DELAWARE TRUSTS: HOW THEY MIGHT HELP YOUR CLIENTS IN VARIOUS STATES. By: David A. Diamond. Part Two

Transcription

1 DELAWARE TRUSTS: HOW THEY MIGHT HELP YOUR CLIENTS IN VARIOUS STATES By: David A. Diamond Part Two As discussed in Part One of this article, as planners and clients become more sophisticated, planners must consider how Delaware trusts would impact their clients in various states. Knowing the benefits of Delaware trusts is a solid beginning, but knowing how they could impact your clients in various states is an important step before deciding whether or not the Delaware provisions will be advantageous for your client. The states covered in this article are California, Florida, Illinois, Massachusetts, Michigan, New York (also including Connecticut and New Jersey), and Washington, D.C. (also including Maryland and Virginia). These were selected as we find that much of the Delaware trusts being established by settlors outside of Delaware are for clients in those states. Last month Part One discussed various advantages of Delaware trust law including: favorable tax treatment; the ability to have perpetual trusts; trust instrument flexibility; and directed trusts. Part Two discusses other advantages of Delaware law including: decanting; selfsettled asset protection trusts; moving an existing trust to Delaware from another state; Delaware s sophisticated legal and judicial environment; and Delaware s significant history and robust trust industry. DECANTING Decanting refers to a trustee s ability to pour, or decant, assets from one trust into another trust. This can be used to modify a trust by transferring the assets into a new trust with 2011 David A. Diamond, as appeared in Estate and Personal Financial Planning September 2011

2 different terms. The new trust can be one created by the trustee for the purpose of receiving the assets from the first trust, or can be a trust already in existence. The general concept is that where a trustee has the power under a trust instrument to make an outright distribution of trust principal to one or more beneficiaries, the trustee can instead make a distribution to a new trust for one or more of the same beneficiaries. As of the date of this article eleven states have decanting statutes. These states are Alaska (Alaska Stat ), Arizona (Ariz. Rev. Stat ), Delaware (12 Del. C. 3528), Florida (Fla. Stat. Ann ), Missouri (Missouri Uniform Trust Code Section ), Nevada (13 Nev. Rev. Stat ), New Hampshire (N.H. Rev. Stat. Ann. 564-B:4-418), New York (NY Est. Powers & Trusts Law ), North Carolina (N.C. Gen. Stat. 36C ), South Dakota (S.D. Codified Law ), and Tennessee (Tenn. Code Ann (27)). In addition New Jersey has case law which has permitted decanting, although that state does not have a decanting statute. Weidenmayer v. Johnson, 106 N.J. Super. 161 (1969). Also some states such as Colorado, Ohio, and Pennsylvania have had draft decanting legislation for the past few years, but that legislation has not been enacted in those states as of yet. The Delaware Decanting Statute 12 Del. C Delaware s decanting statute was first enacted in It has been amended various times, including in the just passed Delaware Trust Act See Delaware Senate Bill 83, Sections 6 and 7, effective July 13, For Delaware law to apply, and therefore to be able to utilize the Delaware decanting statute, the first trust must have a Delaware trustee or co-trustee. 2

3 The 2011 revisions to the Delaware statute added a new Subsection (f) to make it clear that that a trustee is authorized to utilize the Delaware decanting statute whenever Delaware is the place of administration of the trust from which the distribution is made. 12. Del. C (f). The statute begins by stating that unless the first trust provides otherwise, a trustee who has a power to make principal distributions outright to one or more proper objects of this power in the first trust may instead exercise that authority by appointing all or a part of the assets subject to this invasion power to a second trust, rather than distributing outright. Del. C. 3528(a). There is no requirement in the statute that the trustee s power to make a distribution from the principal of the first trust be an absolute or unfettered power. Even if the first trust has an ascertainable standard, the trustee can still decant from the first trust. This provides a realistic opportunity to utilize the statute, as many existing trusts have some type of ascertainable standard. If the first trust does have one or more ascertainable standards, the new trust must comply with one or more of those standards. 12 Del. C (a). For example, if the first trust provides for distributions in the trustee s discretion for the health, education, maintenance, or support of a beneficiary, the new trust must follow one or more of these standards. But note that the trustee is not required to incorporate all of the ascertainable standards in the new trust. For example, the trustee could decant to a new trust in which the ascertainable standard is solely education of a beneficiary. See Thomas R. Pulsifer, The Delaware Decanting Statute, presented at the 2008 Delaware Trust Conference, Dec. 4, 2008, found on Note that there is no requirement that the new trust include all of the beneficiaries of the first trust. However the new trust cannot add beneficiaries who could not receive principal distributions from the first trust. The statute does provide that the new trust may grant a power 3

