On August 31, 2023, Delaware Governor John C. Carney signed House Bill 132, as amended (“Trust Act 2023”), into law. The legislation includes the following highlights:
One significant clarification implemented by Trust Act 2023 is the modification of Delaware’s spendthrift statute, 12 Del. C. § 3536, which codifies the rights of a beneficiary’s creditors and assignees with respect to trust assets. Prior to Trust Act 2023, the non-exhaustive list of a beneficiary’s “creditors” for purposes of Section 3536 included “any person that has a claim against the beneficiary, the beneficiary’s estate, or the beneficiary’s property by reason of any forced heirship, legitime, marital elective share, or similar rights.” Absent from this list was mention of a beneficiary’s former spouse. As a result of Trust Act 2023, however, the non-exhaustive list of creditors now also expressly includes “a former spouse who has a claim against the beneficiary, the beneficiary’s estate, or the beneficiary’s property,” which conclusively resolves the issue and should make trustors, beneficiaries and their counsel comfortable that a beneficiary’s former spouse is indeed a “creditor” under Delaware’s spendthrift statute and, consequently, has no rights with respect to the assets of a spendthrift trust in the absence of a contrary provision in the governing instrument or a power vested in the beneficiary that would cause the assets to be reachable under the statute.
Notably, the synopsis to Trust Act 2023 explains that the amendment of Section 3536 is not an expansion of rights, but rather a clarification of existing law. Any prior confusion on this subject resulted from a misinterpretation of the 1973 Delaware Supreme Court case, Garretson v. Garretson, 306 A.2d 737, 742 (Del. 1973). Garretson involved a separated couple where the husband, who was a beneficiary of a testamentary spendthrift trust , failed to satisfy obligations to his wife, to whom he was still married, under the terms of a separation agreement. To obtain jurisdiction over the husband, the Court of Chancery issued a sequestration order over the trust income. The husband appealed, arguing that the trust income could not be sequestered because it was a spendthrift trust and the Court, noting the support obligation of the husband to his wife, held that the spendthrift clause did not apply to the wife because she was not the husband’s creditor. Notably, however, the Court assumed for purposes of the ruling that the husband and wife were still married and expressly acknowledged that the situation could be entirely different if the wife lost her status as wife (i.e., if husband and wife were divorced).
By adding former spouses to the non-exhaustive list of creditors under Section 3536, Delaware statutory law now makes it entirely clear that a former spouse is, indeed, treated as a creditor for purposes of Delaware’s spendthrift statute.
Trust Act 2023 makes another change that impacts spousal rights by amending Delaware’s APT Act. In general terms, the APT Act enables a transferor to create and fund a trust for the benefit of the transferor (i.e. a so-called self-settled asset protection trust) that will not be subject to claims by certain creditors of the transferor. Since its enactment, 12 Del. C. § 3573 has provided that the limitations imposed by the APT Act do not apply to any person to whom the transferor is indebted on account of an agreement or order of court for the payment of support or alimony in favor of such transferor’s spouse, former spouse or children, or for a division or distribution of property incident to a judicial proceeding with respect to a separation or divorce in favor of such transferor’s spouse or former spouse. The definition of “spouse” under the APT Act is only persons to whom the transferor was married at, or before, the time the transfer to the asset protection trust was made. In other words, a spouse to whom the transferor was married at the time of the transfer is a so-called “exception creditor” and a transferor could not use the Qualified Dispositions in Trust Act to avoid claims by such “spouse” against the transferor in the event of a divorce.
The amendment to Section 3573 adds new paragraph (c) that enables a transferor to make a qualified disposition in trust that will not be subject to claims by the transferor’s current spouse, provided that the spouse receives certain disclosures and provides written consent. New Section 3573(c) requires that the following information and documents are provided to the spouse before the qualified disposition is made: (i) a written instrument providing notice of the qualified disposition as described in the statute and consent to the qualified disposition as described in, and executed in accordance with, the statute; (ii) a copy of the Qualified Dispositions In Trust Act; and (iii) a copy of the governing instrument of the trust that is the subject of the qualified disposition, (iv) a list of the property that will be the subject of the qualified disposition, and (v) disclosure of all material information relating to the value of such property, a reasonable estimate of the value of such property, and the basis for such estimate.
Paragraph (c)(2)a of Section 3573 provides that the written instrument required by the statute 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.
Section 3573(c)(2) further requires that the written statement must contain a list of the property that will be the subject of the qualified disposition, contain a reasonable estimate of the value of such property, contain the consent of the transferor’s spouse, which consent may be with or without consideration, to the qualified disposition, and be signed by the transferor’s spouse and witnessed in writing by someone other than the transferor or any person related or subordinate to the transferor within the meaning of § 672(c) of the Internal Revenue Code.
