This article reprint was published in Volume 40 of the Tax Management Estates, Gifts and Trusts Journal and provides an overview of the federal tax laws known as the Delaware Tax Trap, including:

  • A review of the Trap’s history.
  • How to spring and not to spring the Trap, and  when to spring and not to spring the Trap.
  • A summary of how the Trap works under current Delaware law and how it works under the laws of some other states.

Estate planning attorneys throughout the United States long have fretted about the poorly understood aspect of the federal tax laws known as the Delaware tax trap (‘‘the Trap’’), which is codified in §2041(a)(3) and §2514(d). Although practitioners have had a vague notion that triggering the Trap might be beneficial in certain situations, they have been scared to
death that a client’s exercise of a power of appointment might inadvertently subject a trust to federal estate or gift tax. Would a malpractice action be far behind? As a result, the goal has been to avoid triggering the Trap at all cost.

Times change.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or services. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. 

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