Offshore Trusts for Michigan Residents

Michigan’s domestic asset protection trust statute has a feature no other DAPT state offers: the ability to preserve tenancy by the entirety status when married couples transfer assets into the trust. For married Michigan residents with individual creditor exposure, the DAPT combined with TBE preservation creates a fallback that survives even if the trust transfer is successfully challenged.

Michigan’s DAPT statute has operated under its intended legal rules only since 2022, no court has tested it in a contested creditor challenge, and the U.S. Supreme Court’s decision in United States v. Craft means TBE does not protect against federal tax liens. A Cook Islands trust addresses each of those weaknesses by moving assets outside U.S. court jurisdiction entirely.

How Does Michigan’s DAPT Preserve Tenancy by the Entirety?

Michigan’s Qualified Dispositions in Trust Act does something no other DAPT statute does. When married couples transfer tenancy by the entirety property into a Michigan DAPT, the assets keep their TBE status inside the trust. If a creditor later challenges the transfer and a court orders the assets returned, the only remedy is an order directing the trustee to transfer the property back to both spouses as tenants by the entirety—the statute is codified at MCL 700.1047(6).

The practical effect is a two-layer defense. A creditor of one spouse faces TBE protection on jointly held assets. If the creditor manages to overturn the DAPT transfer, the assets return to TBE ownership, where they remain protected from individual creditors. The creditor wins the challenge but still cannot reach the assets.

Michigan’s statute also includes a last-in, first-out rule: if a court orders the trustee to distribute assets to satisfy a creditor, the most recently transferred assets go first. Assets transferred earlier remain in the trust longer, giving them more time to season past the two-year statute of limitations for fraudulent transfer challenges.

The combination fails in three situations. Both spouses share the same liability, which eliminates TBE protection against joint creditors. The couple divorces, which terminates TBE at dissolution. Or a creditor pursues the claim in federal bankruptcy court, where § 548(e)(1) imposes a 10-year lookback on self-settled trust transfers and overrides state DAPT protections.

The US v. Craft Problem for Michigan TBE Protection

Michigan’s TBE protection has a weakness that most 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.

The Craft decision means Michigan TBE does not protect against federal tax claims, even though it blocks most other individual creditor claims. Business owners taking aggressive tax positions, real estate developers running complex partnership structures, and anyone under IRS 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 trustee’s obligation runs to the trust deed, not to U.S. federal tax authorities. The IRS can still pursue the U.S. settlor personally and seek a contempt order, but it cannot reach assets the foreign trustee holds in foreign accounts.

Michigan’s DAPT Statute Has a Thin Track Record

Michigan enacted its DAPT statute in 2016, but the Uniform Voidable Transactions Act was not amended to match the DAPT rules until 2022. Before Public Act 145, 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 requiring clear and convincing evidence to overturn a qualified disposition. The fix was necessary, but it means Michigan’s DAPT has operated under its intended legal rules for only about four years. No Michigan court has tested the amended statute in a contested creditor challenge.

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 thinner still. And every DAPT faces a structural weakness that state case law cannot resolve: § 548(e)(1) allows a bankruptcy trustee to claw back transfers to self-settled trusts made within 10 years.

Does Michigan’s DAPT Protect Against Divorce?

Michigan’s DAPT statute includes a marital property provision that most DAPT states do not offer. Assets transferred into a qualified trust more than 30 days before a marriage are not considered marital property. They cannot be counted as part of the settlor’s estate or awarded to the settlor’s spouse in a divorce.

The protection covers only assets moved into the trust before the marriage. Assets transferred during the marriage do not receive the same treatment unless the non-transferring spouse consents to the transfer as a qualified disposition. Someone entering a second marriage with existing wealth can fund a Michigan DAPT at least 30 days before the wedding, creating a backstop that works independently of any prenuptial agreement.

When Does a Michigan Resident Need an Offshore Trust?

Michigan’s DAPT-TBE combination is a reasonable domestic option for married couples with individual creditor exposure and moderate non-exempt liquid assets in the $200,000 to $500,000 range. The two-year seasoning period is competitive with other DAPT states, and the TBE preservation feature adds a fallback that no other state offers.

An offshore trust is appropriate when non-exempt liquid assets exceed $500,000 and exposure includes federal claims such as tax, bankruptcy, or regulatory actions. An offshore trust also fits when both spouses share liability (eliminating TBE protection), when the settlor is unmarried (TBE requires marriage), or when the person wants protection backed by decades of contested litigation rather than a statute amended four years ago. The structural differences between Cook Islands trusts and DAPTs explain why the offshore structure eliminates every vulnerability the Michigan statute leaves open.

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

What Does an Offshore Trust Cost Compared to a Michigan DAPT?

Cook Islands trusts cost between $20,000 and $25,000 to establish and $5,000 to $8,000 per year to maintain. Michigan DAPTs cost roughly $3,000 to $7,000 to establish and $1,000 to $3,000 annually. The cost difference reflects the difference in protection: a Michigan DAPT operates within the U.S. legal system, subject to federal override, while an offshore trust operates outside it entirely.

Over five years, a Michigan DAPT runs roughly $8,000 to $22,000. A Cook Islands trust runs roughly $40,000 to $65,000. Someone holding $2 million in non-exempt liquid assets pays roughly 2% to 3% across five years for the offshore structure—a fraction of a single adverse judgment.

Tax Treatment of an Offshore Trust for Michigan Residents

An offshore trust does not change federal or Michigan income tax obligations. The IRS treats a Cook Islands trust as a grantor trust under IRC § 679, which means all income flows through to the settlor’s personal return. Michigan taxes worldwide income at a flat 4.25%, and some Michigan cities impose additional income taxes—Detroit’s rate reaches 2.4% for residents. The trust’s income remains fully taxable at every level.

The reporting requirements are the CPA’s responsibility, not the attorney’s. Required forms include Form 3520 and Form 3520-A annually, plus FBAR and FATCA (Form 8938) reporting for foreign accounts exceeding the applicable thresholds. The forms are informational. They report the trust’s existence and transactions but do not create any additional tax liability beyond what the settlor already owes on the income.