The general concept behind this expansion of the statute is that, if spouses can agree to a division of assets through premarital and postnuptial agreements, they should be permitted to knowingly and willfully agree to qualified dispositions to a Delaware asset protection trust that may affect their rights, provided they follow the required notice and written consent. Spouses might agree to post-nuptial arrangements where certain assets are in trust for one spouse, protected from the claims of the other spouse in the event of divorce. In practice, it may be advisable for both spouses to have separate legal representation when entering into a Section 3773(c) notice and consent, similar to other pre-nuptial and post-nuptial agreements. Additionally, trustees of Delaware asset protection trusts may wish to include a new item on their intake checklists, inquiring whether the transferor is married at the time of the transfer and, if so, whether the transferor’s spouse has signed a Section 3773(c) notice and consent so that the trustee is aware of whether the spouse is (or is not) an exception creditor. Obviously, the notice and consent should be delivered to the trustee, along with the solvency affidavit and other relevant documents.
Additional updates in Trust Act 2023 relating to spouses are the amendments to Delaware’s domestic relations statute relating to dispositions of marital property, 13 Del. C. § 1513. One such amendment clarifies that “marital property” does not include gifted property held in a trust that was created by another person of which the donee spouse is a beneficiary, regardless of whether other individuals are beneficiaries of the same trust. The second such amendment adds language to Section 1513 to confirm that a discretionary interest in a trust as described in 12 Del. C. § 3315(b) is not “property acquired” by the spouse as such term is defined in Section 1513.
Section 3315(b) of Title 12 of the Delaware Code generally provides that a beneficiary eligible to receive distributions from a trust in the discretion of a trustee or other fiduciary has a discretionary interest in the trust, a discretionary interest in a trust is a mere expectancy, not a property right, and a beneficiary eligible to receive distributions from a trust in the discretion of a trustee or other fiduciary, even if subject to an ascertainable standard, has a discretionary interest in the trust. These amendments provide greater certainty regarding the treatment of trust assets in the event of divorce.
Section 3340 of Title 12 of the Delaware Code provides a set of criteria for determining when a trust is administered in Delaware. Section 3332 of Title 12 of the Delaware Code addresses, among other things, the determination of governing law. Because Section 3332 provides that Delaware law ordinarily governs the administration of a trust when the trust is administered in Delaware, Sections 3332 and 3340 work in tandem to establish a statutory framework for conducting a governing law analysis under Delaware law.
Sections 3340 and 3332 were both modified by Trust Act 2023 to clarify the application of these sections and the connection between them. First, Section 3332 was modified to add an express cross-reference to Section 3340, emphasizing that, subject to a contrary provision in a trust’s governing instrument, the laws of Delaware shall govern the administration of a trust while the trust is administered in Delaware as provided in Section 3340. Next, Section 3340, which establishes criteria for determining place of administration in Delaware(usually the presence of a Delaware corporate trustee serving with or without individual trustees or if the sole individual trustee or a majority of individual trustees (if only individual trustees are serving) resides in Delaware), was modified to clarify that satisfying the framework set forth in the statute is not the exclusive method of determining that a trust is administered in Delaware.
The amended statutory language recognizes the reality that the determination of place of administration can, in addition to meeting the criteria of the statute, be satisfied through other methods, such as an analysis of the relevant facts, and complying with common law conflict of laws analysis.
Delaware’s designated representative statute, 12 Del. C. §3339, provides for the appointment of a designated representative to represent beneficiaries – usually beneficiaries whose rights to information are restricted or eliminated under the terms of the governing instrument and minor, incapacitated and unborn beneficiaries – in certain circumstances. Prior to Trust Act 2023, the appointment of a designated representative by the trustor (under subsection (a)(4)) or by a beneficiary himself or herself (under subsection (a)(5)) was not permitted if a designated representative was appointed for such beneficiary in a manner prescribed by the trust’s governing instrument (under any one of subsections (a)(1) through (3)). Trust Act 2023 amends Section 3339 to provide that appointment by the trustor or by the beneficiary is prohibited if a designated representative is not appointed and serving under the statutorily-preferred methods, which recognizes the possibility that a designated representative may have been appointed but may not be then willing or able to serve. This minor but meaningful change should add utility to the statue and potentially avoid issues in a situation where a designated representative had been appointed but is not willing or able to serve. Where, formerly, parties may have arguably been left without a clear path to appoint a new designated representative, this amendment may present additional flexibility.
Additionally, prior to Trust Act 2023, Section 3339 provided that when the trustor appoints a designated representative for purposes of representing a minor beneficiary, a beneficiary who is incapacitated, an unborn beneficiary, or a beneficiary whose identity or location is unknown and not reasonably ascertainable, in any nonjudicial matter, as such term is defined in § 3303(e) of Title 12, the appointed designated representative must not be related or subordinate to the trustor within the meaning of § 672(c) of the Internal Revenue Code. As a result of Trust Act 2023, Section 3339 was amended to clarify that the trustor is also prohibited from appointing himself or herself under such circumstances.
