Report of the Estate Planning, Trust and Probate Law Section

Report of the Estate Planning, Trust and Probate Law Section 1 2 3 4 5 6 7 To the Council of Delegates: The Estate Planning, Trust and Probate Law Section respectfully requests your favorable consideration of the following proposal to adopt the Ohio Legacy Trust Act. A rationale for the proposal follows the statutory language below. Respectfully submitted, 8 9 10 11 EXHIBIT A Section 5816.01 Short Title William J. McGraw, Troy Chair 12 This chapter shall be known as and may be cited as the Ohio Legacy Trust Act. 13 Section 5816.02 Chapter Definitions 14 As used in this chapter, unless the context otherwise requires: 15 (A) Advisor means a person who: 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 (1) satisfies the eligibility criteria of Revised Code 5816.11(A); and (2) is given authority by the terms of an Ohio Legacy Trust to remove and/or to appoint one or more trustees or to direct, consent to or disapprove of a trustee s actual or proposed investment or distribution decisions. Any person who satisfies the criteria of this division shall be considered an advisor even if that person is denominated by another title, such as protector. (B) Asset means property of a Transferor, but does not include any of the following: (1) property to the extent it is encumbered by a valid lien; (2) property to the extent it is generally exempt at the time of a Qualified Disposition under applicable non-bankruptcy law, including but not limited to Revised Code 2329.66; (3) property held in the form of a tenancy by the entireties to the extent that, under the law governing the entireties estate at the time of a Qualified Disposition, it is not subject to process by a Creditor holding a claim against only one tenant; 15

31 32 33 34 35 36 37 38 39 40 41 42 (4) property transferred from a Non-Legacy Trust to an Ohio Legacy Trust to the extent that property would not be subject to attachment under the applicable nonbankruptcy law governing that Non-Legacy Trust. (C) Bankruptcy Code means the Bankruptcy Code codified in Title 11 of the United States Code, as amended and as it may be further amended from time to time. (D) Beneficiary shall have the meaning ascribed to it in Revised Code 5801.01(C). (E) Claim means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. (F) Creditor means, with respect to a Transferor, a person who has a claim and any transferees, assignees, or successors of or to that claim. 43 (G) Debt means liability on a Claim. 44 45 46 47 48 49 50 51 52 53 54 55 (H) Disposition means a transfer, conveyance, or assignment of property, including but not limited to a partial, contingent, undivided or co-ownership interest in property. Disposition also includes the exercise of a power so as to cause a transfer of property to a trustee or trustees, but shall not include the release or relinquishment of an interest in property that, until the release or relinquishment, was the subject of a Qualified Disposition. (I) Internal Revenue Code means the Internal Revenue Code of 1986, codified in Title 26 of the United States Code, as amended and as it may be further amended from time to time. (J) Investment decision means any participation in any decision regarding the retention, purchase, sale, exchange, tender, or other transaction affecting the ownership of or rights in investments. 56 57 58 (K) (L) (M) Lien has the meaning ascribed to it in Revised Code 1336.01(H). Non-Legacy Trust means any trust other than an Ohio Legacy Trust. Non-Qualified Trustee means any trustee other than a Qualified Trustee. 59 60 61 62 63 64 (N) Ohio Legacy Trust or legacy trust means an irrevocable trust evidenced by a written trust instrument that: (1) has, names, or appoints at least one Qualified Trustee for or in connection with the property that is the subject of a Qualified Disposition; (2) expressly incorporates the laws of this state to govern the validity, construction and administration of the trust; 16

65 66 67 (3) expressly states that the trust is irrevocable; and (4) has a Spendthrift Provision applicable to the interests of any beneficiary in trust property, including any interests of a Transferor. 68 A trust that satisfies the criteria of the above divisions (1) through (4) shall be 69 considered an Ohio Legacy Trust even if the trust instrument also allows for one or more 70 Non-Qualified Trustees, and regardless of the language used to satisfy divisions (1) 71 through (4). 72 73 (O) (P) Person has the meaning ascribed to it in Revised Code 5801.01(N). Property has the meaning ascribed to it in Revised Code 5801.01(P). 74 75 76 77 (Q) Qualified Affidavit means an affidavit that meets the requirements of Revised Code 5816.06. (R) Qualified Disposition means a disposition by or from a Transferor to any trustee of a legacy trust. 78 (S) Qualified Trustee means a person who is not a Transferor and who: 79 80 81 82 83 84 85 86 87 88 89 90 91 92 (1) in the case of a natural person, is a resident of this state, or, in all other cases, is authorized by the law of this state or by a court of competent jurisdiction of this state to act as a trustee and whose activities are subject to supervision by the Ohio Superintendent of Banking, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, or The Office of Thrift Supervision or any successor to them; and (2) maintains or arranges for custody in this state of some or all of the property that is the subject of the Qualified Disposition, maintains records for the Ohio Legacy Trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation of required income tax returns for the Ohio Legacy Trust, or otherwise materially participates in the administration of the Ohio Legacy Trust. (T) Spendthrift Provision shall have the meaning ascribed to it in Revised Code 5801.01(T). (U) Spouse and former spouse means only the person a transferor was married to at or before the time a Qualified Disposition is made. 93 94 (V) (W) Transferor means a person who directly or indirectly makes a disposition. Valid Lien has the meaning ascribed to it in Revised Code 1336.01(M). 95 96 Section 5816.03 Exemptions Spendthrift Provision: Creation, Effect, Exceptions, and 97 (A) In addition to any other method allowed by law, the Spendthrift Provision of an 17

