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
- Va. Code §55.19.
- Canfield v. Security-First Nat’l Bank of Los Angeles, 1939, 87 P.2d 830, 13 Cal.2d 1.
- See, generally, Restatement (Second) of Trusts §156 (1959). See Weyawoth v. Delaware Trust Co., 45 N.2d 427 (Del. Ch. 1946).
- 12 Del.C. §3536.
- J.B.G. v. P.J.G., Del. Ch. 286 A.2d 256 (1971), aff’d, Del. Super., 306 A.2d 737 (1973).
- See Note 7 above.
- 10 Del.C. §3502.
- 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.
- 12 Del.C. §3536(b); Wilmington Trust Co. v. Carpenter, Del. Ch. 1961, 168 A.2d 306.
- For example, a beneficiary may reduce his personal income taxes through a charitable deduction for interests assigned to a qualified charity.