Domestic Asset Protection Trusts and the Single Member Delaware LLC: Belt and Suspenders
Delaware is one of the best states that offers the self-funded Asset Protrction Trust (“APT”). This trust is designed to protect assets from future creditors, yet provide an income benefit to you, the donor. This is a trust commonly used by medical and dental professionals, executives, business owners, to hedge against future business and professional malpractice risks. One way to fend off against future challenges is to establish a stronger situs to Delaware by having the trustee be the sole member of a single member Delaware LLC (SMLLC) that holds trust assets. The concern is a possible challenge from the donor’s home state division of revenue about taxes or possibly a disgruntled creditor that challenges the setup and connection to Delaware and therefore the ability of the donor to avail himself of Delaware law as provided on the Delaware code as interpreted by cases from the Delaware Court of Chancery.
The Delaware APT is an irrevocable trust for the donor’s own benefit. The Delaware LLC is especially useful if the trust has bifurcated trustees where one trustee is a qualified trustee in Delaware and the other trustee is an advisor trustee located outside Delaware. The statute on APTs does not require a Delaware LLC. Nevertheless courts may look to more than the statute. For that reason one element to argue the APT, if challenged by another state for failing to pay tax in the donor’s home state, is a Delaware trust and not a trust of the donor’s home state is to comply with the Delaware statute and trust instrument. A second supplemental “belt and suspender” argument is to have the management in Delaware or to have the trustee hold trust assets in Delaware.
Holding trust assets in a Delaware LLC creates a strong connection to Delaware because companies that incorporate in Delaware are legally deemed to hold their stock in Delaware no matter where those stocks or LLC interests are held. For example when stockholders cannot be found, dividends are escheated to Delaware’s Division of Unclaimed Property and not the donor’s state. When the Delaware LLC interest is in the name of the APT trustee, they are deemed to be an intangible asset held in Delaware. Also the Delaware qualified trustee should sign the LLC Operating Agreement. It is also good to have the trustee’s office serve as the Delaware Registered Agent for the Delaware LLC to keep the Delaware office proximately located to the Trustee, concentrating the activity to one place in Delaware.
Delaware is the home to many APTs and John Williams of The Williams Law Firm, PA has experience setting up Delaware APTs, single member Delaware LLCs, incorporating in Delaware and personally acting as Qualified Delaware Truste, in place of expensive trust companies.
John Williams wrote this while attending the American Bar Association’s Spring Symposium for the Real Property Trusts and Estates section, where Incnow was a sponsor.