98 99 100 101 102 103 104 105 106 107 108 109 110 111 112 Ohio Legacy Trust may be stated pursuant to the rules of Revised Code 5805.01(B). (B) Except as provided elsewhere in this section, the Spendthrift Provisions of an Ohio Legacy Trust shall restrain both voluntary and involuntary transfer of a Transferor s interest in that trust. Any Spendthrift Provision in an Ohio Legacy Trust is, and shall be considered to be, enforceable under applicable non-bankruptcy law within the meaning of 541(c)(2) of the Bankruptcy Code, or any successor provision, and such effect shall accrue whether or not the relevant Ohio Legacy Trust makes any reference to such effect. In addition to the restraints required by this division, an Ohio Legacy Trust and its Spendthrift Provisions may also provide for any other restraints on alienation that are permitted by Ohio law. (C) Notwithstanding division (B) or the terms of any Spendthrift Provision, but subject to divisions (D), (E), and (F), a Transferor s interest in property that is the subject of a Qualified Disposition may be attached or otherwise involuntarily alienated in connection with: (1) any debt the Transferor owes pursuant to an agreement or court order for: 113 (a) payment of child or spousal support or alimony to the Transferor's spouse, 114 former spouse or children; or 115 (b) division or distribution of property in favor of the Transferor's spouse or former 116 spouse; 117 118 119 120 121 or (2) any debt the transferor owes to a person as a result of death, personal injury, or property damage suffered by that person on or before the time of the Qualified Disposition in question, if that death, personal injury or property damage is determined to have been caused in whole or in part by the tortious act or omission of either: 122 (a) the Transferor; or 123 (b) another person for whom the Transferor is vicariously liable. 124 125 126 127 128 129 130 131 132 133 (D) A transferor's interest in property that is transferred pursuant to a qualified disposition, and such transferor's beneficial interest in a legacy trust, shall not be subject to any claim for forced heirship or legitime. (E) A transferor's interest in property that is transferred pursuant to a qualified disposition, and such transferor's beneficial interest in a legacy trust, shall not be subject to a distributive award under Revised Code 3105.171, or to any similar award under the law of another jurisdiction, to a person other than the transferor's spouse or former spouse. Courts shall be liberal in finding that such similarity exists. (F) Nothing in this section shall deprive any Beneficiary of any exemption rights that they may have under applicable law after trust property is received by that person. 18

134 Section 5816.04 Limits To Transferor's Authority 135 To the extent conferred by the governing legacy trust instrument, a Transferor to 136 an Ohio Legacy Trust may have any or all of the rights, powers, and interests described in 137 Revised Code 5816.05. A Transferor shall have no rights, powers, or interests in, over, 138 to, or regarding the corpus or income of an Ohio Legacy Trust unless such rights, powers, 139 or interests are permitted by both Revised Code 5816.05 and the governing trust 140 instrument, and any written, verbal, tacit, express, implied, or other agreement or 141 understanding purporting to grant, permit, or recognize any greater rights, powers, or 142 interests shall be void. Any portion of a trust instrument that is not voided shall remain 143 valid and effective. 144 Section 5816.05 Permissible Retained Rights of a Transferor 145 A legacy trust may allow or provide for any or all of the following rights, powers 146 or interests, none of which grants or shall be deemed to be, either alone or in any 147 combination, a power to revoke a trust: 148 149 (A) A Spendthrift Provision or a provision that, upon the happening of a defined event, results in the termination of a Transferor s right to mandatory income or principal. 150 (B) A Transferor's power to veto a distribution from the trust. 151 152 153 154 (C) A power of appointment (other than a power to appoint to a Transferor, the Transferor's Creditors, the Transferor's estate or the Creditors of the Transferor's estate) exercisable by will or other written instrument of a Transferor effective only upon the Transferor's death. 155 156 (D) (E) A Transferor's right to receive trust income as set forth in the trust instrument. A Transferor's: 157 158 159 160 161 162 163 164 165 166 167 168 169 (1) potential or actual receipt of income or principal from a charitable remainder unitrust or charitable remainder annuity trust as those terms are defined in 664 of the Internal Revenue Code, and any successor provision; and (2) right, at any time and from time to time by written instrument delivered to the trustee, to release such Transferor's retained interest in such a trust, in whole or in part, in favor of one or more charitable organizations that has or have a succeeding beneficial interest in such trust. (F) A Transferor's power to consume, invade or appropriate property of the trust, but only if limited in each calendar year to five percent of the value of the trust principal at the time of exercise of the power. (G) A Transferor's potential or actual receipt or use of principal or income if the potential or actual receipt or use is or would be the result of any one or more Qualified Trustee acting: 19

