Delaware enjoys international renown for its trust and tax law advantages and its innovative estate planning vehicles.
- Delaware has a well thought-out body of trust laws; a supportive legislature, executive branch, and legal and banking community; and many institutions that compete for trust business.
- Benefits of having a trust in Delaware include tax advantages, creditor protection, flexible distribution rules, and others.
- Delaware’s innovative approach to trusts helps ensure that Delaware will remain as the premier home for new or existing trusts.
Delaware has been a trust-friendly jurisdiction for generations. Even if you don’t live in Delaware, there are numerous reasons why you should consider establishing a new trust in Delaware and why you should explore moving an existing trust to the First State.
1. Your trust will have a trust-friendly home
No other state can match Delaware’s trust history. Starting early in the 20th century, Delaware began to establish a trust infrastructure. Thus, it has a well-thought-out body of trust laws (which it updates on an ongoing basis); a supportive legislature, executive branch, and legal and banking community; and many institutions that compete for trust business within the state. Delaware’s innovative approach to trusts helps Delaware maintain its position as the premier home for new or existing trusts.
2. Directed trusts: You may continue to control your trust’s investments or involve trusted advisors with distribution decisions
For over a century, Delaware has recognized the “directed trust,” in which the trustee makes investment decisions as directed by an advisor named in the trust. Under the law, a trustee will be liable for following the instructions of an advisor named in the governing instrument only if it engages in wilful misconduct. To recognize this diminished responsibility, Wilmington Trust Company customarily charges less to administer directed trusts than trusts over which we have investment duties. In addition to investment matters, Delaware’s directed trust law also covers distribution and other decisions, relieves a directed trustee from the duty to monitor the advisor’s conduct, and recognizes that a “protector” may be an “advisor.” A 2004 Delaware court case sustained the law.
Consequently, the Delaware directed trust might be right for you if you want to fund your trust with stock in a family company, maintain a relationship with a money manager, or involve family members in deciding how much is distributed to your beneficiaries.
3. Your trust can be perpetual
Historical trust law in every state imposed a “rule against perpetuities” that limited the duration of a trust. In 1986, Delaware abolished the common-law rule against perpetuities. Currently, personal property, including stocks, bonds, other intangible personal property, and tangible assets other than real property, may remain in trust forever. Real property held in trust continues to be governed by a 110-year limitation, but you may avoid this limitation by placing real property in a limited liability company or family limited partnership because an interest in one of these entities is personal property under Delaware law.
4. Your trust might avoid state income taxes on accumulated income and capital gains
Because Delaware allows perpetual trusts of personal property and doesn’t tax trust income in most cases, it’s an excellent place for you to create a long-term or “dynasty” trust. Delaware does impose an income tax, but the trustee of a Delaware trust may deduct income (including capital gains) accumulated for future distribution to non-resident beneficiaries. Given that Delaware has a small population and that it determines the residences of future beneficiaries in a favorable way, few Delaware trusts created by non-residents pay Delaware income tax. If your trust has no Delaware beneficiaries, the trustee is not required to file a Delaware return. In addition, if you live in California, Massachusetts, New Jersey, New York, or one of a number of other states, your Delaware trust might be exempt from your home state’s income tax, so the income may escape state tax entirely.
5. Your trust can protect assets from your beneficiaries’ creditors
A Delaware spendthrift trust provides your beneficiaries substantial protection from creditor claims. So, if your Delaware trust contains a spendthrift clause, a beneficiary’s interest will generally be shielded in an unlimited amount. A creditor cannot force you, your trustee, or your beneficiary to act in a way that will defeat the law’s protections. Plus, your trustee may pay your beneficiary’s ongoing personal expenses, even if it knows that there is an existing creditor.
Download the article to read the remaining five reasons to have your trust in Delaware.
Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts
and directed trusts.
Please see important disclosures at the end of the article.
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