Ohio Legacy Trusts for Attorneys: Strike the Balance Between Control and Security

Around 4:30 A.M. last Wednesday—somewhere between changing diapers and rocking my newborn—it struck me that I need an estate plan… What if tragedy struck, and suddenly I’m not around to support my family?  But, at the same time, I don’t plan on dying anytime soon …  So can I set up a trust  that gives me a say in distributions so I have peace of mind in this life, too?  … And then there’s the possibility of defending a legal malpractice claim.  Can I take preventative steps in my estate plan to ensure my assets are safe in the event of a malpractice claim?

If you’re an attorney like me, these thoughts almost certainly entered your mind.  New research finds attorneys have a 2 to 12 percent chance of facing a malpractice claim each year depending on practice area.  An entire law review journal is dedicated to legal malpractice, and in a time when multi-million dollar judgments against attorneys splash the news, lawyers face tremendous liability from malpractice.

Because of this potential liability, attorneys need an estate plan that both prepares for the worst and hopes for the best.  A plan that offers both control and protection.  Good news: both are possible with an estate plan that utilizes an Ohio Legacy Trust, or “OLT.”

The OLT strikes the balance between asset protection and control that hands-on professionals like attorneys find compelling.  Passed March 2013, the Ohio Legacy Trust Act, R.C. 5816, allows you to create and fund an asset protection trust to guard against creditors, yet retain some control over distributions from the trust.  Here are the highlights:

  • Creditors have a short period of time to make claims against your OLT assets–eighteen (18) months in many cases[1]—after your property has been transferred to the OLT;
  • You can be a beneficiary of your own OLTA,[2] which is not true for other trusts;
  • Although you can’t be the trustee of your OLT, you do retain significant power over distributions, including the power to veto a distribution from the trust;[3] and
  • If you don’t like your trustee’s decisions regarding management or distributions, you have the power to change trustees.[4]

Attorneys and other professionals would benefit from this told because transfers to the OLT can receive significant protection.  Unlike other trusts where creditors can make claims against the trust during your lifetime, future creditors have a short 18-month window to file claims against your OLT assets.  Your existing creditors also have a shortened window: either (i) eighteen (18) months after the establishment of the OLT, or (ii) six (6) months after the OLT could have reasonably been discovered by the creditor if the creditor sues within three (3) years of the transfer to the OLT.[5]

Even if the creditor does file within these windows, the creditor must prove bad faith or intent to defraud by “clear and convincing evidence,”[6] which is the highest standard of proof in civil law.  Thus, once your OLT is properly established and funded, most of your creditors will be precluded from reaching the assets of your trust.

The duality of control and protection makes the OLT a powerful tool.  In addition to the ability to appoint and change the trustee, the person setting up their OLT has the following rights and powers:

  • The power to withdraw up to 5% of the trust assets every year;[7]
  • The ability to fund the OLT with virtually any kind of asset (such as stocks, personal property, artwork, investments, and real property);
  • The power to appoint property to other beneficiaries, all while protecting the property from creditors;[8] and
  • The right to live in a home transferred to the OLT.[9]

In exchange for these benefits and protection from creditors, the OLT must be irrevocable.[10]  For that reason, the OLT should probably be used only for “rainy-day” assets you would like to protect from creditors.  Additionally, the trustee you appoint must be independent—not your relative or someone under your control—and must be located in Ohio.[11]  You will also need to sign an affidavit that states the following:

  1. The assets of the OLT are not the product of illegal activity;
  2. You have the full right to transfer the assets;
  3. You will not be insolvent after the transfer;
  4. You have no intention to defraud creditors;
  5. There are no pending court actions against you;
  6. You are not involved in any administrative proceeding; and
  7. You do not foresee filing for bankruptcy.

Because the OLT can be a powerful guard limiting exposure to assets, attorneys should consider using the OLT as part of their estate plan to plan for their family’s future and to guard against potential malpractice claims.  Please contact the attorneys at Kohrman Jackson & Krantz to set up a time to discuss whether a Legacy Trust is right for your needs.

[1] R.C. 5816.07(B)(1)(a).

[2] R.C. 5816.02(D); R.C. 5801.01(C).

[3] R.C. 5816.05(B).

[4] R.C. 5816.05(I).

[5] R.C. 5816.07.

[6] R.C. 5816.08(A)(5).

[7] R.C. 5816.05(F).

[8] R.C. 5816.05(C).

[9] R.C. 5816.05(J).

[10] R.C. 5816.02(K)((1)(c).

[11] R.C. 5816.02(S)(1)(b).