170 171 172 173 174 175 176 177 178 179 180 181 182 (1) in such Qualified Trustee's discretion. For purposes of this section, a Qualified Trustee is presumed to have discretion with respect to the distribution or use of principal or income unless the discretion is expressly denied to the trustee by the terms of the trust instrument; or (2) pursuant to a standard in the trust instrument that governs the distribution or use of principal or income; or (3) at the direction of an Advisor described in Revised Code 5816.02(A) who is acting in the Advisor's discretion or pursuant to a standard in the trust instrument that governs the distribution or use of principal or income. If an advisor is authorized to direct such distributions or use, then the Advisor s authority shall be presumed to be discretionary unless otherwise expressly stated in the trust instrument. (H) A Transferor's right to remove any Advisor and appoint a new Advisor who satisfies the eligibility criteria set forth in Revised Code 5816.11(A). 183 (I) A Transferor s right to remove any trustee and appoint a new trustee. 184 185 186 187 188 189 190 191 192 193 194 195 196 197 198 199 200 201 (J) A Transferor's potential or actual use of real or tangible personal property including but not limited to property held under a qualified personal residence trust within the meaning of the term as described in 2702(c) of the Internal Revenue Code, and any successor provision, or a Transferor's possession and enjoyment of a qualified interest within the meaning of such term as described in 2702(b) of the Internal Revenue Code and any successor provision. (K) Provisions requiring or permitting the potential or actual use of income or principal to pay, in whole or in part, income taxes due on income of the trust, including but not limited to provisions permitting such use in the discretion of any one or more Qualified Trustee acting in such Qualified Trustee's discretion or at the direction of an Advisor who is acting in such Advisor's discretion. (L) The ability of a Qualified Trustee, whether pursuant to a qualified trustee s discretion or the terms of an Ohio Legacy Trust or the direction of an Advisor, to pay after the death of a Transferor all or any part of the debts of the Transferor outstanding at the time of the Transferor's death, the expenses of administering a Transferor's estate, or any estate, gift, generation skipping transfer or inheritance tax. (M) A provision that pours back after the death of a Transferor all or part of the trust property to the Transferor s estate or any trust. 202 Section 5816.06 Qualified Affidavits and Related Rules 203 204 205 (A) Except as set forth elsewhere in this Section, a Transferor shall sign a Qualified Affidavit before or substantially contemporaneously with making a Qualified Disposition. 206 (B) A Qualified Affidavit shall be notarized and shall state under oath that the 20

207 208 209 210 211 212 213 214 215 216 217 218 219 220 221 222 223 224 225 226 227 228 229 230 231 property being transferred to the trust was not derived from unlawful activities and that the Transferor: (1) has full right, title, and authority to transfer the property to the Ohio Legacy Trust; (2) will not be rendered insolvent immediately after the transfer of the property to the Ohio Legacy Trust; (3) does not intend to defraud a Creditor by transferring the property to the Ohio Legacy Trust; (4) does not have any pending or threatened court actions against the Transferor, except for those court actions identified by the affidavit or an attachment thereto; (5) is not involved in any administrative proceedings, except for those proceedings identified by the affidavit or an attachment thereto; and (6) does not contemplate, at the time of transfer, filing for relief under the provisions of the Bankruptcy Code. (C) A Qualified Affidavit shall be considered defective if it materially fails to meet the criteria set forth in Revised Code 5816.06(B), provided that a Qualified Affidavit shall not be deemed defective due to any or all of the following: (1) non-substantive variances from the language set forth in Revised Code 5816.06(B); (2) statements or representations in addition to those set forth in Revised Code 5816.06(B) if such statements or representations do not contradict those required by Revised Code 5816.06(B); or (3) technical errors in the form, substance, or method of administering an oath if such errors were not the fault of the affiant and the affiant reasonably relied upon another person to prepare or administer the oath. 232 (D) A Qualified Affidavit shall not be required: 233 234 235 236 (1) from a transferor who is not a beneficiary of the Ohio Legacy Trust that receives the Disposition; or (2) in connection with Dispositions that are part of, are required by, or are the direct result of, a prior Qualified Disposition that was made pursuant to a Qualified Affidavit. 237 (E) If a Qualified Affidavit is required by this Section and a Transferor: 238 239 (1) fails to timely sign a Qualified Affidavit; or (2) signs a defective Qualified Affidavit; 21

