CHAPTER 1.04. Delaware Trusts

• Jurisdiction: United States

1.04. Delaware Trusts

[1] Grantor Trusts

A grantor or common law trust is created by a contract by which the owner of present or future assets agrees that those assets will be held by a trustee for the benefit of one or more other persons (the trust beneficiaries). Usually this is accomplished by a trust agreement entered into by the trustor (the party establishing the trust) and the trustee, who can be the same person as the trustor. No filing with the Secretary of State or any other records office is necessary for the creation of such a trust; however, for real estate to be placed in that trust, the deed transferring title to the trustee is usually recorded in the applicable recorder of deeds office for the same reasons of notice as any other deed is recorded.

Such trusts can be revocable or irrevocable. A revocable trust is one under which the trustor can at any time revoke the trust and cause the trust assets to be returned to the trustor or otherwise disposed of free of the trust. An irrevocable trust is one under which the trustor has relinquished such authority and is bound by the terms of the trust.

In a grantor or common law trust, title to the real property is in the name of the trustee for the benefit of the trust beneficiaries. The trust itself is not a legal entity separate from the trustee as may be the case for a Delaware statutory trust. Although the trustee usually acts as the manager of the trust assets, the trust instrument can establish a variety of rights and responsibilities of the trustee relative to the beneficiaries, and vice versa, from the most limited to the most expansive, even to the point where a trustee must have the consent of the trust beneficiaries for any actions with respect to the trust assets. Although the trustee will have fiduciary duties to the beneficiaries, how a particular trust operates is largely governed by the terms of the trust instrument.

As nothing is filed in the public records to create a common law trust, the trust instrument is the only guide for ascertaining the authority of the trustee to bind the trust. For this reason, Delaware statutes protect third parties in their dealings with a trustee. In the context of real estate transactions, this means that a purchaser or mortgagee who accepts a deed or a mortgage in good faith and for value can rely on the trustee's authority unless the purchaser or mortgagee knows that the trustee is exceeding or improperly exercising the trustee's authority.⁷¹ Nor does the purchaser or mortgagee have any duty to inquire into the extent of the trustee's powers or the propriety of the delivery of the deed or mortgage.⁷² Moreover, the purchaser or the mortgagee can rely on the trustee's actions even if the trusteeship has terminated, unless the purchaser or mortgagee knows of that termination.⁷³ Finally, if greater comfort is desired, the...