4 of appointment to one or more of the beneficiaries of the first trust, including a general power of appointment, and that power of appointment can be in favor of people who are not beneficiaries of the first trust. 12 Del. C (a). Thus although current beneficiaries cannot be added to the new trust, remainder beneficiaries can be added to the new trust through the use of a power of appointment given to any beneficiary eligible to receive discretionary principal distributions from the first trust. The statute does not address the possibility of decanting income, so income cannot be decanted as such. Even if the first trust provides that income is to be distributed to one or more beneficiaries, there is no requirement that the new trust provide that income is to be distributed. See Pulsifer, supra. However, the statute does require that the new trust cannot reduce any income interest for which a marital deduction was taken for federal tax purposes under I.R.C or I.R.C. 2523, or for state tax purposes under any comparable provisions. 12 Del. C (a) (3). Also the statute provides that in the case of any trust assets that have been treated as gifts qualifying for a gift tax exclusion under I.R.C (b), the second trust shall provide that the beneficiary s remainder interest vests and become distributable no later than the date upon which the interest would have vested and become distributable under the terms of the first trust. 12 Del. C (a) (2). Also the statute provides that the decanting ability does not apply to trust property subject to a power of withdrawal held by a trust beneficiary who is the only trust beneficiary to whom the trustee has authority to make distributions. 12 Del. C (a) (4). Although the statute requires that the trustee s exercise of the decanting be in writing, signed and acknowledged by the trustee and filed with the records of the trust, there is no requirement that notice be given to beneficiaries, and no requirement for filing any action with 4

5 any court. 12 Del. C (b). As will be discussed below, since the act of decanting is a discretionary action taken by the trustee, the trustee needs to carefully weigh any decanting where notice is not given to the beneficiaries. Potential Uses of Delaware s Decanting Statute Most situations involve changes to administrative provisions. Examples include adding or changing successor trustees, granting individuals powers to remove and appoint trustees, adding a distribution committee, updating outdated investment or other administrative provisions, or adding a trust advisor to direct the trustee. Decanting is an alternative to modifying or reforming an otherwise irrevocable trust, to make these types of administrative changes. Decanting could also be used for other administrative matters which might not come to mind immediately. For example some practitioners are proponents of using decanting to create a trust that is a grantor trust for income tax purposes where the first trust is a simple or complex trust and there are no toggle provisions in the first trust to convert it to a grantor trust for income tax purposes. Another example raised by practitioners is decanting to break the nexus with a given state for determining whether the trust is a resident trust in that state for income tax purposes. The argument is that if a trust is moved to Delaware from a state that would tax the trust, and then the Delaware trustee can create a new trust and decant the assets to that new trust. That new trust would not have any nexus to the original state, and thus not be subject to fiduciary income tax in that state. This argument is not free of doubt, whereas one could argue that there is truly a break of nexus, the taxing authority in the first state could argue that the decanting was 5

