Client Alerts

The Ohio Legacy Trust Act: Ohio at the Forefront of Asset Protection

By: James A. Goldsmith, Stuart R. Susskind and Richard G. Hardy

About: Trusts & Estates, Corporate Restructuring, Bankruptcy & Creditors’ Rights

March 2013 – The Ohio Legacy Trust Act is part of Ohio House Bill 479, commonly known as the Ohio Asset Management Modernization Act (the “Act”), which was signed into law by Governor Kasich on December 20, 2012 and which will take effect on March 27, 2013. With the passage of this Act, Ohio has leaped to the forefront of legitimate asset protection jurisdictions.

The Act provides for the creation of a new type of trust in Ohio, referred to as an “Ohio Legacy Trust”. A Legacy Trust provides an unprecedented level of asset protection, previously unavailable under Ohio law. Ohio joins twelve other states in allowing these types of self-settled asset protection trusts. For the first time under Ohio law, an individual can now create a trust, transfer his or her assets to it, remain as a beneficiary of the trust and enjoy protection from the claims of future creditors against the trust’s assets.

The Act provides a number of requirements for a valid Legacy Trust. The Grantor can have no power to revoke or terminate the trust. However, the Grantor may retain many other powers and rights with regards to the trust property. The Grantor can, at the discretion of the Trustee, receive discretionary distributions of income and/or principal from the Trust. In addition, the Grantor can have all of the following rights and powers:

  1. the right to withdraw up to 5% of the trust property on an annual basis;
  2. the right to appoint the property to persons other than himself or his creditors;
  3. the right to continue to live in a residence held or acquired by the Trust;
  4. the right to veto distributions from the Trust to other beneficiaries; and
  5. the right to remove and replace the Trustee.

The Ohio Legacy Trust is an effective shield for most claims that arise after the creation of the Trust. The Act imposes stringent requirements on creditors seeking to recover assets held in a validly created Legacy Trust. Critically, in providing a creditor’s sole remedy, the Act creates a new and very narrow cause of action. A creditor can “avoid” a transfer only if the creditor can show that the transfer was made with specific intent to defraud that specific creditor. Moreover, the creditor must prove this action by clear and convincing evidence, a very high standard to meet.The Act also significantly limits the time period in which a creditor may bring this action. The Act generally limits the time to bring the action to 18 months or, in some cases, longer if a creditor takes certain steps to collect the obligation within 3 years of the transfer to the Trust. In further limiting creditors, the Act requires a court to award reasonable attorney’s fees and costs to the prevailing party in any final judgment.

The Act also includes other amendments to the Ohio Revised Code affecting the rights of creditors. Perhaps the most significant change is that Ohio’s homestead exemption increases from $20,200 to $125,000. This means that a married couple may exempt from creditors up to $250,000 of equity in their Ohio residence. The Act also expands existing exemptions for retirement accounts to include appreciation or gains from those accounts, adds an exemption for 529 Plans, and extends these exemptions to beneficiaries who receive them by reason of death, among other changes.

Finally, the Act modifies the existing Ohio Uniform Fraudulent Transfer Act (the “OUFTA”), to provide that a transfer is fraudulent as to creditors with claims arising within a reasonable time not to exceed four years after the transfer. Effectively, this means that creditors with claims arising after the transfer may not rely on the one year savings statute under the OUFTA.

Because the Act has broad impact on creditors and is complex, this Client Alert is not intended to be exhaustive. Please contact any member of Ulmer & Berne’s Trust and Estates or Creditors’ Rights Groups for further information.