Infrastructure

An important factor in evaluating the effectiveness of Delaware APTs is that Delaware has a long-standing tradition of leadership in the trust industry. The original Delaware Act was written and enacted over a three-month period in 1997, and amendments have been drafted and enacted in short order. As noted above, the Delaware Court of Chancery has held that creditors’ claims that transfers to Delaware APTs were fraudulent transfers were barred by laches. TrustCo, 2015 Del. Ch. LEXIS 18. In other situations, that court has upheld Delaware statutes in difficult cases, such as those that might arise if creditors were to challenge a Delaware APT.

Defending Delaware APTS

If a client lives in Delaware or is an NRA, creditors should not be able to reach the assets of his Delaware APT except in the situations mentioned above. If a client does not live in Delaware but is a resident of the United States, a Delaware APT should afford the same protection, but this cannot be guaranteed because issues under the U.S. Constitution might come into play. The danger is that a court in a state that does not recognize APTs might decide that its law—not Delaware law—applies and order the trustee to pay a creditor, even if the claim is not one that is recognized under the Delaware Act.

There are several reasons why a client’s trust should stand even if he is not a Delaware resident or an NRA. They include:

• • A non-Delaware court may not enter a judgment that binds the trustee of a Delaware APT if it does not have jurisdiction over trust assets or a trustee.
• • A non-Delaware court should defer to Delaware courts on issues that involve a Delaware trust.
• • A judgment against a client is not binding on the trustee of the client’s valid trust.
• • A non-Delaware court should apply Delaware law—not its own law—on questions involving a Delaware APT.
• • Delaware courts might not have to recognize (that is, give full faith and credit to) judgments that non-Delaware courts enter against a trust.
• • Delaware may set deadlines for the enforcement of judgments from other states.
• • Creditors should not be able to reach a Delaware APT if the client ends up in bankruptcy.

Conclusion

No court has considered how effectively a Delaware APT protects assets, so the Delaware APT is not yet fail-safe. But a properly designed and implemented Delaware APT(asset protection trust) will raise formidable obstacles for creditors. The Delaware APT also offers planning options, outside of creditor protection, that might be of great benefit to clients.