Two representatives from a prominent Delaware trust company visited us in New York in order to solicit our clients’ trust business. They spoke at length of the merits of Delaware as a trust jurisdiction. They noted how much money has poured into Delaware because of its favorable corporation and trust laws. They suggested that Delaware legislators and judges will continue to develop Delaware law to be favorable to trusts, in order to keep trust money and attract new trust money to Delaware.
They also noted how foreign trusts in offshore jurisdictions are obligated to report trust details to the IRS under FATCA (the Foreign Account Tax Compliance Act). Their implication is that Delaware trusts are better or more “secret” than offshore trusts.
However, there is one glaring hole in the concept of a Delaware asset protection trust, which is that a Delaware trustee is required to uphold a judgment from a court outside Delaware, which means that the assets in the Delaware APT would be turned over to a foreign judgment creditor. This completely vitiates the rationale behind sending assets to a Delaware trust for asset protection purposes. This potential flaw in a Delaware APT has never been tested in a Delaware court. As we tell our clients, you may be the test case, and few if any clients want to be a test case in court.
The conclusion is that Delaware asset protection trusts are risky for asset protection goals. For other goals – – generational planning, a favorable litigation climate, sophisticated courts, experienced trustees – – Delaware might be one of the premier domestic jurisdictions for trust planning. However, we have serious issues with Delaware for asset protection planning. We have the same issue with other domestic asset protection trust states.
And yes, offshore trusts report to the IRS. As we have long counseled, there is no hiding money offshore from the IRS. Domestic trusts, including in Delaware, report to the IRS also. However, for asset protection purposes, foreign trusts offer compelling and proven advantages. Domestic trusts remain vulnerable to domestic challenges, including U.S. court judgments.