Steve Leimberg's Asset Protection Planning Email Newsletter

Executive summary

A number of Delaware practitioners have been left scratching their heads over a recent LISI newsletter (Asset Protection Planning Newsletter # 217) highlighting the 40th anniversary of a Delaware case pertaining to third-party spendthrift trusts.1 Garretson v. Garretson. 2 Though the authors of the commentary report that the case was a "landmark court decision," their analysis strangely does not comport with our opinion of how jurists and practitioners in Delaware have viewed the case for nearly four decades. This commentary provides our view of the subject and addresses the point validly made by the authors of such commentary that advisors should be aware of which states offer the best creditor protection to beneficiaries.

Facts:

Garretson is a case about a husband who left his wife after 24 years of marriage. The following year, Mrs. Garretson commenced a maintenance action against Mr. Garretson and ultimately won an order for final support, pursuant to which Mr. Garretson was required to pay Mrs. Garretson $400 per month. However, Mr. Garretson soon stopped making payments to Mrs. Garretson, moved out of state, and obtained a divorce decree in Mexico.

His failure to pay led Mrs. Garretson to bring a second action in the Court of Chancery seeking a judgment against Mr. Garretson for the amount of the arrearages and an order directing the Bank of Delaware to pay the judgment and all future monthly payments from a testamentary trust of which Mr. Garretson was a beneficiary (and of which the Bank was the trustee). To obtain personal jurisdiction over Mr. Garretson, who was by then a nonresident of Delaware, the Court of Chancery issued an order of sequestration with respect to the trust income. Our view of the case is that the sequestration order was not a judgment in favor of the wife and did not pierce the trust. Rather, in our opinion, it was an order temporarily removing the trust income held by the trustee so as to coerce the husband's appearance in court.

The Bank of Delaware appealed the Court of Chancery's order denying the Bank's motion to dismiss the wife's complaint, while Mr. Garretson (by special appearance) appealed the denial of his motion to vacate the sequestration order (and award of interim counsel fees). They argued that by statute3 and by virtue of the spendthrift provision in the trust, the trust income could not be sequestered. The statute and trust both prohibited a "creditor" of the trust...