6 merely an exercise by the trustee of a power of appointment in the first trust, thus continuing the nexus with the first trust and the initial state. Other uses involve more substantive matters that go beyond altering administrative provisions. A trustee might decant to a trust with fewer beneficiaries. Decanting could also be used to extend the duration of a trust for reasons such as creditor protection or protection of a beneficiary with concerns such as substance abuse. A pot trust for the benefit of a parent and his or her children could be decanted into separate trusts for each of the beneficiaries, with the intention of separating the future discretionary withdrawal decisions for each trust. However, the trustee needs to exercise even more care when decanting into a new trust that changes more than administrative provisions. The decision to decant is that of the trustee, and the responsibility and liability go with that decision. In particular, where a beneficiary has his or her interests changed, reduced, or even eliminated, the trustee needs to be certain it is acting in a fiduciary manner that could withstand any challenge. The 2011 amendments to the Delaware decanting statute add a provision that provides that a trustee, trust advisor, or any party exercising its authority to decant is held to the standard of care and the standard of liability applicable to the trustee and any such advisor when making outright distributions. 12 Del. C (e). Also, although the statute does not require that notice of the decanting be given to beneficiaries, again the trustee needs to act in a manner that will withstand the test of fiduciary responsibility. Another issue with altering beneficial interests through decanting is that the trustee needs to be sure there will not be adverse GST, gift, or estate tax issues. In January 2011 the Service issued Rev. Proc stating that the Service would not issue advance rulings on whether decanting altered the beneficial interests of beneficiaries subject to tax implications. The GST 6

7 tax issues have been addressed by the Service, notably in Reg (b )(i) (E) Example 2. This provides that the decanting will not taint the GST exempt status of a grandfathered trust provided that the decanting could not shift a beneficial interest in the trust to a beneficiary at a lower generation, and that the decanting does not extend the time for vesting of any beneficial interest in the trust beyond the period provided in the original trust. As for gift tax, conceivably the Service could argue that if a beneficiary who has his or her interest in the trust reduced or eliminated does not object to the trustee s decanting, that beneficiary has made a gift. Generally there should be no adverse federal estate tax consequences unless the decanting gives a beneficiary a general power of appointment, which could cause estate inclusion under IRC For a discussion of the possible tax implications of decanting see Alan Halperin and Michelle R. Wandler, Decanting Discretionary Trusts: State Law and Tax Considerations, Tax Management Estates Gifts and Trusts Journal, September 9, 2004; See also William R. Culp and Briani Bennett Mellen, Trust Decanting: an Overview and Introduction to Creative Planning Opportunities, 45 Real Property, Tr. And Est. L. J. 16 (Spring 2010); See also Anne Marie Levin and Todd A. Flubacher, Put Decanting to Work to Give Breath to Trust Purpose, 38 Est. Plan. 3 (Jan. 2011). How the Delaware Statute Applies to Your Clients in Other States Various articles have compared the decanting statutes among the states that have them. Although there are differences among all of the statutes, the Delaware statute is generally noted as being beneficial for not requiring an absolute ability of withdrawal, and for not requiring any court approval. On the limiting side of the Delaware statute, some of the other states statutes 7

8 would allow the decanting to trust beneficiaries who are not current beneficiaries, such as remaindermen. See Levin and Flubacher, supra. When the practitioner is considering the Delaware decanting statute, it is important to know how this could impact his or her client. As done in Part One of this article, Part Two discusses the how the Delaware statute might impact clients in California, Florida, Illinois, Massachusetts, Michigan, New York (also including Connecticut and New Jersey), and Washington, D.C. (also including Maryland and Virginia). As noted above, these states were selected as we find that much of the Delaware trusts being established by settlors outside of Delaware are for clients in these states. California, Connecticut, Georgia, Illinois, Maryland, Massachusetts, Michigan, Virginia, and Washington, D.C. do not have decanting statutes. Florida and New York do have decanting statutes, and your client may want to use the statute in their state. Unlike Delaware, the Florida statute requires the trustee to have absolute power to invade the principal of the trust. Furthermore, unlike Delaware, the Florida statute does not allow the decanting to reduce a fixed income interest, nor an annuity or unitrust interest. Like Delaware, the Florida has a savings clause regarding maintaining the marital deduction NEED CITE. Also the Florida statute has a tax savings clause relating to charitable deductions, whereas the Delaware statute does not. The recent amendments to the New York statute have made some significant changes. The most notable change is that under the revised statute, the New York trustee is no longer required to have absolute discretion. The trustee can decant even if there is an ascertainable standard. NY EPTL (B) (4). This is a significant change, because this provides more 8

