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Did Delaware just get dissed over the security of trusts?

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Jeffrey M. Verdon, a California-based attorney who specializes in estate planning, has a message for his clients: Stay clear of Delaware when it comes to starting an asset-protection trust.

“Asset protection in Delaware can be a risky venture, and it may be beneficial for individuals and families to look elsewhere to establish asset protection trusts,” Verdon wrote in a recent article for Kiplinger, a national publisher of business advice and financial forecasts.

These types of trusts are designed to protect the beneficiary’s assets from taxation, creditors and even child support or alimony claims. The latter fall under the category of “exception creditors,” and most states allow them to reach assets in a trust if they have a claim against the beneficiary.

Delaware law protects against claims of this kind, and yet a number of lawyers from outside the state have expressed concern over Kloiber v. Kloiber, a 2014 Delaware Supreme Court case that allowed an ex-spouse to access a trust created by the father of her former husband.

The case was complex and involved a series of procedural questions, but to critics like Verdon the takeaway was obvious.

“If I set up a trust for my child and my child gets divorced, I’m not expecting their ex-spouse to be able to access that trust, which is what Kloiber allows them do,” Verdon told the Delaware Business Times.

Verdon said that many states have gone a similar route, opening up their laws to exception creditors for the sake of fairness. “This is a disturbing trend,” he said.

Trust law is complicated, however, and it can take time to understand what a given case means for this specialized industry.

“I haven’t seen that sort of chilling effect,” said Jim Gallagher, who runs the tax and estates practice at the New Castle County-based Morris James LLP.

He noted that Delaware often gets this kind of attention from outside lawyers looking to promote their respective states. “People outside of Delaware are always sort of sending slings and arrows at us,” Gallagher said. “They’re looking to promote business in their state. It’s understandable.”

Thomas R. Pulsifier, partner at the Wilmington-based firm Morris, Nichols, Arsht & Tunnell LLP, agreed that a competitive streak among lawyers is partly to blame. But in this case, he said, the law is simply being misinterpreted.

“It may be that these writers mean to mislead their readers intentionally,” Pulsifier said. “But I think it is more likely that the complexity of the topic, coupled with their bias in favor of their preferred jurisdiction, leads them to write more as an advocate than a scholar.”

He said Kloiber settled on a procedural matter and had no bearing on case law. He also noted that the law protecting third party trusts — those formed by one party for the benefit of another — from exception creditors was affirmed by the Court of Chancery as recently as early March.

Verdon disputed that Kloiber does not affect case law. But he also noted that the impact of the case is still unfolding.

“Things move slowly in our industry,” he said.

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