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Shielding trust assets from creditors is a primary consideration in Delaware.

In every state, trust assets are protected from a trustee’s creditors, but not necessarily from a beneficiary’s creditors. For example, if a beneficiary is divorced, his or her estranged spouse may have a legal right to all or a portion of those assets.

Whether a creditor can obtain assets belonging to a trust beneficiary depends on state law concerning so-called "spendthrift" provisions of a trust. (See glossary.) Some states don’t recognize spendthrift trusts; others only to limited degrees.

For example, Virginia recognizes them up to $500,000.1 In California, a creditor can reach any amount above what is needed to provide for the beneficiary’s support.2

Delaware will not allow a creditor to reach the principal of a spendthrift trust for any purpose—except when an individual tries to put assets outside the reach of creditors by creating a trust for him or herself.3

Discretionary income is also protected.4 However, when a beneficiary is supposed to receive regular income from a trust, Delaware allows the beneficiary’s spouse or children to receive income to meet a support obligation,5 but neither a creditor6 nor trustee in bankruptcy7 can reach that income.

In Delaware, assets held by a bank trustee are exempt from attachment;8 a beneficiary’s creditors can’t attach assets even if a trust has no spendthrift provision;9 and a would-be plaintiff can’t use attachment proceedings to obtain jurisdiction over a trust beneficiary.10

Nonetheless, a beneficiary of a Delaware Trust can assign up to one-half of the interest in a spendthrift trust to charity—even though spendthrift trust interests are, as a rule, absolutely unassignable.11 This gives beneficiaries greater flexibility than in other states and permits sophisticated tax planning.12

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Footnotes

  1. Va. Code §55.19.
  2. Canfield v. Security-First Nat’l Bank of Los Angeles, 1939, 87 P.2d 830, 13 Cal.2d 1.
  3. See, generally, Restatement (Second) of Trusts §156 (1959). See Weyawoth v. Delaware Trust Co., 45 N.2d 427 (Del. Ch. 1946).
  4. 12 Del.C. §3536.
  5. J.B.G. v. P.J.G., Del. Ch. 286 A.2d 256 (1971), aff’d, Del. Super., 306 A.2d 737 (1973).
  6. See Note 7 above.
  7. Id.
  8. 10 Del.C. §3502.
  9. Id.
  10. Attachment is the process of seizing property and bringing the same into legal custody. Attachment proceedings are often used to obtain local jurisdiction over a nonresident by seizing his property within the state. In Delaware, this process may not be used upon a nonresident trust beneficiary.
  11. 12 Del.C. §3536(b); Wilmington Trust Co. v. Carpenter, Del. Ch. 1961, 168 A.2d 306.
  12. For example, a beneficiary may reduce his personal income taxes through a charitable deduction for interests assigned to a qualified charity.