Delaware's new trust statute may need some sprucing up when the state's legislators reassemble in Dover.
This summer the state revamped its trust law to bring it up to par with a new statute in Alaska. Both states now protect trust assets by imposing a four-year deadline on creditors who seek to prove their money was fraudulently transferred to a trust.
But the Delaware law allows banks and other lenders to invade a trust if the person establishing it listed its assets on a personal financial statement. Some attorneys say this aspect of the Delaware law, which is not included in the Alaska statute, could give too much leeway to creditors-the very people asset protection trusts are designed to fend off.
"The Delaware law has gaping holes you could drive a Mack truck through if you're a certain kind of creditor," said Gideon Rothschild, a partner of Siller Wilk, New York, and vice chairman of the asset protection committee of the American Bar Association.
People involved with the Delaware legislation have taken note.
"We wanted to ensure lenders are not taken advantage of by settlors who were duplicitous in including trust assets on a balance sheet," said Daniel F. Lindley, a co-drafter of the Delaware law.
"We may conclude that lenders ought to be able to do their own due diligence and don't need that exemption," he added. Based in Wilmington, Mr. Lindley is a partner in the Philadelphia law firm of Duane, Morris & Heckscher.
The Delaware law assures that some creditors can seek their due, such as those owed alimony or child support, or someone who was personally injured by the transferor before the trust was set up.
The introduction of both the Alaska and Delaware laws has gotten private bankers and trust attorneys alike buzzing about their applicability for estate planning and asset protection. The drafter of the Alaska trust law, Jonathan G. Blattmachr, a partner of the New York law firm Milbank, Tweed, Hadley & McCloy, has voiced concern that the Delaware law is flawed.
Mr. Lindley said he has traded voice-mail messages with Mr. Blattmachr and would consider his assistance in sprucing up the Delaware statute.
In response to the Alaska law, the Delaware trust and estate community rushed to get its law through this summer before the legislators adjourned, Mr. Lindley said.
"We view this as a cutting-edge initiative, like the Delaware corporate law, which is refined annually," he said.