9 opportunities to utilize the New York statute, as many existing trusts have some type of ascertainable standard. Other changes to the statute include a clarification of the ability to grant a power of appointment to a beneficiary in the new trust, as well as provisions requiring that notice be given to beneficiaries. NY EPTL (J) (2). Lastly, New Jersey has no statutory provision authorizing a trustee to transfer trust property into another trust, but does have case law which has allowed a trustee to decant an existing trust into another trust based on a best interests standard provided in the trust. Weidenmayer v. Johnson, 106 N.J. Super. 161 (1969). This does not provide the statutory protection of the Delaware decanting provisions. SELF-SETTLED ASSET PROTECTION TRUSTS A self-settled asset protection trust is a trust where the settlor can also be a permissible beneficiary, and as long as the provisions of the statute are followed, the trust assets will not be subject to the claims of the settlor s creditors. These are also referred to as domestic asset protection trusts or qualified spendthrift trusts. Delaware enacted its law, entitled the Qualified Dispositions in Trust Act in July Del. C to At that time, only Alaska had enacted similar legislation, which was in April Alaska Statutes At that time these trusts were considered to be beyond the norms of trust laws. However, as of the date of this article, self-settled asset protection trusts have gained significant popularity. They are often the topic of discussion at formal meetings within the estates and trusts practice. In fact there are often asset protection sub-committees of various committees and forums, where these trusts are an integral part of the discussion. 9

10 The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) (Pub.L , 119 Stat. 23, enacted April 20, 2005), recognized self-settled asset protection trusts. Initially the bill was going to prevent these trusts from protecting assets from a bankruptcy proceeding. The end result was that these trusts are recognized under the bankruptcy law, but subject to a 10 year statute of limitations under the federal act. This means that a creditor has ten years to bring a cause of action against the assets in the trust if the action is under a bankruptcy proceeding. As we will discuss, the statute of limitations for the Delaware law is four years. Thus, although the creditor has more time to bring a cause of action under the federal law, in fact the federal law recognizes these trusts as a valid trust with creditor protection for the settlor. As of the date of this article, twelve states have self-settled asset protection trust statutes. Delaware and Alaska have already been mentioned. The other states are Hawaii (Haw. Rev. Stat. Section 554G), Missouri (Mo. Rev. Stat. Section (3) (2)), Nevada (Nev. Rev. Stat. Section (1) (b)), New Hampshire (N.H. Rev. Stat. Ann. Section 564-D:1-18), Oklahoma (Okla. Stat. Ann. Tit. 31, 10-18), Rhode Island (R.I. Gen. Laws Section (10), South Dakota (S.D. Codified Laws to ), Tennessee (Tenn. Code Ann to 112), Utah (Utah Code Ann (1) (a)), and Wyoming (Wyo. Stat ). Although these statutes have gained more recognition, and are now in a handful of states, it is noteworthy that there is no fully adjudicated case law on these statutes. Thus the practitioner should make sure his or her client understands that if he or she establishes one of these trusts, there is no precedent upholding its validity. However, it is often pointed out that at a minimum these trusts serve as an additional impediment between a creditor and the settlor of the trust. That is, in addition to the creditor successfully bringing a cause of action on the claim, the 10

11 creditor must then also make a claim against the asset protection trust. A common opinion of proponents of these trusts is that this often leads to settlement by the creditor. This might partially explain why there is no case law after fourteen years of these statutes being in existence. The Delaware Qualified Dispositions in Trust Act The Delaware statute provides that a settlor can create a self-settled asset protection trust which future creditors, including future spouses, cannot attach as long as the requirements of the statute are met. The transfer to the trust must be to a trust with a Delaware trustee by means of a trust agreement. The trust must be irrevocable. The trust must incorporate Delaware law, unless it was transferred to a Delaware trustee from an out-of-state trustee. The settlor cannot retain a general power of appointment over the assets, although the right to receive a fixed percentage of principal, not exceeding 5%, can be permitted. The trust must have a spendthrift clause. Sufficient administrative functions must be performed in Delaware to assure a Delaware nexus. The statute also provides that the settlor may retain various potential powers including: a power to veto a distribution from the trust; a limited testamentary power of appointment; a potential or actual right to receive income or principal in certain circumstances; the power to remove a trustee or advisor and to appoint a new trustee or advisor (other than a related or subordinate party; the power to serve as the investment advisor; and the power to use real property held in a qualified personal residence trust ( QPRT ). The basic premise of the statute is that if these rules are followed, the assets do not belong to the settlor even though he or she is a permissible beneficiary. Since the assets do not belong to the settlor, his or her creditors cannot reach the assets in the trust to satisfy claims against the settlor personally. There are exceptions to this rule. 11

