Offshore Trusts for Michigan Residents

Michigan enacted its Qualified Dispositions in Trust Act in 2016, making it one of the newer DAPT states. But the statute was not fully functional until 2022, when Public Act 145 amended the Uniform Voidable Transactions Act to align with the DAPT framework.

For the first five years, Michigan estate planning attorneys were reluctant to use the statute because the fraudulent transfer standard had not been updated to match the trust protections.

Michigan now offers a DAPT with a two-year seasoning period, a clear-and-convincing-evidence standard for creditor challenges, and a feature unique among DAPT states: the ability to preserve tenancy by entireties status for assets transferred into the trust by married couples.

The DAPT-TBE Combination

Michigan’s DAPT statute does something unusual under MCL 700.1047(6). When married couples transfer tenancy by entireties property into a Michigan DAPT, the assets retain their TBE status inside the trust. If a creditor successfully challenges the transfer and a court orders the assets returned, the sole remedy is an order directing the trustee to transfer the property back to both spouses as tenants by the entireties.

This creates a layered defense. A creditor of one spouse faces TBE protection on the jointly held assets. If the creditor manages to challenge the DAPT transfer, the assets return to TBE ownership, where they remain protected from individual creditors. The creditor wins the DAPT challenge but still cannot reach the assets.

For a married Michigan physician whose malpractice exposure is individual, this combination is powerful. The DAPT holds liquid assets with TBE protection preserved. Retirement accounts remain in domestic plans under ERISA. The family home is protected by the $40,475 homestead exemption plus TBE ownership.

The combination fails in three scenarios: both spouses share liability (TBE does not protect against joint creditors), the couple divorces (TBE terminates), or the creditor pursues the claim in federal bankruptcy court (where DAPT protections do not override federal law).

The US v Craft Problem

Michigan TBE protection has a specific weakness that other TBE states do not share. In United States v. Craft (2002), the U.S. Supreme Court ruled that the IRS could reach one spouse’s interest in Michigan entireties property to satisfy a federal tax lien. The Court held that federal tax law is not bound by state property classifications.

Craft means that Michigan TBE does not protect against federal tax claims, even though it protects against most other individual creditor claims. Michigan residents facing potential IRS exposure—business owners with aggressive tax positions, real estate developers with complex partnership structures, or anyone under audit—cannot rely on TBE against the most powerful creditor in the country.

A Cook Islands trust addresses this because Cook Islands law does not recognize or enforce IRS liens. The Cook Islands trustee’s obligation runs to the trust deed, not to U.S. federal tax authorities. While the IRS can pursue the U.S. settlor personally, it cannot reach assets held by the foreign trustee in foreign accounts.

The 2022 Fix and What It Means

Michigan’s DAPT statute was enacted in 2016 but the Uniform Voidable Transactions Act was not amended to match until 2022. Before the amendment, a creditor challenging a DAPT transfer could argue that the general UVTA standard (preponderance of the evidence) applied rather than the higher standard the DAPT statute intended.

Public Act 145 of 2022 resolved this by explicitly requiring clear and convincing evidence to overturn a qualified disposition. The fix was necessary and welcome, but it means Michigan’s DAPT has operated under its intended legal framework for only about four years. No Michigan court has tested the amended statute in a contested creditor challenge. The protection is statutory, not yet confirmed by judicial precedent.

Ohio’s Legacy Trust, by comparison, has been in effect since 2013—a decade longer under stable statutory language, though it too lacks appellate case law. Michigan’s later start and mid-course correction make its track record even thinner.

When Each Tool Is Appropriate

Michigan’s DAPT-TBE combination is a strong domestic option for married couples with individual creditor exposure, moderate asset levels ($200,000 to $500,000 in non-exempt liquid wealth), and no federal tax concerns. The two-year seasoning period is competitive with the strongest DAPT states.

A Cook Islands trust is appropriate when non-exempt liquid assets exceed $500,000 and exposure includes federal claims such as tax, bankruptcy, or regulatory actions. It also fits when both spouses share liability (eliminating TBE protection) or when the settlor wants protections tested by decades of contested litigation rather than a statute amended four years ago.

For Michigan residents who use both structures, the DAPT holds moderate assets at lower cost while the Cook Islands trust holds the core liquid wealth. The DAPT’s preserved TBE feature adds a domestic layer that complements the offshore trust’s jurisdictional separation.

Cook Islands trusts cost $20,000 to $25,000 to establish and $5,000 to $10,000 per year to maintain. Michigan DAPTs cost $3,000 to $7,000 to establish and $1,000 to $3,000 annually. The cost difference reflects the difference in protection: domestic versus jurisdictional, untested versus proven.

IRS and Michigan Tax Reporting

An offshore trust does not change federal or Michigan income tax obligations. The IRS treats the trust as a grantor trust under IRC Section 679. All income appears on the settlor’s personal return. Required forms include Form 3520 and Form 3520-A annually, plus FBAR and FATCA reporting for foreign accounts. Michigan taxes worldwide income at a flat 4.25%. The trust’s income remains fully taxable at both levels.