240 then, subject to the normal rules of evidence, such failure or defect may be 241 considered as evidence in any proceeding commenced pursuant to Revised Code 242 5816.07, but no Ohio Legacy Trust or the validity of any attempted Qualified 243 Disposition shall be affected in any other way due to such failure or defect. 244 Section 5816.07 Restrictions on Actions, Remedies, and Claims 245 246 247 248 249 250 251 252 253 254 255 256 257 258 (A) Notwithstanding any law to the contrary, no creditor may bring any action of any kind, including but not limited to an action to enforce a judgment entered by a court or other body having adjudicative authority or an action at law or in equity or an action for an attachment or other final or provisional remedy, against any person who made or received a Qualified Disposition or against any property that is the subject of a Qualified Disposition or against any trustee of a legacy trust, except that a creditor may, subject to the rules of this Section and Revised Code 5816.08, seek to avoid any Qualified Disposition of an asset on the grounds that a Transferor made the Qualified Disposition with the intent to defraud the specific Creditor bringing the action. (B) A Creditor's cause of action or claim for relief under division (A) is extinguished unless the action under division (A) is brought by a Creditor of a Transferor who meets one of the following requirements: (1) the Creditor is a Creditor of the Transferor before the relevant Qualified Disposition, and the action under division (A) is brought within the later of: 259 (a) three years after the Qualified Disposition; or 260 (b) one year after the Qualified Disposition is or reasonably could have been 261 discovered by the Creditor if the Creditor: 262 (i) can demonstrate that the Creditor asserted a specific claim against the 263 Transferor before the Qualified Disposition; or 264 (ii) files a suit, other than an action under division (A), against the Transferor that 265 asserts a claim based on an act or omission of the Transferor that occurred before the 266 267 Qualified Disposition, and that suit is filed within three years after the Qualified Disposition; 268 269 270 271 272 273 274 or (2) the Creditor becomes a Creditor after the Qualified Disposition, and the action under division (A) of this section is brought within three years after the Qualified Disposition. (C) In any action described in this section, the burden is upon the Creditor to prove the matter by clear and convincing evidence. The preceding sentence provides substantive rather than procedural rights under Ohio law. 275 (D) Notwithstanding any law to the contrary, a Creditor, including a Creditor whose 22

276 277 278 279 280 281 282 283 284 285 286 287 288 289 290 291 292 293 294 295 claim arose before or after a Qualified Disposition, or any other person shall have only the rights and remedies with respect to a Qualified Disposition that are provided in this section and Revised Code 5816.08, and neither the Creditor nor any other person shall have any claim or cause of action against any trustee or Advisor of an Ohio Legacy Trust, or against any person involved in the counseling, drafting, preparation, execution or funding of a legacy trust. (E) Notwithstanding any law to the contrary, and in addition to any other limitations imposed by this section, no action of any kind, including but not limited to an action to enforce a judgment entered by a court or other body having adjudicative authority, shall be brought at law or in equity against a trustee or an Advisor of an Ohio Legacy Trust, or against any person involved in the counseling, drafting, preparation, execution or funding of an Ohio Legacy Trust, if, as of the date such action is brought, an action by a creditor with respect to the Ohio Legacy Trust would be barred under this section. (F) If more than one Qualified Disposition is made in connection with the same Ohio Legacy Trust, then: (1) each Qualified Disposition will be separately evaluated, without regard to any subsequent Qualified Disposition, to determine whether a Creditor's claim regarding that particular Qualified Disposition is extinguished as provided in division (B); and (2) any distribution to a Beneficiary shall be deemed to have been made from the latest Qualified Disposition. 296 (G) For purposes of this section, counseling, drafting, preparation, execution 297 or funding of an Ohio Legacy Trust includes the counseling, drafting, preparation, 298 execution and funding of a limited partnership, limited liability company, corporation, or 299 similar or comparable entity if the limited partnership interests, limited liability company 300 interests, stock, or other similar or comparable ownership interests in the relevant entity 301 are subsequently transferred to the legacy trust. 302 Section 5816.08 Avoidance of Qualified Dispositions 303 304 305 306 307 308 309 310 311 312 (A) If a qualified disposition to an Ohio Legacy Trust is avoided pursuant to Revised Code 5816.07(A), then: (1) that specific Qualified Disposition shall be avoided only to the extent necessary to satisfy a Transferor's debt to the Creditor who brought the action pursuant to Revised Code 5816.07(A), and any part of the Qualified Disposition that is not used to satisfy such debt shall remain subject to the trust; and (2) all other qualified dispositions to the trust, including but not limited to any qualified disposition of a partial, co-ownership or undivided interest in property by a transferor other than the transferor whose qualified disposition is avoided, together with the Ohio Legacy Trust itself, shall remain valid and effective. 313 (B) If a Qualified Disposition is avoided pursuant to Revised Code 5816.07(A), 23

