Using Delaware Bank Accounts and Trusts to Shield Deposits, Trust
Funds, and Trust Distributions from Creditor Claims
By Richard W. Nenno, Esq.
Wilmington Trust Company, Wilmington, DE
Creditors of non-Delaware residents as well as Delaware residents
may not reach assets of accounts in Delaware banks. The current
statute provides as follows (10 Del. C. §
3502(b)):
Banks,
trust companies, savings institutions and loan associations …
shall not be subject to the operations of the attachment laws of this
State.
This protection is not new. In fact, the earliest predecessor of
the statute was enacted in 1871 (14 Del. Laws 90). Over the years,
Delaware courts have read the protection broadly as follows:
•
Sterling v. Tantum, 94 A. 176 (Del. Super. Ct. 1915)--Funds in
trust department of corporation having banking powers are exempt from
attachment even though trust department is distinct from banking
business
•
Provident Trust Co. v. Banks 9 A.2d 260 (Del. Ch. 1939)--Filing
of creditor bill in equity court does not enable creditors to reach
assets of self-settled trust at Delaware trust company
•
Bank of Delaware v. Wilmington Housing Authority, 352 A.2d 420
(Del. Super. Ct. 1976)--Wages of employee of Delaware bank are not
subject to garnishment
•
Delaware Trust Co. v. Partial, 517 A.2d 259 (Del. Ch.
1986)--Request for temporary restraining order to enjoin withdrawal of
funds from bank denied
However, the Delaware Supreme Court held in Garretson v.
Garretson, 306 A.2d 737, 742 (Del. 1973), that “the seizure
by sequestration of spendthrift trust income in the hands of a bank as
Trustee at the suit of a wife seeking maintenance from a husband is
not an attachment within the meaning of § 3502.”
Nevertheless, in the nonmarital context, a Delaware or non-Delaware
resident may obtain substantial protection from creditors by placing
funds in a checking, savings, trust, or other account at a Delaware
institution. Even in the marital context, an individual will be no
worse off by so doing than he or she would have been by holding funds
elsewhere and might be better off because, in Delaware Trust Co. v.
Partial, 517 A.2d 259, 261 (Del. Ch. 1986), the Delaware Court of
Chancery indicated that Garretson has limited
application:
It
has been held that Section 3502 does not directly exempt Delaware
banks from the operation of our sequestration process. The statute
authorizing sequestration, however,--and the Garretson case
construing it--is limited to the seizure of property to compel
appearance and thus has no application to the case at
bar.
In addition, mandatory or discretionary distributions from a
marital-deduction trust, a charitable-remainder trust, a revocable
trust, an asset-protection trust, etc., Delaware or otherwise, into an
account in a Delaware bank or trust company will insulate the funds
from creditor claims.
Whereas the statute prohibits attachment of assets in a
non-bankruptcy context, it will not apply upon the filing of a
petition under the United States Bankruptcy Code unless the account
fits within one of the limited exemptions or exclusions provided by
the Bankruptcy Code.
For more information, in the Tax Management Portfolios, see
Rosen and Rothschild, 810 T.M., Asset Protection Planning.
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