Ohio Adopts Advanced Creditor-Proof Trust Provisions

Kegler Brown Creditors' Rights + Bankruptcy Alert

On March 27, 2013, Ohio took a bold step to allow individuals to shield assets from subsequent creditors with the Ohio Legacy Trust Act, Revised Code Section 5816.01 et seq. This legislation represents Ohio’s domestic asset protection trust provisions. Although other jurisdictions have other similar domestic asset protection trust legislation, by some reports, Ohio’s Legacy Trust Act creates the most favorable environment in the nation for individuals seeking creditor protection.

Under prior law, Ohio followed the common practice of not protecting the general assets of its citizens from forced surrender of those assets to judgment creditors unless the assets were within a narrowly defined list of exemptions from execution. Typical examples of exempt assets included retirement plan assets, a limited amount of personal property and a modest homestead exemption. Self-settled trusts were previously not protected from creditors unless otherwise exempt.

With the adoption of the Ohio Legacy Trust Act, an individual, whether a resident of Ohio or elsewhere, can create an irrevocable trust and fund it with assets that become beyond seizure by subsequent creditors if the basic statutory requirements are met. In effect, Ohio has extended the “spendthrift” provisions seen in most common trusts to thwart subsequent creditors.

Lenders may be surprised to discover that creditors will have no easy time challenging transfers of assets into a Legacy Trust. A creditor will not be able to set aside a transfer unless the creditor proves that the transfer was made with the specific intent to defraud that specific creditor (and not creditors in general). The creditor must prove its case by clear and convincing evidence (not merely by a preponderance of the evidence). Even the statute of limitations for bringing an action to challenge a transfer is short. A creditor with an existing claim has just 18 months after the transfer, or six months after discovery of the transfer, to file its action. The filing of a personal property transfer document in the newly-created registry with the applicable Ohio county recorder provides constructive notice of a personal property transfer to all creditors. If a creditor challenge is unsuccessful, the court hearing the challenge is required to award attorneys’ fees to the trust creator.

Ohio’s new legislation provides as much, if not more, protection than similar “asset protection trust” legislation in other states. For example, creation of an Ohio Legacy Trust is not substantially more difficult than the creation of any other inter vivos trust. The trustee must either be an individual resident of Ohio (other than the trust creator) or a bank. The specific provisions dealing with asset protection are very straight forward.

For decades, business executives, physicians, architects, real estate developers, lawyers and accountants, just to name a few professions, have been concerned about protection of their individual assets in the event of an adverse judgment or finding of liability. With an Ohio Legacy Trust, those individuals can create statutorily enacted protections between their personal assets and subsequent creditors. An Ohio Legacy Trust could also be a valuable supplement to or replacement of a prenuptial agreement in light of the legislation’s restrictive definition of “spouse” as the settlor’s spouse at the time of the asset transfer.

For more information on the Ohio Legacy Trust Act, contact Tom Sigmund, Ken Cookson, or Christy Prince at Kegler Brown Hill & Ritter in Columbus at 614-462-5400.