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Advantages of Delaware Trusts

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The State of Delaware has established itself as a favorable jurisdiction for personal trusts – for both residents and nonresidents alike – due to its contemporary laws, income tax advantages and investment flexibility, among other reasons.

Highlighted below are just a few of these advantages:

  • Directed Trusts:
    Much of the wealth that funds trusts comes from grantors who are still in the wealth creation stage. The desire to retain some level of control over their assets has ushered in significant growth in the use of directed trusts. As of December 2023, more than 40 states have some form of statute that allows a trustee to be directed on matters such as investments, distributions, tax compliance or perhaps a combination of some or all of these functions.
  • State income tax savings:
    State income taxes can be a significant drag on the growth of an irrevocable trust. Delaware offers an appealing venue for irrevocable trusts because it does not impose any state income tax on realized capital gains or income accumulated for distribution to nonresident beneficiaries in future years. In many states, a trust’s realized capital gains and accumulated ordinary income are taxed at rates between five and 10 percent, with rates in California as high as 13.3 percent. Although the Delaware trust would still be subject to federal income tax on income and realized capital gains, the state income tax savings can greatly increase trust earnings. Even though Delaware may not impose a state level income tax on the trust, the trust might be subject to income taxes by another state. These considerations are discussed in more depth in the Advantages of Delaware Trusts paper.
  • Tax-efficient wealth transfer:
    Unlike many states that limit the duration of a trust, Delaware does not place time limits on properly structured dynasty (or perpetual) trusts. Assets transferred into a dynasty trust can benefit generations of clients’ descendants potentially without incurring gift, estate or generation-skipping transfer taxes. See discussion below titled Favorable Tax Treatment for Long-Term Trusts.
  • Environmental, Social and Governance (ESG) investing:
    Delaware recognizes the growing interest among beneficiaries in investing trust assets in holdings that promote ESG goals. Under Delaware statute, the trust instrument may expand the laws of general application to fiduciaries, including laws pertaining to, “the manner in which a fiduciary should invest assets, including whether to engage in one or more sustainable or socially responsible investment strategies, in addition to, or in place of, other investment strategies with or without regard to investment performance.”
  • Electronic Execution of Documents:
    Under Delaware statute, inter vivos and testamentary trust agreements as well as most other documents related to these trust agreements can be executed electronically. The documents covered include just about any type of document that will be involved such as: the execution of a trust agreement; the modification of a trust through modification agreement, merger or decanting; and more. Beginning in 2023, Delaware law permits remote online notarization. This means that a Delaware notary can use audio visual communication technology to notarize the signature of a person located in a different location, whether the person who has signed the document is in Delaware or elsewhere.
  • Confidential Trusts:
    For a variety of reasons, grantors may not want to disclose the existence of a trust to their beneficiaries. Under Delaware law, the grantor may permit nondisclosure to the beneficiaries in the terms of the trust instrument. Even if the trust instrument does not provide for nondisclosure, the Delaware statute provides various other mechanisms for nondisclosure of information to a beneficiary. The parameters of whether this statute should be utilized, and the length of time the trust might remain confidential, should be considered carefully by the grantor and their counsel.
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Favorable Tax Treatment for Long-Term Trusts

A client’s ability to contribute assets to a trust that will continue for successive generations without the imposition of any transfer tax is a significant opportunity when compared to the alternative of passing assets outright, from generation to generation, subject to a federal transfer tax at each generation. Assuming a $13.61 million contribution to a trust, a five percent after-tax rate of return on the investment assets, a new generation every 25 years, and a federal estate tax of 40 percent applied at each generational transfer, a Delaware GST-exempt trust would have a value of $528,512,855 million after only 75 years. The same sum of $13.61 million held outside of a trust (and subject to a gift tax or estate tax upon transmittal to each successive generation) would have a value of $114,158,777 million.

Assumptions:

  1. Federal estate tax rate: 40%

  2. Return on investment assets: 5% annually

  3. No state income taxes

  4. No distributions from trust or consumption of principal or income

  5. No basic exclusion amount used to offset taxable amount in future years

     

Delaware Specialized Trust Provisions

In 2023 we launched our specialized trust provisions, which offer guidance on the application of Delaware’s modern trust laws to help protect and preserve clients’ wealth. After determining the aspects of the trust, look through our body of provisions that address any topics and incorporate language as needed. The six categories are:

  • Provisions for All Trusts
  • Investment Advisor Provisions
  • Distribution Advisor Provisions
  • Other Advisor Provisions
  • Special Situations
  • Sample Language for Any Trust

 

Complete the form to request the full paper for more about:

  • Directed Trusts
  • Freedom of Disposition
  • Methods for Modifying a Trust in Delaware
  • Procedural Matters
  • And more…
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Delaware Trusts

Explore solutions to common client situations enabled by Delaware trusts.

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Delaware Specialized Trust Provisions

Evolve your clients' documents with our digital collection of specialized trust provisions.

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Disclosures

This information is not intended to be and should not be treated as legal, investment, accounting or tax advice and is for informational purposes only. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. All information discussed herein is current only as of the date appearing in this material and is subject to change at any time without notice.

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