On July 1, 2019, Indiana joins seventeen (17) other states now legalizing what is commonly referred to as a self-settled domestic asset protection trust, designated by Indiana law as a “Legacy Trust.” The domestic asset protection movement began back in 1997 in Delaware and Alaska. Initially, the movement was motivated to offer within the United States domestic asset protection “havens” that previously only existed “offshore.” Indiana is now joining the ranks of domestic asset protection jurisdictions so that its residents may protect assets from creditor claims without being required to move their assets outside of the State of Indiana, thereby retaining business in Indiana.

How is a Legacy Trust Different?

The Legacy Trust offers new ways to protect property from claims of creditors. Before the Legacy Trust, Indiana law provided the general rule that creditors of an individual creating a trust as the “settlor,” transferring property to that trust and retaining beneficial rights in the trust property, could not escape the claims of the settlor’s creditors against that trust’s property. Beginning in July, a properly funded and established Indiana Legacy Trust is an exception to this prior law. You will now be permitted to transfer property in a “qualified disposition” to an irrevocable Legacy Trust, retain certain rights in the property as a beneficiary, and limited control over the property, including serving as an investment advisor to the Trustee, and future claims of your creditors, subject of course to some exceptions, may not satisfy those claims against your Legacy Trust property.

What Property is Not Protected by a Legacy Trust?

The asset protection offered by a Legacy Trust is not absolute, and certain property will not be protected even within the trust. A lender may still satisfy claims against property that you or the Trustee of your Legacy Trust list on an application or a financial statement in connection with receiving or maintaining a loan or credit notwithstanding any change to the character, form or ownership of the assets. Property transfers to the Legacy Trust rendering the transferor insolvent, done to defraud creditors, made in contemplation of filing for bankruptcy, derived from unlawful activities, or the transferor’s “qualifying affidavit” fails to disclosed pending or threatened lawsuits or administrative proceedings, are all situations causing the property transferred to not be protected under the new law. Transfers of property that are prohibited by the settlor’s agreements, notes, guarantees, mortgages, indentures, instruments, undertakings or other documents do not receive the protections of the Legacy Trust law.

What Claims May Continue to be Satisfied from Your Legacy Trust?

Additionally, no matter what property is in a valid Legacy Trust, the property will not be protected against the following types of claims:

Claims that arose prior to a qualified disposition of property to a Legacy Trust and an action is brought not later than the later of two (2) years after the transfer was made or (6) six month after the transfer was either made a public record or recorded or otherwise was discovered or could have reasonably been discovered by the claimant.
Claims arising after a qualified disposition of property to a Legacy Trust, if an action is brought within two (2) years after the qualified disposition.
Actions brought in Indiana under the Uniform Fraudulent Transfer Act in which the requirements for recovery are met by clear and convincing evidence; however, a claim by the State of Indiana has a lower evidence standard and longer claim period.
Claims for child support under a judgment or court order.
Court judgments or orders for marital property division in the dissolution of the settlor’s marriage or legal separation when the qualified disposition occurred during the marriage or within thirty (30) days before the marriage, unless timely notice of the transfer was given to the other party.
Settlor’s Bankruptcy Trustee may reclaim assets transferred to a Legacy Trust for ten (10) years after the transfer.
Legacy Trust is not exempt and is a counted for determining settlor’s Medicaid eligibility.

Who Should Consider Establishing a Legacy Trust?

A Legacy Trust is meant to protect extra wealth against future unforeseen claims. The ideal candidate for establishing a Legacy Trust has significantly more net wealth accumulated than existing levels of debts or claims, and more than he or she reasonably expects to ever need in the future. He or she is still actively working in a high-risk profession or business, or simply wants to retain control over the property during his or her lifetime... just in case the market takes a nosedive.

What Costs Are Involved in Establishing a Legacy Trust?

Establishing and administering a Legacy Trust is more time-consuming and costly than other types of trusts. The costs will include:

Initial consultation to broadly review and evaluate your personal situation to determine whether a Legacy Trust appears appropriate for you.
Expenses related to a due diligence detailed review by counsel and fiduciary trustee of your assets and review of your loan and other documents concerning your liabilities.
Drafting and finalizing the Legacy Trust instrument with the specific provisions you desire.
Working with the selected trustee and other advisors to provide required documentation and transfer instruments.
Continuing trustee fees for administering the Legacy Trust and investing its property.
Continuing accounting fees necessary to complying with tax reporting requirements.

Are Transfers to a Legacy Trust Completed Gifts or Are Its Assets Subject to Federal Estate Taxes at My Death?

A qualified disposition of property to a Legacy Trust may be structured as either a completed gift or an incomplete gift for federal estate and gift tax purposes. The choice in the structure will depend on each person’s financial situation and current or anticipated changes in the federal estate and gift tax laws. An incomplete gift structure allows the settlor to retain more “control” over the property transferred to the Legacy Trust. But, in either case, the settlor can retain the right to receive discretionary distributions of principal or income as determined by an independent trustee.

How Do I Get Started in this Process?

New and existing clients may contact us for a Legacy Trust Information Questionnaire to complete and bring to an initial consultation. Our hourly rates will apply to the consultation and related future work that you authorize. You should anticipate a process of due diligence that takes some time in establishing a Legacy Trust, and likely a little lengthier at this time due to how new the law is and possible trustees requiring time to study the new law.

If you have any questions about the information in this Legal Alert or if you have received a charge, please contact your Rothberg attorney to see if we can assist you.

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The Legal Alert is for general information purposes only, and is not intended as legal, tax, or accounting advice or as recommendations to engage in any specific transaction and does not purport to be comprehensive. Under no circumstances should any information contained in this Legal Alert be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant, or other advisor regarding your specific situation. Rothberg Logan & Warsco LLP will not be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission.

Legal Alert: Indiana Legacy Trusts