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When you’re creating a trust for the benefit of yourself or your family members, choosing the state law that will govern it has many implications and potential benefits—not just for you, but for your beneficiaries as well. Historically, Delaware has been the jurisdiction of choice for grantors of trusts. For generations, the state has built a trust-friendly body of legislation and has supported its laws with a knowledgeable and effective court system.
Though you have many choices when it comes to determining the best jurisdiction for your trust, we’ve outlined the top five reasons we believe establishing your trust in Delaware can benefit you and your family.
1. State Income Tax
Delaware has long been known as a tax-friendly state for trusts. Primarily, trusts aren’t subject to Delaware state income tax if beneficiaries aren’t Delaware residents. In addition, trusts don’t need to file a Delaware state income tax return. Nevertheless, it’s important to note that beneficiaries who receive trust distributions may still be subject to taxation, and the trust may be taxed in the grantor’s home state depending on its rules.
2. Flexibility
Delaware is considered a relatively flexible jurisdiction for trusts for many reasons. One unique distinction is its decanting statute, which allows for relatively easy transfers between trusts—a significant benefit in many cases. In addition, Delaware allows for the ability to delegate to advisors, which alleviates trustees from assuming absolute discretion.
Perpetual trusts are also allowed in Delaware, as are purpose trusts. A perpetual trust allows trust assets to pass from one generation to the next (free from gift, estate and generation-skipping taxes), while purpose trusts allow grantors to establish perpetual, non-charitable trusts.
3. Quiet Trusts
Grantors do not always want their beneficiaries to know about the nature and extent of their interest in a trust, or even of the existence of a trust for their benefit. Parents or grandparents who create trusts for their children and future generations often fear that knowledge of significant wealth may undermine productivity or otherwise harm them.
Delaware allows for quiet trusts, which differ from other states in a variety of ways. One important difference is that grantors can direct trustees to not inform a beneficiary of his or her interest in the trust. Grantors can also specify the age or time that must pass before the beneficiary can be informed of the trust.
4. Directed Trusts
Delaware uniquely permits trust responsibilities to be bifurcated, which has several benefits. First, a family can retain a certain degree of control over the direction of the trust. This authority can be particularly useful in cases where trust assets include real estate investments or other unique assets for which the family wishes to designate a chosen asset manager. In addition, the trustee can take direction from the family or a third party without compromising his or her fiduciary responsibility.
5. Asset Protection Trusts
Delaware allows self-settled asset protection trusts, a feature that can be advantageous to many people. In particular, grantors with significant wealth in their own name who want the ability to protect assets from creditors while maintaining a beneficial interest in the trust are likely to benefit from self-settled asset protection trusts. Alternatively, anyone engaged in high-risk activities or professions, such as physicians and attorneys, may want to consider Delaware for this reason.
Conclusion: Consider Delaware When Creating Your Next Trust
Since trust law is not the same in all states, choosing the right jurisdiction can have multiple benefits for you and your beneficiaries. There are many reasons why Delaware is attractive as a trust jurisdiction besides the unique characteristics we’ve described above. To learn more, please access our Delaware Trust Booklet online.