Big Benefits in Tiny Delaware: A Small State Offering a Wealth of Trust Planning Advantages

First Republic Private Wealth Management

February 13, 2015

Delaware’s rich history in trust and business matters, which dates back to colonial times, serves as the foundation for the First State’s forward-thinking approach to trust planning. The following are some of the unique aspects of Delaware trust law:

Directed Trusts
Delaware law allows for the bifurcation of trustee duties through the use of directed trusts. In a directed trust, the responsibility for investment, distribution or other administrative decisions is vested in one or more advisors, as appointed in the trust agreement. For example, an investment advisor would typically bear responsibility for the trust’s investments and would direct the trustee as to what to buy, sell, and hold. Other types of advisors can be appointed in situations where the terms of the trust stipulate that a beneficiary comply with certain requirements (i.e., remaining free of drugs or alcohol) in order to receive trust distributions. These distribution advisors may be in a better position to monitor or track these types of requirements if they are familiar with the beneficiary and his circumstances, while corporate discretionary trustees usually are not.

Dynasty Trusts

Delaware abolished its rule against perpetuities1 in 1995, paving the way for the creation of dynasty trusts. Dynasty trusts have made it possible for wealthy families to pass their assets down to succeeding generations free of transfer tax.

Possible State Income Tax Advantage
Delaware law allows resident trusts to not only take a deduction on income that is actually distributed to beneficiaries but also to take a deduction on income that is accumulated, provided that the beneficiary is not a resident of Delaware. This means that for a large majority of Delaware trusts, there is no state fiduciary income tax on income or capital gains at the trust level.

Although an analysis of how the client’s state of residence will treat the income and capital gains of a Delaware trust is essential, this unique advantage can serve as a powerful tax planning tool.  For example, if a client funds a Delaware trust with shares of low basis stock, the savings in state capital gains tax could be sizable when the shares are sold.

Silent Trusts
According to Delaware law, notification to a beneficiary about the existence of a trust can be delayed for a “period of time.” While this term is not specifically defined in the statute, it should be reasonable, measureable and clearly provided for in the trust agreement. For example, a trust’s grantor may want to wait until his beneficiary child attains a certain age — perhaps 30 or 35, when he or she may be more financially mature — to learn about their wealth. 

So don’t be fooled by Delaware’s size. This small state offers a host of trust planning alternatives, making it a national leader in modern day wealth management

1 The only exception is for real estate held directly by the trust, which has a limitation of 110 years.

First Republic Private Wealth Management encompasses First Republic Investment Management, Inc. (“FRIM”), an SEC-registered investment advisor, First Republic Securities Company, LLC (“FRSC”), Member FINRA/SIPC, First Republic Trust Company (“FRTC”) and First Republic Trust Company of Delaware LLC (“FRTC-DE”). FRIM, FRSC, and FRTC-DE are wholly owned subsidiaries of First Republic Bank.   This article is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such.