Divorce and Asset Protection Trusts

This post is not new news.   But, I had occasion a couple days ago to refer to the Delaware case below in my lawyering work.   I believe it provides some discussion points that many clients and practitioners may find important.  I purposely do not add my views or suggestions about these points.   They speak for themselves, at least to the extent of  being check-list items for asset protection planning.

This 2014 Delaware trust opinion involves a Delaware irrevocable dynasty trust created by a divorcing husband’s father, and including the husband’s sale to the Delaware trust of the son’s business, etc.  The sale was structured as a defective income tax sale [a BDIT sale for you tax readers].  The husband also is a beneficiary of the Delaware trust.

In the next sentence I include a link to a pdf copy of this 2014 Delaware Court of Chancery opinion in IMO Daniel Kloiber Dynasty Trust u/a/d December  20, 2002 C.A. No. 9685-VCL (August 1, 2014).   Click Delaware Case re Kloiber for a copy of the opinion.

At the time of this 2014 Delaware opinion the husband and wife were in the midst of a contested divorce in Kentucky. With the above trust purposely having been designed to exist only under Delaware law, during the course of the Kentucky divorce the husband — without success — asked this Delaware court for a restraining order to prevent his divorcing wife from pulling the Delaware trust into the Kentucky divorce arena.

The Delaware court’s comments I refer to below are in support of the court denying the husband’s request for the temporary restraining order. The Delaware court, therefore, did not have a judicial need actually to answer these jurisdictional questions. Rather the Delaware court’s Kentucky v. Delaware jurisdictional commentary helped the court support its denial of the restraining order request.

I make only the following three points for purposes of this blog post:

One is the Delaware court’s raising of the question that the husband as seller of his business to the Delaware trust is possibly deemed merely a third-party rather than a trust beneficiary (as to the sale). Accordingly, this sale to the trust and the husband as seller are possibly not matters limited to or bound by Delaware trust law.

Two is the Delaware court’s discussion about the wife’s claims against the trust (in the Kentucky divorce) possibly not being subject to or bound by Delaware trust law.  The Delaware court stated that the wife — at the time of the pending Kentucky divorce — was no longer a beneficiary of the Delaware trust because of the trust’s definition of a spouse, etc. The trust includes a “moving definition” of spouse that applied to cut this wife out as a trust beneficiary once she and her husband separated at the time of the divorce action. Therefore, the Delaware court suggested the wife arguably is merely a third-party not bound by Delaware trust law, who can assert her claims against the trust in the Kentucky divorce proceeding.

Three is the Delaware Court’s apparent, broad embracing of the constitutional Full Faith and Credit Clause in relation to the Kentucky divorce action and the wife’s fraudulent transfer claims against her husband in the Kentucky court.

Finally, I make clear here that I am not licensed as a lawyer in Delaware and, as with all my blog posts, my above comments are not legal or tax advice that a reader may rely on, particularly under Delaware law.

 

 

2 thoughts on “Divorce and Asset Protection Trusts

  1. Can you explain the legal points that justify the adjective “fraudulent” in your statement “wife’s fraudulent transfer claims” in bullet three?

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