The state of Delaware, not to be outdone by Alaska's bid to become an attractive locale for personal trusts, has passed a law that keeps pace with a measure recently adopted by the 49th state.
In April, Alaska surprised many by enacting legislation to encourage the nation's wealthy to put their money in trust in the state. Alaska's trust law is meant to emulate some advantages of offshore trusts, such as tax savings and protection of trust assets from creditors.
Reaction was swift in Delaware, a traditional personal trust haven, which responded this month by enacting a law that also protects trust assets from creditors.
In a state whose history is intertwined with that of its wealthy families, bankers and lawyers in Delaware were not going to sit back and watch what they perceive as a Johnny-come-lately try to better their trust law.
"It stung a lot of us," said Daniel F. Lindley, one of the law's drafters and a partner in the Wilmington office of the Philadelphia law firm Duane, Morris & Heckscher. "It was a matter of personal pride: You want to keep Delaware as one of the most favorable trust states."
Trust and estate law varies from state to state. The laws in Alaska, Delaware, Idaho, South Dakota, and Wisconsin already stand out because they, unlike the majority of states, allow so-called "dynasty" trusts, which do not have to terminate.
A battle is emerging among states that want to encourage the establishment of trusts in their backyards.
"They're scrambling because they saw it worked for credit cards and brought lots of employment and taxes. They want to do the same for trusts," said John P.C. Duncan, a partner in Jones, Day, Reavis & Pogue, a Chicago law firm.
The new laws make Delaware and Alaska the only states that impose deadlines of four years on creditors seeking to prove money transferred to a trust belongs to them. Individuals setting up trusts in the two states can remain their own beneficiaries.
Existing Delaware law already has provisions that assign trust rulings to state chancery court and encourage trustees to hire outside money managers. Confidentiality for private banking clients is buttressed by a lack of requirements that trust agreements be publicly filed.
Indeed, Delaware-based trustees Wilmington Trust Corp., a bank founded by the DuPont family, and start-up Commonwealth Trust Co. could easily tout the benefits of locating a trust in their state even before the me-too asset protection law was passed.
Wilmington Trust has long benefited from its location and anticipates continued prominence in the trust business.
"We are the eighth-largest (personal) trust company in the country, even though we are here in dinky little Delaware," said Richard W. Nenno, the bank's vice president and trust counsel.
It manages trust assets for clients from all 50 states and 17 foreign countries. Protection from creditors was needed for the state to stay competitive.
"We had been discussing doing something like this, but clearly the act by Alaska galvanized us," Mr. Nenno said.
Delaware trust assets can still be attacked by children, spouses, and former spouses, lenders who extended credit on the basis of financial statements that included the assets, and others whose claims arise from incidents that occurred before the establishment of such a trust.
Close on the heels of the law, Commonwealth Trust, Wilmington, started a national marketing campaign to position itself as an ideal provider of trust administration for principals of closely held businesses.
Should litigation arise involving a client, Commonwealth executives said, their state's chancery court can make better legal interpretations about trusts than Alaska's.
"The advantage we have in Delaware is the history of our law," said Peter A. Horty, president of Commonwealth Trust.