Delaware Dynasty and Asset Protection Trusts, A Paper Tiger?

Dear Clients, Colleagues, and Friends,

Sam built a fortune from furniture manufacturing. When he sold his successful business for a huge sum ten years ago, his one goal was to ensure his son would never have to struggle the same way he did - through a disastrous lawsuit and a financially ruinous divorce.

Sam established a Delaware Dynasty Trust (DDT) to protect his son against future creditors and potentially vengeful ex-wives. Trusting Delaware's reputation as a top-ranked U.S. trust jurisdiction, Sam believed the trust would ensure his son's long-term financial wellbeing. What he didn't count on was the 2014 Kloiber v. Kloiber case, which involved a long-standing exception to Delaware self-settled asset protection trust law exposing DDTs and Delaware Asset Protection Trusts (DAPTs) to penetration by ambitious and determined ex-spouses.

In 2002, Daniel Kloiber's father established a DDT. The trust was drafted as a "support trust" for the benefit of Daniel, his wife and his descendants, and over the years accumulated roughly $310 million in assets. When son, Daniel divorced in 2014, his ex-wife demanded a piece of this trust using precedent set in the 1973 Garretson v. Garretson case. Garreston established that divorcing spouses can invade support trusts because a divorcing spouse seeking maintenance from her ex is considered an" exception creditor" under Delaware law. Spendthrift language like the so-called HEMS standard for health, education, maintenance and support exposed the Kloiber DDT's assets to Daniel's divorcing spouse rather than protecting against it. Under this precedent, the original DDT's assets were severed to create a new trust for his ex, rendering the protections afforded by vaunted Delaware Trust law feckless.

This is Delaware law's dirty little secret, and it's a hole a Mack truck could drive through. Dangerously, this is an exception about which most trustors are unaware.

So Sam has a problem. He created a DDT drafted as a "support trust" for the benefit of his son, and his son's wife (as long as they remained married) and his descendants in Delaware. He now knows that the language used in the trust can be penetrated by a future ex-wife. What can Sam do to fix it?

Nevada trust experts advise the safest way to create a dynasty trust is to draft it as a discretionary trust in a no-exception creditor state like Nevada, in which only the trustees have the sole authority to distribute trust income and corpus to beneficiaries. Unlike Delaware, Nevada does not have an "exception creditor" exemption for alimony and child support claims. So, although Sam already established a DDT for the benefit of his son, his trustee may relocate the entire trust to Nevada for superior protection, eliminating the ex-spouse creditor exception under Delaware trust law.

Sam does this and rests easy knowing that whatever challenges his son faces throughout life, fighting for the assets in his trust against a vengeful ex-spouse will not be one of them.

If you have already established a domestic DDT or DAPT, check with your trust expert to determine if it can be penetrated by an exception creditor. If so, consider redomiciling your trust to Nevada for greater protection.

For more information about DDT and DAPT's or other issues pertaining to this subject, contact the Jeffrey M. Verdon Law Group, LLP, Jeff@jmvlaw.com, (949) 333-8150.

Posted in Client Alert.