12 The first exception is if a creditor can prove that the settlor has committed a fraudulent conveyance. Delaware has enacted the Uniform Fraudulent Transfers Act ( UFTC ), 6 Del. C to The Qualified Dispositions in Trust Act defaults to the provisions in the UFTC in determing actual and constructive fraud, and the applicable statutes of limitations. In the case of a creditor whose claim arose after the settlor transferred the assets into the trust, if the creditor must prove that the settlor acted with actual intent to defraud the creditor. If a creditor is asserting that a claim arose before the settlor transferred the assets into the trust, the creditor must prove that the settlor acted with constructive intent to defraud creditors in general. 12 Del. C (a). The burden of proof is upon the creditor and the standard is clear and convincing evidence. 12 Del. C (b). If the claim is for actual intent to hinder, delay or defraud any creditor of the settlor, the statute of limitations for bringing a claim (sometimes referred to as the look back period ) is arose before the settlor transferred the assets into the trust, the statute of limitations for bringing a claim (sometimes referred to as the look back period ) is four years after the settlor transferred the assets into the trust. If the claim arose after the settlor transferred the assets into the trust, the look back period is four years after the settlor transferred the assets into the trust. In addition to the claim for actual or constructive fraud, the statute also has two additional carve-outs. Unlike claims for actual or constructive fraud in which the creditor is subject to a statute of limitations, these additional exceptions to the rule do not have any statute of limitations. The first carve-out is the exception for current or former spouses. If at the time the settlor transfers assets into the trust he or she is married or was previously married, if that spouse later has a successful claim against the settlor pursuant to a qualified court order or settlement agreement for alimony, child support, or property division, the assets in the trust can be subject 12

13 to those claims. However, the statute provides that the trust cannot be required to satisfy forced heirship. Note that this does not apply to future spouses, only those to whom the settlor is married at the time of, or before the time, the assets are transferred into the self-settled asset protection trust. Thus these trusts are sometimes described as a tool for pre-marital property protection, in addition to, or perhaps in place of, a pre-nuptial agreement. The second carve-out is where before the transfer of the assets into the trust by the settlor, the settlor has tortuously injured someone, including personal injury, property damage, or death. Again, these two specific carve-outs are not subject to any statute of limitations. Determining Suitability of Various Fact Patterns As noted above, there is no case law as of yet determining the validity of this statute, or any similar statute in the other eleven states. The frequent concern is that a court in another state might determine that Delaware law must recognize the creditor s adjudicated claim in the state where the claim is brought, based on the Full Faith and Credit Clause of the U.S. Constitution. The argument is that if the case has a very bad fact pattern, the other state may have difficulty upholding the Delaware law. Note that the Delaware statute provides that any claim against the trust is to be decided under Delaware law, and should be in the Delaware court. Also the Delaware statute provides that if another forum decides the case and does not apply Delaware law, the trustee immediately ceases to serve, and is replaced by the successor trustee named in the trust agreement, or by the Delaware Court of Chancery if no successor is named in the trust agreement. It is important for a trustee to serve in these trusts where the fact pattern is not abusive. A general standard in the Delaware trust community is that the settlor should not transfer more than 13

