The Court of Chancery of Delaware recently validated the Delaware asset protection trust laws and rejected a creditor's attempt to seize assets held in a Delaware asset protection trust in order to enforce a $14 million judgment from Michigan against the trust's grantor. In the Matter of the CES 2007 Trust. The creditor alleged that the trust was merely a facade used to conceal assets, with the grantor still exercising control.
The Court emphasized that the trust had been established in 2007—before the debt arose—and held 90% ownership in various Delaware LLCs, which in turn owned real estate. According to Delaware law, holding an interest in an LLC does not equate to owning the underlying property, so the trust was not deemed to own the real estate directly.
The Court found that the trust complied with all statutory requirements for a valid Delaware asset protection trust: it was irrevocable, included a legally enforceable spendthrift provision, was managed by a qualified Delaware trustee, and was governed by Delaware law. Although the grantor retained certain investment advisory powers and appointed his brother as trust protector, the Court ruled that these elements were permissible under Delaware law and did not render the trust invalid or suggest that the grantor retained control.
Additionally, the Court found no evidence of fraudulent conduct or mismanagement. The grantor's role in managing the LLCs did not, in the Court's view, justify disregarding the trust's protections. Without concrete evidence of wrongdoing, the Court refused to treat the trust as a sham or to "pierce the veil."
This ruling reinforces the strength of Delaware's asset protection trust laws, confirming that adherence to the formal legal requirements can shield trusts from creditor claims—even those based on judgments from other states—unless there is clear evidence of fraud or abuse.
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