust can protect against creditor claims against individual family members and claims by divorcing spouses of family members, as long as the trust is set up in accordance with the Michigan law. In addition, the trust documents can detail the trustee’s responsibilities regarding the property and include policies and guidelines for use and maintenance of the property. Examples of matters that can be addressed in the trust document include:
- Identification of the specific family members who are beneficiaries of the trust (which can and usually does include the settlor);
- Rules for determining use of the property at specific times and by individual beneficiaries;
- Allocation of responsibility for paying the expenses associated with use and maintenance of the property, such as insurance, taxes, utilities, repairs, and grounds maintenance;
- Designation of an independent and neutral trustee vested with administering the trust pursuant to the trust document terms;
- Provisions for participation by the settlor in decision-making with regard to certain fiduciary and administrative matters, as permitted by the law.
Each DAPT is unique, just as every estate plan is carefully tailored to the individual needs of the person creating it. If you create a Domestic Asset Protection Trust, your attorney will ensure that the terms of the trust specifically address your family’s circumstances.
Considerations in Creating a DAPT for a Vacation Home
When you discuss the possibility of creating a DAPT for your vacation home with your attorney, there will be a number of different considerations to take into account. There also may be other estate planning strategies that you can consider to accomplish your goals.
Since a DAPT is an irrevocable trust, full ownership of the property is transferred to the trustee when the trust is created. With some exceptions, an irrevocable trust cannot be changed or terminated, so control of the property is relinquished. However, since the settlor can benefit from the property for life, he or she does not relinquish any enjoyment or access to the property by creating the trust. The settlor can still participate in some decisions relating to administration of the trust as well, as long as the trust document is drafted in accordance with the law.
To protect the property against claims, the trust needs to be created a certain amount of time before creditor or divorce claims arise, which requires advance planning by the property owner. In addition, a DAPT is subject to the Uniform Fraudulent Conveyances Act, which was adopted at the same time as the Qualified Dispositions in Trust Act. Finally, there are federal estate and gift tax considerations that must be addressed when a Domestic Asset Protection Trust is created.
A Domestic Asset Protection Trust should be created in the context of an overall estate plan that takes into account all of an individual’s or family’s present and future needs and goals. Consulting with a Michigan estate planning attorney is the only way to accurately and completely assess your own situation to determine whether a creating a DAPT for your family vacation home is the right choice for you and your family.
A DAPT is not the best solution for every family-owned real estate “up north.” Other options include family-owned limited liability companies (LLCs), partnerships, or revocable trusts. But in the right circumstances, a DAPT offers protections unavailable elsewhere.
Talk With Our Trusted BRMM Attorneys About DAPTs
If you have questions about the Michigan law on Domestic Asset Protection Trusts or would like to discuss the possibility of creating a DAPT or other legal means to protect your family vacation home, our BRMM attorneys are here to help. We will explain the details about how a DAPT works, as well as explore other options that may be available to address your concerns, interests, and goals.
Our office is located in Troy, Michigan. BRMM has served residents of throughout southeastern Michigan since the 1970s. We provide services throughout the state and to out-of-state residents with an interest in a Michigan estate. We also help clients who own property or have interests in both Michigan and Florida. Call us at (248) 213-9514 or complete our online form to set up your free initial consultation.