VERY IMPORTANT information for those in the oil and gas exploration area

Ohio's new legacy trust is a boon to oil and gas industry, landowners

7:56 am, February 22, 2013

With the recent Marcellus and Utica shale boom, there has been a significant increase in the public concern for safety relating to drilling and fracking. While some may set aside Gasland and other portrayals as scare tactics by environmentalists, there is no doubt that fracking has potential liabilities associated with it. The website EcoWatch.org identifies a number of concerns, including:

handling and disposal of radioactive wastewater and sludge;

accidents involving transportation of radioactive/chemical waste;

groundwater contamination from leaking storage containers, abandoned wells and failed casings;

high levels of radon in natural gas from Marcellus shale;

respirable crystalline silica exposure of workers and nearby populations;

air contamination from diesel engines at drilling sites and in local communities;

air contamination from flaring; and

increased health care costs.

There is also concern that fracking may be categorized as an abnormally dangerous activity subject to strict liability — a rather blunt and drastic legal standard. What can land owners, operators and ancillary business owners do to protect a nest egg from complex litigation?

On Dec. 20, Gov. John Kasich signed the Ohio Legacy Trust Act, which allows an individual to put assets aside in trust to be protected from creditors. States including Alaska, Delaware and Nevada have had this kind of law for years, but Ohio is the first state in the Midwest to pass such a law.

Ohio borrowed the best provisions from these other states and now has one of the most protective laws in the country. Beginning on March 27, 2012, residents of Ohio, Pennsylvania and West Virginia who are involved in fracking have been protected by this new law.

An Ohio legacy trust is an irrevocable trust and can be established by anyone, not just an Ohioan. However, there must be at least one Ohio trustee who has custody of the assets, maintains the trust records or materially participates in the management of the trust. The person establishing the trust (called a settlor) cannot be trustee. Typically the trustee would be an Ohio bank or trust company. The settlor then transfers assets to the trustee of the legacy trust and is the primary beneficiary, often with spouse and/or children as permissible beneficiaries as well.

Under the laws of most states, if a settlor is a beneficiary of a trust she established, creditors can reach the trust assets to the extent that the settlor could benefit from the trust. However, the purpose of the legacy trust is to permit the settlor to benefit from the trust but enjoy protection from the settlor's personal creditors.

Sound too good to be true? Well, the answer is yes and no.

Transfers to the legacy trust (like any gift transfers) are subject to claims by a specific creditor that the transfer was “fraudulent.” A transfer to an Ohio legacy trust cannot be effective if it renders you insolvent; you cannot transfer all of your assets to a Legacy Trust and then jilt current creditors.

There also is a statute of limitations period determining how long a creditor might have to contest such a transfer. Ohio's period is the shortest in the country, making it more difficult for class action attorneys to seize trust assets if they received a judgment. This will make Ohio an attractive place to create this type of trust.

Ohio's statute protects transfers to legacy trusts after only 18 months from the date of transfer with respect to non pre-existing creditors. Ohio's statute protects transfers to legacy trusts after the greater of eighteen months from the date of transfer or six months from the date the creditor discovered or should have discovered the transfer to the trust with respect to preexisting creditors. Most other states, including Alaska, Delaware or Nevada, allow plaintiff/creditor's attorneys a much longer time to try to undo a transfer — from two to four years.

The Ohio Legislature determined that it was necessary to allow certain classes of creditors to access the trust assets even though most creditors are barred (they're known as “exception creditors”). Ohio provides an exception for divorcing spouses, but only if the settlor was married to the divorcing spouse prior to the transfer to the legacy trust. Ohio also extends protection to child support orders.

While the Ohio legacy trust is not a panacea, it will offer land owners, business owners and entrepreneurs associated with the shale boom an opportunity to protect a nest egg for a rainy day.

In addition to the right to receive income and principal from the legacy trust, the settlor can retain other significant powers, including the right to change trustees, the right to change the distribution of the ultimate distribution of the trust, the right to manage investment of the trust assets and the right to use the trust assets.

The rules governing the formation and administration of the legacy trust — both tax and non-tax — can be quite complex. To learn more about how a legacy trust can benefit you and your family, seek the advice of competent and qualified counsel and a qualified trust company that has experience with these types of trusts.