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Domestic US Trusts

Delaware Self Settled Trust

Delaware is promoted as the safest and best jurisdiction for asset protection trusts.  Nevertheless, before the statues are discussed, it is clear that a warning should be put in place. There is great variance of opinion as to whether self-settled trusts are legal and will hold up in the courts when challenged by creditors. 

Many circumstances contribute to the answer.  For instance, what if a bankruptcy occurs?  Will the courts enforce the jurisdiction of the bankruptcy courts in federal law or will the state statutes regarding spendthrift thrusts be upheld in protecting the trust from creditors?  How will the IRS deal with debt from a beneficiary in the trust?  The courts have tended to side with public policy and the interest of society, but as it goes with debt, whatever entity has first lien will get the first distribution of funds.  The courts have to decide how the debtors line up in priority.

If you take public policy out of the equation, the law is well established that the settlor's designation of controlling law that governs the administration of a trust, including the efficacy of a trust's spendthrift provision has jurisdictional priority.

Example of the Jurisdiction that Governs the Trust

If the settlor creates a trust to be administered in a state other than that of his domicile, the law of the state of the place of administration, rather than that of his domicile, ordinarily is applicable. Thus a settlor domiciled in one state may create an inter vivos trust by conveying property to a trust company of another state as trustee and delivering the property to it to be administered in that state. In that case, the law of that state will be applicable as to the rights of creditors to reach the beneficiary's interest.

*inter vivos - a transfer or gift made during one's lifetime, as opposed to a transfer upon death (testamentary)

This permits a person who is domiciled in a state in which restraints on alienation are not permitted, to create an inter vivos trust in another state where they are permitted and thereby take advantage of the law of the latter state.

Delaware Trust Law

Delaware trust law mirrors Alaska. 

1.  The trust can be created so that the Settlor is also the beneficiary (spendthrift), but the powers to make distributions must be held with someone different (the trustee).

2   There must be at least one licensed trustee or Delaware Trust Company, bank or othter financial institution who resides within the state.  This trustee must have some responsibility for trust tax returns and administration.

3.  Some part, parcel or portion of the assets must be in the state of Delaware.

4.  The Settlor is permitted the right to veto any distributions

5.  The assets are protected in the trust for all reasons and claims against the Settlor except the following.

• Fraudulent Transfers
• Spousal support, alimony and child support
• Personal injury or property damage which occurred before the transfer to the trust
• Claims by creditors who relied upon an express written statement by the Settlor that the assets of the trust were available to satisfy the debt to such creditor.