CHAPTER 159

FORMERLY

HOUSE SUBSTITUTE NO. I

TO

HOUSE BILL NO. 356

AN ACT TO AMEND TITLE 12, DELAWARE CODE, RELATING TO QUALIFIED DISPOSITIONS IN TRUST.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE:

Section 1. Amend Chapter 35, Title 12, by adding thereto a new subchapter, which subchapter shall read in its entirety as follows:

"Subchapter VI. Qualified Dispositions in Trust. 3570. Definitions.

As used in this subchapter:

(1) 'Claim' means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.

(2) 'Creditor' means, with respect to a transferor, a person who has a claim.

(3) 'Debt' means liability on a claim.

(4) 'Disposition' means a transfer, conveyance or assignment of property, or the exercise of a power so as to cause a transfer of property, to a trustee.

(5) 'Property' includes real property, personal property, and interests in real or personal property.

(6) 'Qualified Disposition' means a disposition by or from a transferor to a trustee, with or without consideration, by means of a trust instrument.

(7) Transferor' means a person who, as an owner of property or as a holder of a general power of appointment, directly or indirectly makes a disposition or causes a disposition to be made.

(8) 'Trustee' means a person who:

a. in the case of natural person, is a resident of this State or, in all other cases, is authorized by the law of this State to act as a trustee and whose activities are subject to supervision by the Bank Commissioner of the State, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, or the Office of Thrift Supervision or any successor thereto; and

b. maintains or arranges for custody in this State of some or all of the property transferred to the trustee, maintains records for the trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation of fiduciary income tax returns for (he trust, or otherwise materially participates in the administration of the trust.

(9) 'Trust instrument' means an instrument appointing a trustee for the property that is the subject of a disposition, which instrument:

a. expressly incorporates the law of this State to govern the validity, construction and administration of the trust;

b. is irrevocable, but a trust instrument shall not be deemed revocable on account of its inclusion of one or more of the following: a transferor's power to veto a distribution from a trust, a testamentary special power of appointment or similar power vested in the transferor, or the transferor's potential or actual receipt of a distribution of income, principal, or both, in the sole discretion of a trustee who is neither the transferor nor a related or subordinate party of the transferor within the meaning of 26 U.S.C. § 672(c); and

c. provides that the interest of a beneficiary in the trust property or the income therefrom may not be transferred or assigned, whether voluntarily or involuntarily, before the trustee distributes the property or income to the beneficiary.

§ 3571. No retained interest of transferor.

A qualified disposition that requires a trustee to distribute all or any part of the trust's income or principal, or both, to the transferor shall not be entitled to any rights or benefits arising under § 3572, but a qualified disposition shall remain subject to § 3572 notwithstanding that the trustee has the sole discretion, exercisable without regard to any ascertainable standard, to distribute trust income or principal, or both, to the transferor if such trustee is neither the transferor nor a related party or subordinate party of the transferor within the meaning of 26 U.S.C. § 672(c).

§ 3572. Avoidance of qualified dispositions.

(a) Notwithstanding any other provision of this Code, no action of any kind, including, without limitation, an action to enforce a judgment entered by a court or other body having adjudicative authority, shall be brought at law or in equity for an attachment or other provisional remedy against property that is the subject of a qualified disposition or for avoidance of a qualified disposition unless such action shall be brought pursuant to the provisions of § 1304 or § 1305 of Title 6.

(b) Notwithstanding the provisions of § )309 of Title 6, a creditor may not bring an action under subsection (a) hereof if:

(1) the creditor's claim against the transferor arose before the qualified

disposition was made unless the action is brought within 4 years after the qualified disposition is made or, if later, within 1 year after the qualified disposition was or could reasonably have been discovered by the creditor; or

(2) the creditor's claim against the transferor arose subsequent to the qualified disposition unless the action is brought within 4 years after the qualified disposition is made.

§ 3573. Persons not subject to qualified dispositions.

Notwithstanding the provisions of § 3572, this subchapter shall not apply in any respect:

(a) to any person to whom the transferor is indebted on account of an agreement or order of court for the payment of support or alimony in favor of such transferor's spouse, former spouse or children, or for a division of distribution of property in favor of such transferor's spouse or former spouse, to the extent of such debt; or

(b) to any creditor who became a creditor of the transferor in reliance upon an express written statement of the transferor that any property that was the subject of the qualified disposition thereafter remained the property of the transferor and was available to satisfy any debt to such creditor incurred by the transferor; or

(c) to any person who suffers death, personal injury or property damage on or before the date of a qualified disposition by a transferor, which death, personal injury or property damage is at any time determined to have been caused in whole or in part by the act or omission of either such transferor or by another person for whom such transferor is or was vicariously liable.

§ 3574. Effect of avoidance of qualified dispositions.

(a) A qualified disposition shall be avoided only to the extent necessary to satisfy the transferor's debt to the creditor at whose instance the disposition had been avoided, together with such costs, including attorneys' fees, as the court may allow.

(b) In the event any qualified disposition shall be avoided as provided in subsection (a) hereof, then:

(1) If the court is satisfied that the trustee has not acted in bad faith in accepting or administering the property that is the subject of the qualified disposition,

a. the trustee shall have a first and paramount lien against the property that is the subject of the qualified disposition in an amount equal to the entire cost, including attorneys' fees, properly incurred by the trustee in the defense of the action or proceedings to avoid the qualified disposition; and

b. the qualified disposition shall be avoided subject to the proper fees, costs, preexisting rights, claims and interests of the trustee (and of any predecessor trustee that has not acted in bad faith); and

c. for purposes of this subparagraph (1), it shall be presumed that the trustee did not act in bad faith merely by accepting such property; and

(2) If the court is satisfied that a beneficiary of a trust has not acted in bad faith, the avoidance of the qualified disposition shall be subject to the right of such beneficiary to retain any distribution made upon the exercise of a trust power or discretion vested in the trustee of such trust, which power or discretion was properly exercised prior to the creditor's commencement of an action to avoid the qualified disposition.

§ 3575. Application of subchapter.

This subchapter shall apply to qualified dispositions made on or after July I,

1997.

§ 3576. Short title.

This subchapter may be cited as the 'Qualified Dispositions in Trust Act.— Section 2. This Act shall become effective upon its enactment.

Approved July 9, 1997