Delaware Trust Companies: Favorable Asset Protection Laws

Take-Away: Delaware has a long history as ‘the place’ to situs a trust. Over the past several months many of those unique features of Delaware’s trust  law have been periodically summarized by me. Yet another fairly unknown feature of Delaware’s law came to my attention in my ‘late night reading,’ which adds to Delaware’s long-standing reputation as a ‘trust-friendly’ jurisdiction.

Background: Delaware has had an asset protection trust statute since 1997. It took Michigan another 19 years to come up with its comparable Qualified Distributions in Trust Act. Yet one Delaware statute that also provides asset protection has been around since 1871 [12 Del. C. Section 3502(b),] with no comparable Michigan statute.

This Delaware statute provides that a trust company or bank is not subject to levy and attachment to enforce a judgment. The purpose of this Delaware statute,  according to its courts  is to ‘aid banks and trust companies in the performance of their duties, and mainly by preventing  the attachment of their deposits,’ not to assist debtors to avoid claims against them. Tekstrom, Inc. v. Savia, 2007 WL 3231632 (Del. Com. Pl. Ct. 2007).

If the deposits are held in a Delaware bank or trust company, they are normally not subject to attachment by a judgment creditor, whether the creditor’s claim is based either in law or on equitable principles. Provident Trust Co. v Banks, 9 A. 2d 269 (Del. Ch. 1939).

What this means is that if a trust has a beneficiary who is vulnerable to potential creditors, or the trust holds an LLC that is established for a business purpose which is exposed to a high level of risk, holding the trust’s or LLC’s cash account in a Delaware bank or trust company (if it is a depository institution) will add an extra layer of creditor protection for that cash from judgment creditors.

This same statute has been extended by Delaware courts to thwart motions to enjoin deposits in a bank account from being withdrawn, transferred or encumbered by the account owner. Delaware v. Partial, 517 A. 2d 259 (Del. Ch. 1986). In the Partial case the chancery judge referenced this unique public policy of Delaware: “Unhappily for plaintiff,  however, the granting of relief sought is, in my opinion, precluded by the legislative policy reflected in the statute that exempts banks in the state from the operation of attachment and garnishment laws of this state.”

But there are, apparently, outer limits to how far this statute will go to protect assets held by a Delaware trust company. Delaware courts have expressly declined to apply this statute to broker dealers, which supports the conclusion that the law is intended to protect only a trust company’s deposits, not securities held by the trust company. Mergenthaler v. Triumph Mortgage Corp. 2017 WL 1550252 (Del. Super. Ct. 2017).

Conclusion: I strongly doubt if an individual would intentionally situs a trust in Delaware solely for the purpose to take advantage of Section 3502(b),  which protects deposits from the claims of a trust beneficiary’s judgment creditors. However,  if the settlor’s decision is to establish an asset protection dynasty-type of trust for multiple beneficiaries, and which trust is also intended to accumulate trust income free from Delaware state income tax [if all the trust  beneficiaries do not reside in Delaware], then the additional protection that Section 3502(b) affords to protect the accumulated trust income may justify locating the situs of the trust in Delaware.