314 315 316 then: (1) if the court is satisfied that a Qualified Trustee has not acted in bad faith in accepting or administering the property that is the subject of the Qualified Disposition: 317 (a) the Qualified Trustee shall have a first and paramount lien against the property 318 that is the subject of the Qualified Disposition in an amount equal to the entire cost, 319 including attorneys' fees, properly incurred by the Qualified Trustee in the defense of 320 the action or proceedings to avoid the Qualified Disposition; 321 (b) the Qualified Disposition shall be avoided subject to the proper fees, costs, 322 preexisting rights, claims and interests of the Qualified Trustee and of any predecessor 323 Qualified Trustee that has not acted in bad faith; and 324 (c) for purposes of this subdivision, it shall be presumed that the Qualified Trustee 325 did not act in bad faith merely by accepting the property; 326 327 328 329 330 331 332 333 334 335 336 337 338 339 340 341 342 and (2) if the court is satisfied that a Beneficiary of an Ohio Legacy Trust has not acted in bad faith in receiving a distribution from that trust, the avoidance of the Qualified Disposition shall be subject to the right of the Beneficiary to retain that distribution if the distribution was made upon the exercise of a trust power or discretion vested in a Qualified Trustee or advisor and that power or discretion was exercised prior to the Creditor's commencement of an action to avoid the Qualified Disposition. For purposes of this subdivision, it shall be presumed that the Beneficiary, including a Beneficiary who is also a Transferor of the trust, did not act in bad faith merely by creating the trust or by accepting a distribution made in accordance with the terms of the trust; and (3) a Creditor shall have the burden of proving by clear and convincing evidence that a trustee or Beneficiary acted in bad faith as required under division (B) of this section. The preceding sentence provides substantive rather than procedural rights under Ohio law. (C) As part of any final judgment rendered pursuant to this section or Revised Code 5816.07(A), the court shall award reasonable attorneys fees and costs to any prevailing party. 343 344 Section 5816.09 Trustees Automatic Removal of Trustees; General Rules on Successor 345 346 347 348 349 Successor or replacement trustees shall be determined or selected as follows: (A) If, in any action involving an Ohio Legacy Trust or any qualified trustee thereof, a court takes any action whereby the court declines to apply the law of this state in determining: (1) the validity, construction, or administration of such trust; 24

350 351 352 353 (2) the effect of any term or condition of the trust, including but not limited to a Spendthrift Provision; or (3) the rights and remedies of any Creditor or other suitor in connection with a qualified disposition; 354 then immediately upon the court's action, and without need for any order of any 355 court, any qualified trustee who is a party to that action shall cease in all respects to be a 356 trustee of the Ohio Legacy Trust and the position of trustee shall be occupied in 357 accordance with the terms of the Ohio Legacy Trust or, if the terms of the trust do not 358 provide for another trustee and the trust would otherwise be without a trustee, a court of 359 this state, upon the application of any Beneficiary of the Ohio Legacy Trust, shall appoint 360 a successor Qualified Trustee upon such terms and conditions it determines to be 361 consistent with the purposes of the trust and this chapter. Upon a qualified trustee 362 ceasing to be trustee pursuant to this division, that qualified trustee shall have no power 363 364 or authority other than to convey trust property to such other trustee that is appointed, installed, or serving in accordance with this division. 365 For purposes of this division (A), the term court shall be liberally construed to 366 include any judicial court, administrative tribunal, or other adjudicative body or panel. 367 (B) In all other cases: 368 369 370 371 372 373 (1) If a legacy trust ceases to have at least one qualified trustee, then a successor qualified trustee shall be appointed pursuant to Revised Code 5807.04 except to the extent that the legacy trust expressly provides otherwise. (2) If a legacy trust ceases to have at least one trustee, then a successor trustee shall be appointed pursuant to Revised Code 5807.04, and the successor trustee must be a qualified trustee unless the legacy trust expressly provides otherwise. 374 375 Section 5816.10 Miscellaneous Rules: Conflicts, Tacking, Savings, Migration, etc. 376 377 378 379 380 381 382 383 384 385 386 (A) In the event of any conflict between this chapter and Revised Code Chapter 1336 (the Ohio Uniform Fraudulent Transfers Act) or any other provision of law similar to Chapter 1336, this Chapter shall control and prevail. (B) A statement in a trust instrument providing that it "shall be governed by the laws of Ohio," or other statements to similar effect or of similar import, shall be deemed to expressly incorporate the laws of this state to govern the validity, construction and administration of that trust instrument and to satisfy the requirements of Revised Code 5816.02(N)(2). (C) A Disposition by a Non-Qualified Trustee to a Qualified Trustee shall not be treated as other than a Qualified Disposition solely because the Non-Qualified Trustee is trustee of a Non-Legacy Trust. 25

