Legal Strategies: Ohio’s Legacy Trust Law Protects Assets

Business clients typically minimize exposure to creditor claims by using liability-limiting business structures, by maintaining appropriate insurance coverages, by maximally funding qualified retirement plans and by dispersing asset ownership within the family.

High-net-worth clients, whose activities subject them to extraordinary claims, may now also use an additional tool to protect a portion of their assets – an Ohio Legacy Trust (OLT).

Placing assets into a plain vanilla revocable living trust does not shield them from creditors. An OLT is an irrevocable trust, the assets of which are protected. An OLT is funded with “excess” assets – assets that are not needed to take care of existing obligations and assets that are not “already-protected.”

Step 1: Solvency analysis.  

•  Assets are listed and debts deducted, along with actual and contingent liabilities (lawsuits, personal guarantees, etc.).
•  Already protected assets (such as funds in qualified retirement plans) are also deducted.
•  Future earnings are considered.
•  A cushion is added – in case calculations are off.

Some or all of the resulting “exposed net worth” can be moved to an Ohio Legacy Trust.

Step 2: Solvency affidavit.

An affidavit is recorded saying the client is legal owner of the property being transferred, that creditors are not being defrauded, that the client will not be rendered insolvent by the transfer, that no lawsuits or administrative proceedings have been filed or are threatened, and that bankruptcy is not contemplated.

Step 3: Waiting period.

Having created the Ohio Legacy Trust, filed the solvency affidavit and transferred property to the trust and waited, in most instances 18 months, a creditor’s claims against the OLT are barred, unless the creditor can prove by clear and convincing evidence the transfer was fraudulent – a high and difficult hurdle.

Structure of OLT.

The client (and possibly the client’s spouse and children) is the lifetime beneficiary of the OLT. The trustee can be a qualified financial institution, or any person, other than the client. The trustee should not be a subordinate of the client. At least one trustee must have ties to Ohio.

Client rights over the OLT.

The client can retain these rights and powers over the Ohio Legacy Trust:

•  To receive trust income and to receive principal – at the trustee’s discretion.
•  To name by will ultimate trust beneficiaries (but not the client’s estate or creditors).
•  To veto distributions to other current trust beneficiaries.
•  To remove the trustee and appoint a new one.
•  To demand up to 5% of the trust property annually.
•  To live in a residence owned by the OLT.

Client Management rights.

The client can retain control and management of assets moved into trust as follows:

•  A limited liability company is created to hold financial or business assets, or real estate.
•  The client is named the manager of the LLC, perhaps under a long-term contract.
•  The member’s interest in the LLC is then assigned to the OLT.

The result: While the client owns no member’s interest that could be attached, he still is in management control.

In sum, clients can achieve a great degree of asset protection by taking common-sense steps in arranging their affairs. In addition, a client with a large net worth and one whose activities subject him to potential extraordinary claims might now also consider setting up an OLT for a portion of their assets.

Have legal strategy questions? Email Nils Johnson Jr. at [email protected].

Copyright 2024 The Business Journal, Youngstown, Ohio.