14 40% of his or her assets into a self-settled asset protection trust. This is a general indication, and not a hard and fast rule. In fact there is no case law, regulation, or statute on this point. As a matter of reference, the Hawaii statute originally limited the amount that a settlor could transfer into a Hawaii self-settled asset protection trust to 25% of his or her net worth. However, this was changed in the 2011 amendments. Also a good practice is to serve as trustee of these trusts where the settlor is implementing overall wealth transfer and management strategies, and not just asset protection. Gift and Estate Tax Treatment With the increased gift tax and GST tax exemptions under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, self-settled asset protection trusts have been described as viable methods for using these exemptions where a settlor is otherwise not comfortable parting with the assets. As an example, if a husband and wife have $20 to $30 million in combined net worth, making a gift of up to $10 million may make good tax sense, but may be perceived by the husband and wife as giving away one-third to one-half of their wealth. However, if they were assured that in an emergency, they could be considered for discretionary distributions as settlors of a self-settled asset protection trust, perhaps they would be more comfortable parting with the assets. There are two issues to consider carefully with this analysis. The first issue is to make sure that the husband and wife understand that they are not guaranteed that they will receive distributions from the trust. The nature of the self-settled asset protection trust is that they part with ownership. The exception is that they can retain a right to a fixed unitrust amount up to 5%. 14

15 The second issue is that the practitioner wants to be confident that if his or her clients create one of these trusts to utilize their gift and GST tax exemptions, the transfer to the trust will be considered a completed gift, and will not be included in the estate of the settlor. Otherwise the use of the exemption could be wasted on an incomplete gift where the assets remain in the settlor s taxable estates. There have been Private Letter Rulings on this issue. In 1998, PLR dealt with these related questions. In that fact pattern the settlor established a self-settled asset protection trust under the Alaska statute, retaining only the right to receive distributions of income and principal from the trust in the discretion of the trustee. No other rights were retained by the settlor. The Service was asked to rule whether this was a completed gift, and whether the assets in the trust would be included in the settlor s estate. The Service ruled that it was a completed gift, but declined to rule on the estate inclusion issue. In 2009 PLR the settlor established the same fact pattern with an Alaska self-settled asset protection trust, and requested the same rulings from the Service. Here the service ruled that it was a completed gift, and also ruled that the trust assets would not be included in the estate of the settlor. The ruling specifically said that this ruling on estate inclusion was based on the given fact pattern, and no ruling was being made regarding any other fact patterns. The result obtained in PLR was considered to be a significant advancement in clarifying that these trusts could be used to make completed gifts and avoid estate inclusion of the assets once transferred into the trust, even though the settlor is also a permissible beneficiary. However, there has commentary indicating that this result might not be obtained in any state other than Alaska or Nevada. See Gideon Rothschild, Douglas Blattmachr, Mitchell Gans, and Jonathan Blattmachr, IRS Rules Self-settled Alaska Trust Will Not be in Grantor s Estate, 15

16 Estate Planning, January 2010, Vol. 37, No. 1. The view in that article and in subsequent writings is that only Alaska and Nevada have self-settled asset protection statutes with no carveouts. Comparison is made to Delaware s statute which has the carve-out for spousal claims where the settlor was married to that spouse at the time of or before transferring assets into the trust. The reasoning is based on the Regulations under I.R.C (a) (1) (see e.g., Reg (b) (2)) as well as Rev. Rul , Situation 3. Each of these stands for the proposition that if trust assets can be required to be used to satisfy legal obligations under state law, the assets could be brought back into the settlor s estate. Counter arguments to this indicate that the doctrine of acts of independent significance could lead to the opposite result. The doctrine of acts of independent significance states that where a settlor takes an action unrelated to the establishment of the trust, and with no tax motivation, that act should not be considered to cause the assets in the trust to be included in the settlor s estate. See e.g., Ellis v. Commissioner, 51 T.C. 182 (1968), judgment aff d. 437 F,2d 442. See also Rev. Rul Divorce is cited as an example of an act of independent significance. Thus the fact a Delaware self-settled asset protection trust could be available source to satisfy a marital claim, would be the result of a divorce, which is an act of independent significance, which would not cause estate inclusion. So where does this leave us regarding estate inclusion of a Delaware self-settled asset protection trust? At this point it is unclear. Different practitioners come down on both sides of this discussion. The comfort level of a given advisor may depend on the given fact pattern. Also it is anticipated that eventually a similar Private Letter Ruling will be sought for a self-settled asset protection trust created under the Delaware statute. Final Thoughts on the Delaware Self-Settled Asset Protection Trust 16