387 388 389 390 391 392 393 394 395 396 397 398 399 400 401 402 403 404 405 406 407 408 409 410 411 412 413 414 415 416 417 418 419 420 421 422 423 (D) A Disposition to any Non-Qualified Trustee of an Ohio Legacy Trust shall be treated as a Qualified Disposition if at the time of disposition: (1) there is at least one Qualified Trustee serving pursuant to the terms of that Ohio Legacy Trust; (2) there is no Qualified Trustee serving but the circumstances require appointment or installation of a new Qualified Trustee pursuant to Revised Code 5816.09(A); or (3) there is no Qualified Trustee serving but within one hundred eighty (180) days of the date of disposition a new qualified trustee is appointed, or an application to appoint a new qualified trustee is filed, pursuant to Revised Code 5816.09(B). (E) If a Disposition is made by a trustee of a Non-Legacy Trust to a trustee of an Ohio Legacy Trust, then: (1) except to the extent expressly stated otherwise by the terms of that Disposition, the Disposition shall be deemed a Qualified Dispositions for benefit of all persons who are beneficiaries of both the Non-Legacy Trust and the Ohio Legacy Trust; and, (2) The date of disposition to the Ohio Legacy Trust shall be deemed to be the date on which the property that was part of the Non-Legacy Trust was first continuously subject to any non-ohio law that is similar to this Chapter. Courts shall be liberal in finding that such continuity and similarity exists. (F) An Ohio Legacy Trust may contain terms or conditions that provide for changes in place of administration, changes in governing law, changes in trustees or advisors, or other changes permitted by law. (G) Any valid liens attaching to property immediately before a disposition of that property to a trustee of a legacy trust shall survive the disposition, and the trustee shall take title subject to such valid liens. Nothing in this Chapter is meant to authorize any disposition that is prohibited by the terms of a lien agreement. (H) To the maximum extent permitted by the Constitutions of Ohio and the United States, Ohio courts shall exercise jurisdiction over and shall adjudicate any case or controversy brought before them regarding or arising out of or related to any Ohio Legacy Trust or any qualified disposition, provided such case or controversy is otherwise within the subject matter jurisdiction of the court. Subject to the Constitutions of Ohio and the United States, no Ohio court shall dismiss or otherwise decline to adjudicate any such case or controversy on the grounds that the courts of another jurisdiction have acquired or might acquire proper jurisdiction over, or can or might provide proper venue for, such case or controversy or the parties thereto. Nothing in this division shall: 1) prohibit a transfer or other reassignment of any case or controversy from one Ohio court to another Ohio court; or, 2) expand or limit the subject matter jurisdiction of any Ohio court. 26

424 Section 5816.11 Trust Advisors: Eligibility and Default Fiduciary Status 425 426 427 428 (A) Any person may serve as an Advisor except that a Transferor may act as an Advisor only in connection with investment decisions. (B) An Advisor shall be considered a fiduciary unless the terms of an Ohio Legacy Trust expressly provide otherwise. 429 Section 5816.12 Trustees and Advisors: Default Rules Regarding Discretion 430 Except to the extent expressly provided otherwise by the terms of an Ohio Legacy 431 Trust, each Trustee and Advisor of an Ohio Legacy Trust shall be presumed to have the 432 greatest discretion permitted by law in connection with all matters of trust administration, 433 trust distributions, and all other trustee or advisor decisions. 434 Section 5816.13 Discretionary Interests Not Property of a Beneficiary 435 No Beneficiary or other person shall be deemed to have a property interest in any 436 property of an Ohio Legacy Trust to the extent that the distribution of that property is 437 committed to the discretion of one or more Qualified Trustee or trust Advisor, either 438 acting alone or in conjunction with any other person, including any person authorized to 439 veto distributions. Nothing in this section shall deprive a Creditor of the right to 440 prosecute an action pursuant to Revised Code 5816.07 and Revised Code 5816.08. 441 Section 5816.14 Applicability 442 443 444 445 446 447 448 449 450 451 452 453 454 455 456 457 458 459 This chapter applies to Qualified Dispositions made on or after the effective date of the act. Rationale for the Proposal What is Asset Protection? Asset protection planning is simply the rearranging of someone s assets to minimize the chance of loss from future litigation claims. It is not concealment of assets; evasion of taxes or an attempt to defraud existing creditors. Why is it necessary? We live in a litigious society and adequate insurance may not be reasonably obtained at an affordable price to protect an insured from most claims. Some claims will exceed the available limits, in other cases coverage may be denied or the insurance company might fail. As an example: an executive was working from his home one weekend and had a business delivery at his house. The UPS delivery person slipped on his son s skateboard and broke his back. The company insurance did not cover the accident, because it occurred off business premises. Both the homeowner s insurance and the executive s umbrella insurance policy declined coverage because it was a business delivery. Instead, the executive was personally liable for the entire judgment amount. 27

