In a series of three opinions, all relating to trusts created for the benefit of members of the Peierls Family, the Delaware Supreme Court has offered clarification as to when Delaware law applies to a trust that previously was administered in another state.
Several of the trusts at issue included provisions directing that the validity and effect of the trusts was to be determined by the laws of either New York or New Jersey (depending on the particular trust). The trusts allowed for the appointment of successor Trustees without any geographic restriction (i.e., the successor Trustee could be domiciled in any state). None of the Trustees of the trusts were domiciled in Delaware.
The beneficiaries petitioned the Delaware Court of Chancery to: (1) allow the current Trustees of each trust to resign; (2) appoint a Delaware trust company as sole Trustee; (3) reform each trust to allow a sole Trustee to act; and (4) reform each trust by converting them into "directed trusts," with a Trust Protector and an Investment Advisor.
The Delaware Court of Chancery has the power to reform a trust under Court of Chancery Rules 100 through 103, which it adopted effective May 1, 2012. However, those rules only apply to trusts to which Delaware law applies. Since the Peierls trusts did not yet have a Delaware Trustee, the Court of Chancery concluded that Delaware law did not apply to the trusts, and thus it did not have the jurisdiction to make the requested reformations. The Delaware Supreme Court affirmed.
The Delaware Supreme Court concluded that the law governing a trust is the law designated in the trust agreement (even if designated indirectly, as long as the Settlor "manifested an intention" that a particular state's law should govern). In the absence of such a provision, the law that governs is that of the state to which the administration of the trust is most substantially related.
However, even if the trust agreement designates a particular state law to govern, there is no presumption that the Settlor thereby intended that the governing law could not change in the future. So, if the trust agreement allows for the appointment of successor Trustees without any geographic restriction, the Settlor is consenting thereby to the possibility of a different law someday governing the trust (since the administration of the trust will be deemed to take place in the state in which the Trustee is domiciled). Accordingly, the appointment of a Delaware Trustee can be sufficient to change the trust's governing law to that of Delaware, even if the trust agreement expressly provides that it is to be governed by the law of another state.
The Delaware Supreme Court concluded that the Peierls trusts were not yet governed by Delaware law, since no Delaware trustee had yet been appointed (since the Peierls family had asked for the appointment of a Delaware Trustee and the reformation of each trust in the same petition). Therefore, the Court of Chancery had no authority to modify the trusts. However, the Delaware Supreme Court noted that, for some of the Peierls trusts, no prior judicial approval was necessary for a Trustee to resign and for a successor Trustee to be appointed. So, if the Peierls family appointed a Delaware Trustee on their own, they could then submit a new petition to the Court of Chancery, which would then have the jurisdiction to make the requested modifications.
However, with respect to any testamentary trusts, and to certain inter vivos trusts over which another state already had exercised oversight, the petitioners would need the consent of the other state's courts in order to transfer the situs of the trust to Delaware.
As a result of the Peierls opinion, Delaware law may apply to any trust that has a Delaware Trustee, even if the trust agreement expressly provides that the trust was to be governed by another state's law. In order to prevent any such switch in governing law, the trust agreement would need to direct that either (1) the original governing law should continue to apply even if the situs of the administration of the trust is changed, or (2) that successor Trustees must be domiciled within the state whose law initially governs the trust.