By: Eric R. Kaplan, Esq.
In July 1997, Delaware became the second state (after Alaska) to enact self-settled spendthrift trust legislation with its “Qualified Dispositions in Trust Act”[1] (hereinafter referred to as the “Act”). The Act authorized the creator of a trust (hereinafter referred to as the “Settlor”) to create and transfer assets into a Delaware asset preservation trust (hereinafter referred to as a “DAPT”) in which the Settlor is also designated as a discretionary beneficiary. If the trustee is not also the Settlor and is also not a related or subordinate party to the Settlor, then the discretionary distributions made to the Settlor as a beneficiary will not expose the DAPT’s assets to the claims of the Settlor’s creditors.
The Act initially carved out three exceptions to the DAPT’s protective nature.[2] For purposes of this discussion, the applicable exception applied to transfers made to the DAPT at a time that the Settlor was indebted on account of an agreement for payment of support or alimony in favor of the Settlor’s spouse[3] or children. This means that if a transfer to a DAPT is not protected from claims of either the Settlor’s spouse or children with respect to child support and/or alimony, then only those assets in the DAPT needed to satisfy such amounts (including legal fees) would be exposed. As such, a Settlor’s spouse in a DAPT is commonly known as an “exception creditor,” and the Settlor cannot avoid claims by his or her spouse.
Effective as of August 31, 2023, the Act was amended in such a manner that impacts spousal rights with respect to transfers to a DAPT. Section 3573(c) was added to the Act, enabling Settlor to make a transfer to a DAPT that will not be subject to claims by the Settlor’s spouse, so long as such spouse first receives certain disclosures and provides written consent. The information and documentation that must be provided to the Settlor’s spouse prior to a transfer being made to a DAPT includes:
(1) a written instrument providing notice of the [transfer to the DAPT] and consent to the [transfer];
(2) a copy of the Act; and
(3) a copy of the DAPT that is the subject of the [transfer], a list of the property [being transferred, disclosure of all material information relating to the value of [the transfer], a reasonable estimate of the value of [the transfer], and the basis for such estimate.
Additionally, the “written instrument” described in item (1) above must contain the following statement in capital letters:
YOUR SPOUSE IS CREATING OR HAS CREATED AN IRREVOCABLE TRUST INTO WHICH PROPERTY IS BEING TRANSFERRED. A COPY OF THE TRUST INSTRUMENT THAT WILL GOVERN OR GOVERNS SUCH IRREVOCABLE TRUST IS ANNEXED HERETO AS AN EXHIBIT. THE PROPERTY THAT IS TO BE TRANSFERRED TO THE IRREVOCABLE TRUST, WHICH IS THE SUBJECT OF A PROPOSED DISPOSITION UNDER DELAWARE’S QUALIFIED DISPOSITIONS IN TRUST ACT (12 Del. C. §§ 3570 et seq.), IS AS FOLLOWS: _______________________. THE ESTIMATED VALUE OF SUCH PROPERTY IS $_________________________. YOUR CONSENT TO YOUR SPOUSE’S TRANSFER TO THE TRUST DESCRIBED HEREIN IS IRREVOCABLE AND YOUR RIGHTS TO THIS PROPERTY AS A SPOUSE OF THE TRANSFEROR WILL BE AFFECTED DURING YOUR MARRIAGE, UPON DIVORCE (INCLUDING THE PAYMENT OF ALIMONY OR A DIVISION OR DISTRIBUTION OF PROPERTY IN A DIVORCE), OR AT THE DEATH OF YOUR SPOUSE.
The above-referenced written statement must also:
(1) provide a list of the property that will be transferred to the DAPT;
(2) contain a reasonable estimate of the value of such property;
(3) contain the consent of the Settlor’s spouse, which consent may be with or without consideration, to [the transfer]; and
(4) be signed by the Settlor’s spouse and witnessed in writing by someone other than the Settlor or any person related or subordinate to the transferor within the meaning of Internal Revenue Code Section 672(c).
Such statutory amendment to the Act allows spouses to receive proper notice and then knowingly agree and provide informed consent to transfers to a DAPT that might otherwise affect such spouse’s marital and/or property rights.
[1] 12 Del. C. §§ 3570 et seq.
[2] The three exceptions (numbers 2 and 3 below of which are beyond the scope of this summary) apply to the extent that:
(1) A transfer was made to the trust at a time that the settlor was indebted on account of an agreement for payment of support or alimony in favor of the settlor’s spouse or children, or for the division of property in favor of the settlor’s spouse, but only to the extent of the debt;
(2) There exists “any creditor who became a creditor of the transferor in reliance upon an express written statement of the transferor that any property that was the subject of the qualified disposition thereafter remained the property of the transferor and was available to satisfy any debt to such creditor incurred by the transferor”; or
(3) The subject liability of the settlor is a liability to any person who suffers death, personal injury, or property damage on or before the date that the transfer of the assets to the trust was made.
[3] The definition of “spouse” pursuant to 12 Del. C. § 3570(9) means “only persons to whom the transferor was married at, or before, the time the qualified disposition is made.” Therefore, the term “spouse” means a spouse only in existence at the date a transfer to a DAPT is made.