460 461 462 463 464 465 466 467 468 469 470 471 472 473 474 475 476 477 478 479 480 481 482 483 484 485 486 487 488 489 490 491 492 493 494 495 496 497 498 499 Which States have adopted APT statutes Alaska, Delaware, South Dakota, Nevada, Missouri, Tennessee, Wyoming, Oklahoma, Rhode Island, Utah and New Hampshire are the eleven states that now have domestic asset protection trust statutes. Ohio s background More than 10 years ago, Susan Locke of KeyBank recommended to members of the Ohio Bankers League that they consider possible enactment of an asset protection statute in Ohio. In May 2007, two committees were formed, one through the OBL, and the present committee of the OSBA EPTPL. For the next two years, the topic of asset protection was discussed primarily among member banks of the Ohio Bankers League while the OBL committee worked to convince commercial lenders that the legislation would not have a chilling effect on lending opportunities. In January 2009, the OSBA committee began its work in earnest and started a series of conference calls to review draft legislation created, in large part, by committee member John Sullivan. In 2010, six separate conference calls were held, attended by the majority of the committee members and all spent considerable time and effort laboriously reviewing each and every provision of the proposed statute. These conferences resulted in numerous revisions that reflect significant input from Bo Loeffler, Mike Stegman, Robert Brucken, Roy Krall, Sandra Brantley, Susan Locke, and many other committee members. The attached draft statute represents the final product of those conference calls and significant additional e-mail correspondence by members of the committee. The draft statute is heavily influenced by legislation from other states, most notably Delaware and the states that follow Delaware s model, such as South Dakota. The invaluable assistance of Ken Lather should also be mentioned since he offered to computerize the drafts and keep track of proposed and incorporated changes to the drafts before and after each conference call. Ohio s draft statute The statute is referred to as The Ohio Legacy Trust and the recommendation is to create a new chapter 5816 to Title 58 of the Ohio Revised Code. In summary, an Ohio Legacy Trust is an irrevocable trust that is governed by the laws of Ohio. The statute contains a number of defined terms some of which are referred to here through the use of parentheses. The statute allows a person referred to as the transferor the ability to make transfers of assets, referred to as qualified dispositions, to the trust and still benefit from those assets through actions of a qualified trustee. The transferor must create a qualified affidavit in connection with the transfer of assets and aver in that affidavit that the transfer will not render the transferor insolvent, defraud his creditors, or be done prior to his filing for bankruptcy. The statute spells out the ability of creditors of the transferor to access the assets in the 28

500 501 502 503 504 505 506 507 508 509 510 511 512 513 514 515 516 517 518 519 520 521 522 523 524 525 526 527 528 529 530 531 532 533 534 535 536 537 trust under certain circumstances and it defines who qualifies as an exception creditor. It spells out what rights the transferor may retain in the trust and what authority a trust advisor can have under the trust instrument. The statute contains 14 sections that will be reviewed in brief: 5816.01 Short Title Provides for the title of the Act: Ohio Legacy Trust Act. 5816.02 Chapter Definitions The definitions section engendered considerable discussion during the conference calls held by the OSBA Committee. A number of the definitions cross-reference other Ohio statutes, in particular; definitions for beneficiary, person, property and spendthrift provision all refer to the definitions in the Ohio Trust Code. Cross references are also made to the Ohio Uniform Fraudulent Transfers Act for lien and valid lien. Definitions were added for references to the Bankruptcy Code and the Internal Revenue Code. The remaining definitions are specific to the statute and should be carefully reviewed and understood when reading the statute. For instance, it is critical to understand that the definition of spouse and former spouse only means a person the transferor was married to at or before the time a qualified disposition is made. There are also specific definitions for disposition, Ohio Legacy trust, Non-legacy trust, qualified affidavit, qualified disposition and qualified trustee. The definition of Ohio Legacy Trust sets forth the requirements that must be met in order for such a trust to come within the protection of the statute. 5816.03 Spendthrift Provision: Creation, Effect, Exceptions and Exemptions This section contains a cross-reference to the Ohio Trust Code provision describing the validity of a spendthrift provision and restates the Ohio rule that a spendthrift provision in an Ohio Legacy Trust will restrain both voluntary and involuntary transfers. This section also contains the enumerated exceptions to a spendthrift provision and the situations when property transferred into an Ohio Legacy trust can be accessed. These exceptions are in addition to any claims for relief under the statute s fraudulent transfer rules. One exception is for any debt the transferor would owe pursuant to an agreement or court order for payment of child or spousal support or alimony to the transferor s spouse or former spouse. (Recall that the definition of former spouse is limited to a person the transferor was married to at or before the time of a qualified disposition). Similar to other states, Ohio s version provides an exception for a child support claim, alimony and for property division upon divorce (a distributive award under RC 3105.171) if the ex-spouse was married to the transferor before or on the date of the transfer of assets to the trust. 29