17 As noted throughout this discussion, this has become a very viable planning tool for overall wealth management, transfer, and protection. However, it is important to have a fact pattern that is not perceived as abusive. Also, these may be an alternative method for settlors to utilize their increased gift and GST tax exemption amounts, while these increased amounts are in existence. MOVING A TRUST TO DELAWARE, AND DELAWARE S HISTORY AND ENVIRONMENT FOR PROGRESSIVE TRUST LAWS Often times after an advisor learns the details about the various Delaware advantages for trusts, he or she realizes that there are good opportunities for some of his or her clients, but those client has already established a trust in the state in which they live. The question becomes whether it is possible to move an existing trust to Delaware. The complete answer depends in part on the state where the trust is currently resident. Generally, if an inter vivos trust has provisions for removal or resignation of a trustee and appointment of a successor trustee, no court action is required in that state. If the inter vivos trust does not have those provisions, it may be necessary to go to court in that state. On the other hand, if the state has a decanting statute, such as New York or Florida, the trustee in that state could decant the trust to Delaware. Generally in a testamentary trust, it will be necessary to go to the court in the state where the testator died, in order to move it to another state. The process from the Delaware side is generally streamlined and straight forward. A sound practice is prior to any action in the other state, petition the Delaware Court of Chancery to issue an Order stating that at the moment the Delaware Trustee is named as successor trustee or co-trustee, the trust is governed by Delaware law for administrative purposes. Whether the 17

18 trust is also governed by Delaware law for dispositive and construction will depend on the language of the trust. If it is silent as to choice of law, it is advisable to have the Order stipulate that Delaware law applies to administrative, dispositive, and construction matters. Often times the petition to the Delaware Court of Chancery will also contain a request to reform the trust. A common example is reforming a trust to add a trust advisor to direct the trustee on certain matters. Delaware does not have a non-judicial modification statute. Rather, the practice for many years has been to use the common law reformation process, utilizing the consent-petition process. This means that the court acts on a petition to reform the trust as indicated in the petition. All interested parties can waive notice, or consent to the petition. Alternatively they have a 30 day period to appear in front of the court to argue against the proceeding. As a general matter, this proceeding is done where all parties are in agreement, so it is done on consent by all interested parties. Delaware has a virtual representation statute that further enables the process. Also, a guardian ad litem may be appointed to represent the interest on minor and unborn beneficiaries in certain instances. The Delaware Court of Chancery has been in existence since It is known for its expertise in hearing trust law and corporate law cases. As noted earlier, it has upheld important statutes, a good example being the Duemler case discussed in Part One of this Article, which upheld the Delaware Trust Advisor statute. Those who have participated in proceedings in the Delaware Court of Chancery are aware of the speed, agility, and flexibility of the court, balanced with its thorough review of the underlying requests. Currently consent petitions are heard in the Court on Thursday of every other week. Often the result can be obtained in a matter of weeks. 18

19 Also the Delaware trust environment is well developed. The Delaware State Banking Commissioner s web page shows 65 providers of trust services. This means that families can be confident that if their relationship with a given Delaware trustee does not work out, there are many other providers on a local, regional, and national scale. Also the Delaware estates and trusts bar is nationally recognized. Delaware attorneys frequently publish and speak nationally, and often work with attorneys around the country. Delaware s beneficial trust laws have a significant history. For example the trust advisor statute has been in existence for 25 years. For close to one century Delaware has had a tradition of bifurcating trust roles between a trustee and an advisor, even before the statute was enacted. The rule against perpetuities was abolished in 1995, and most of the other advantages have been in existence for many years. While many other states are working to catch up to Delaware s progressive environment, Delaware continues to review its laws every year, to keep its leading edge. CONCLUSION This article has discussed various advantages of Delaware law, and how these might apply to your clients. Delaware will not be the answer to every need of an advisor s clients, however it may often fill the needs of several of these clients. 19