Why Choose Delaware For Your Trust
Delaware Tax Advantages
Delaware permits a trustee of a resident trust to deduct income (including capital gains) set aside for future distribution to nonresident beneficiaries, thus allowing for a trust to have a significantly reduced state income tax burden so long as its beneficiaries reside outside of the State of Delaware. As the burden of state income taxes can be a significant drain on the growth of an irrevocable trust, this can be a substantial benefit. This aspect of Delaware law may be of significant use to those establishing a Delaware Incomplete Gift Nongrantor Trust or “DING,” in eliminating state income taxes on capital gains realized upon the sale of trust assets, making it attractive to closely held business owners who are considering selling their interest in the business at a future date.
Delaware Court of Chancery
With over 200 years of experience in trust and corporate law, the Delaware Chancery Court is a court of equity, as opposed to a court of law, which is unlike most states.
Anatomy of the Court of Chancery
The Court of Chancery consists of one Chancellor and four Vice Chancellors, as well as, Masters. The Chancellor and Vice Chancellors are nominated by the Governor and must be confirmed by the Senate for 12-year terms. The Delaware Court of Chancery is a non-jury trial court that serves as Delaware’s court of original jurisdiction in corporate and trust matters.
Exclusivity of the Court
Because the Court of Chancery is able to focus exclusively on fiduciary and commercial matters, this court system does not experience the same backlog that other state court systems do. This court system has been ranked number one every year since 2002 by the U.S. Chamber of Commerce state liability systems ranking study. A premium is placed on confidentiality throughout the court system
Unless asked, Delaware courts do not supervise the administration of trusts. In the event a dispute arises, the parties can easily obtain a court order to seal the record, keeping the trust agreement, the parties, and their dispute out of the public eye. Delaware’s statutes also allow a settlor, by express direction to the trustee, to maintain the secrecy of a trust’s existence for a designated period of time, allowing a settlor to limit beneficiary notification.
Delaware has a long history of well-reasoned court rulings and it has consistently demonstrated its commitment to safeguarding the advantages of Delaware’s laws. All trust administration and trust interpretation cases are exclusively within the jurisdiction of Delaware Court of Chancery, and upon appeal, the Delaware Supreme Court.
Delaware’s Progressive State Legislature
In addition to its unique court system, Delaware also has a very progressive state legislature that is very knowledgeable about trust law. The legislature benefits from a strong and influential state Bar Association and Banker’s Association that work together to keep Delaware’s trust legislation on the cutting edge. Delaware’s laws are focused on carrying out the settlor’s intent.
A Brief History of Delaware Legislature
The Delaware legislature has historically been a leader in trust legislation with many other states following Delaware’s lead. A timeline of important Delaware trust legislation starts with the 1933 enactment of law allowing the beginning of a new perpetuities period upon the exercise of a power of appointment, the pre-cursor to the repeal of the Rule Against Perpetuities. Additional significant legislative enactments can be found on our timeline.
Bifurcation of Trust Duties
In 1994, Delaware’s law permitted directed trusts and bifurcation of trust duties to allow the grantor to separate the duties traditionally held by a trustee into clearly defined roles for two or more fiduciaries. This legislation permitted the separation of investment duties from the trustee’s other duties by giving those duties to an investment adviser. The decision as to whom the adviser will be and the extent of the adviser’s power is determined by the trust document.
Advantages of this approach:
- Allows the trustee to focus on its separate duties and be removed from decisions with regard to investments, instead taking direction from advisers as to trust investments.
- Allows the trustee to act upon the direction of the adviser without being responsible for the adviser’s decisions
This flexible approach to allocating separate fiduciary duties is very different from traditional trusts where the trustee may delegate trust duties, but still remains liable for some level of oversight as to both the choice of fiduciary and decisions made by the same.
Further Advancements in Delaware Trust Law
In 1995, Delaware repealed its Rule Against Perpetuities thus allowing for the Delaware Dynasty Trust. This legislation opened the flood gates for trust planning in Delaware since it allowed a grantor to set up a trust using transfer tax exemptions that could remain in existence forever and continue to accumulate income transfer tax free for future generations.
This legislation was followed by legislation enacting the Delaware Qualified Dispositions in Trust Act in 1997 to allow for self settled trusts sometimes referred to as asset protection trusts. These self settled trusts must be established within certain parameters, such as they must be irrevocable, contain a spendthrift clause, provide that Delaware law govern the trust’s validity, construction, and administration; and appoint at least one Delaware trustee.
Other significant legislation has followed, such as:
- the codification of the common law doctrine of virtual representation in 2000
- the total return trust statute in 2001
- the decanting statute in 2003 which established that a trustee, who could distribute principal outright to one or more beneficiaries, may also exercise that power in further trust unless the governing instrument provided otherwise, thus providing a method for non-judicial reformation of a trust
- legislation establishing Purpose Trusts was enacted in 2004, allowing for trusts to be set up without beneficiaries to achieve a specific purpose, such as a cemetery trusts or other non-charitable purpose trusts.
- the Delaware legislature passed a law that allows tenancy by the entireties property to retain its character when contributed to a Delaware trust in 2010
The progressive Delaware state legislature is always evolving, and Commonwealth prides itself on communicating any developments to clients.
Delaware Bar Association and Delaware Bankers Association
The Delaware Banker’s Association works in conjunction with the Delaware Bar Association together to keep Delaware’s trust legislation constantly evolving.