Protect Your Assets from Lawsuits and Creditors

An Asset Protection Trust (APT) must be created in accordance with the Michigan Qualified Dispositions in Trust Act.  This is a very complex statute which prescribes the terms and conditions of an APT.  Any trust that does not comply with the Qualified Dispositions in Trust Act will not provide the benefits of an APT. 

The purpose of an APT is to protect assets owned by the trust from judgment creditors, and to allow the trustee of the trust to distribute the assets to the trust owner under certain conditions.  No other type of trust provides protection from creditors while still allowing the trustee to return assets to the trust owner.

An APT may benefit anyone who is more likely to be liable for a significant debt or claim payable to a judgment creditor, such as officers and directors of banks, general partners in real estate deals, and professionals subject to malpractice claims.  In addition, any individual who has accumulated substantial wealth, owns a business, or is high profile, may find that an APT is beneficial to their financial security.  An APT is also highly effective for prenuptial financial planning.  

Assets that the trust owner wants to protect from judgment creditors should be added to the APT, unless those assets are already protected by other laws. 

Certain assets are protected by other laws, and do not need the additional protection of an APT.   These are some assets protected from judgment creditors under Michigan law:

• Life insurance death benefits and cash value payable to a spouse or child of the insured
• Education savings accounts
• Qualified retirement accounts (IRA & 401(k))
• Real estate owned by a married couple (but only if one spouse is liable for a judgment)

Before using an APT, it should first be determined whether asset protection objectives may be achieved by using another legal arrangement.  For example, if the objective is to a protect a beneficiary from his or her creditors, then another type of trust may be more suitable.  Some types of business entities also provide protection from judgment creditors.  Finally, a Medicaid Trust protects assets from creditors, but the trust assets cannot be distributed to the trust owner.  

An "umbrella" policy is supplemental liability insurance.  In other words, it increases the dollar limits for liability insurance you already have.  Umbrella policies do not provide additional coverage against uninsured losses.  For example, if you are sued for a business matter, then a personal umbrella policy will not supplement business liability coverage.  In addition, some losses are simply excluded from coverage.  You must review the policy carefully to understand its limitations and exclusions.

Umbrella policies can be an important source of money to pay a judgment against you, and they are very affordable.  In that sense, they are a form of asset protection.  However, umbrella insurance does not actually protect your assets.  These policies only provide additional money to pay settlements or judgments that exceed the policy limits of insurance you already have.  Conversely, an APT prevents a judgment creditor from collecting any money that is held in the trust.

In summary, an APT prevents a creditor from collecting a judgment, while an umbrella policy provides additional resources to pay a judgment that is the result of an insured loss.