538 539 540 541 542 543 544 545 546 547 548 549 550 551 552 553 554 555 556 557 558 559 560 561 562 563 564 565 566 567 568 569 570 571 572 573 574 575 576 577 Another exception is for any debt the transferor owes to someone as a result of death, personal injury or property damage suffered by a person on or before the time transfers to an Ohio Legacy Trust were made if they have been caused by the acts or omissions of the transferor or someone for whom he/she would be liable. Ohio follows the law of Delaware, New Hampshire, Rhode Island, and South Dakota in this regard by providing an exception for certain tort claims, and such creditors are protected even if the transferor was unaware of their claims at the time of transfer into trust. By contrast, certain other states have limited or no exceptions for existing creditors. For example, the only true exception creditor in Alaska is the holder of a child support claim that is more than thirty (30) days old at the time of a transfer into trust. Nevada has no exception creditors and only allows fraudulent transfer claims by creditors known to the transferor at the time of transfer. Finally, this section delineates that a transferor s interest in property will not be subject to any claim for forced heirship. 5816.04 Limits to Transferor s Authority This section provides that a transferor can only retain rights under an Ohio Legacy Trust that are both spelled out in the trust instrument and are allowed under the provisions of section 5816.05. There is no ability to retain rights through any other instrument or by verbal, implied or tacit agreement. 5816.05 Permissible retained rights of a transferor This section (retitled to clarify its application) spells out the rights a transferor may retain under the provisions of the trust instrument. This section is similar in many regards to the rules found in various other states, such as Alaska, Delaware, South Dakota, Rhode Island, New Hampshire, Tennessee, and Wyoming. These include the power to veto distributions from the trust, the ability to hold a special testamentary power of appointment and the right to remove an advisor and appoint a new advisor. Similar to Delaware s statute, Ohio allows the transferor the ability to retain interests in (1) current income; (2) a charitable remainder trust; (3) up to 5% interest in a total-return trust; (4) a GRAT or GRUT; (5) a QPRT; (6) a qualified annuity interest; (7) an ability to be reimbursed for income taxes attributable to trust income; and (8) the ability to have debts, expenses and taxes of the transferor s estate paid from the trust. 5816.06 Qualified Affidavits and Related Rules The Qualified Affidavit is signed in conjunction with the making of a qualified disposition and serves to confirm, under oath, that the transferor is not transferring property that has been obtained from unlawful activities. The transferor also warrants full title to the property. It also serves as the transferor s oath that he/she will not be rendered insolvent by the transfer and is not intending to defraud a creditor by the transfer. It also addresses the existence of any pending or threatened court actions against the transferor and whether the transferor intends to file for bankruptcy relief. 30

578 579 580 581 582 583 584 585 586 587 588 589 590 591 592 593 594 595 596 597 598 599 600 601 602 603 604 605 606 607 608 609 610 611 612 613 614 615 616 This section spells out what might be considered a defective affidavit and when an affidavit is not required; for instance when the transferor is not a beneficiary of the Ohio Legacy trust. 5816.07 Restrictions on Actions, Remedies, and Claims This section outlines situations under which a creditor may challenge transfers to an Ohio Legacy trust. It provides, for instance, that a creditor must have been a creditor of the transferor before the challenged transfer and must bring a claim within the later of three years after the transfer or one year after it could reasonably have been discovered by the creditor. This section also sets forth the standard of proof imposed upon the creditor to show, by clear and convincing evidence, that its claim is valid. This section provides protection for trustees and attorneys involved in creation and administration of a trust against actions initiated by creditors and clarifies that each transfer should be evaluated separately to determine a creditor s claims regarding that transfer. 5816.08 Avoidance of Qualified Dispositions This section addresses the handling of transfers that are found to be subject to access by creditors after a claim has been raised under 5816.07. To the extent that a transfer is to be used to satisfy a debt of a creditor, then only that amount of any transfer should be removed from the Ohio Legacy trust and the trust itself may remain valid and in effect. This section also makes it clear that a qualified trustee has first priority to any funds of the trust necessary to cover costs associated with defending the trust and any beneficiary might be able to retain a distribution even if that distribution affects the amount needed to pay the creditor s debt. Only when a trustee or beneficiary acted in bad faith will this general rule not apply and the creditor has the burden of showing, by clear and convincing evidence, that the trustee or beneficiary acted in bad faith. 5816.09 Automatic Removal of Trustees; General Rules on Successor Trustees This section addresses the automatic removal of a qualified trustee when a court that exercises jurisdiction over an Ohio Legacy trust determines that Ohio law does not apply. The section also sets forth the manner of appointment of successor qualified and nonqualified trustees either in accordance with the terms of the trust instrument or pursuant to the Ohio Trust Code. 5816.10 Miscellaneous Rules: Conflicts, Tacking, Savings, Migration, etc. This section addresses a number of issues including the application of Ohio law to validity, construction and administration of Ohio Legacy trusts and the application of the statute over provisions of the Ohio Uniform Fraudulent Transfers Act in the event of any conflict. 31

617 618 619 620 621 622 623 624 625 626 627 628 629 630 631 632 633 634 635 636 It also addresses the treatment of transfers between trusts when one trust is an Ohio Legacy trust and the other is not. The section creates certain presumptions regarding the qualification of transfers between these trusts. Finally, this section contains a provision that seeks to confirm that Ohio courts will have jurisdiction over any matter brought before them related to an Ohio Legacy trust to the extent possible. 5816.11 Trust Advisors: Eligibility and Default Fiduciary Status This section allows a transferor to serve as a trust advisor only with respect to investment matters. It also provides that any trust advisor will be considered a fiduciary unless expressly stated otherwise in the trust instrument. 5816.12 Trustees and Advisors: Default Rules Regarding Discretion This section creates a default rule that gives trustees and advisors the greatest discretion allowed regarding administration, distributions and other decisions. 5816.13 Discretionary Interests Not Property of a Beneficiary This section clarifies that a non-transferor beneficiary holds no property interest in the assets of the trust if distribution to that beneficiary is done at the discretion of the qualified trustee or trust advisor. This means that a beneficiary s interest is protected from property division at divorce. 5816.14 Applicability This section will determine the effective date of the statute. 1 32