Trust Situs Matters: A Small State Offering a Wealth of Trust Planning Advantages

Alison G. Westbrook, Regional Team Lead, First Republic Trust Company of Delaware
July 1, 2019

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. Delaware has a well-thought-out body of trust laws, which it updates on an ongoing basis, and a supportive legislature, executive branch and legal community. The following are some of the unique aspects of Delaware trust law:

Directed Trusts

A directed trust is a trust in which the responsibility for investment, distribution or other administrative decisions is vested in one or more advisors, as appointed in the trust agreement. Delaware law allows for this division of trustee duties, as opposed to having one trustee retain full authority over distribution, investment and administration. For example, a trust could name the grantor’s sibling as the investment advisor, who could direct the trustee to hold shares in the grantor’s closely-held business. In a traditional trust, this type of investment would not be acceptable to a corporate trustee. Other types of advisors can be appointed in situations where the terms of the trust stipulate that a beneficiary comply with certain requirements (e.g., 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 their circumstances, while corporate discretionary trustees usually are not.

Dynasty Trusts

A dynasty trust is a trust that has the ability to last for multiple generations, often in perpetuity. Delaware abolished its rule against perpetuities in 1995, paving the way for the creation of dynasty trusts (the only exception is for real estate held directly by the trust, which has a limitation of 110 years). Dynasty trusts have made it possible for wealthy families to pass their assets down to succeeding generations free of transfer tax. A dynasty trust may also be a directed trust.

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 or an interest in a closely-held company prior to a liquidity event, the savings in state capital gains tax could be sizable when the shares are sold.

Creditor Protection

Spendthrift provisions in Delaware trusts are strictly enforced and can provide trust beneficiaries substantial protection from creditor claims.

Silent Trusts

A “silent trust” is essentially a trust that includes language dictating that statements are not to be sent to some or all beneficiaries for a period of time. Most states require trustees to send periodic statements to beneficiaries regardless of the trust language. In Delaware, a trust grantor can restrict beneficiary access to information as to the existence of the trust or the assets and administration thereof, for a period of time. For example, a trust’s grantor may want to wait until his beneficiary child attains a certain age — perhaps 35 or 40, when he or she may be more financially mature — to learn about their wealth.

Flexibility

In order to benefit from some of the advantages of Delaware trust law, many trusts may move situs to Delaware simply by naming a Delaware trustee.  Existing Delaware trusts may be modified or decanted into new trusts to make changes to trust provisions for administrative or estate planning reasons.

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.


The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the tax and legal consequences of any strategies mentioned in this document. First Republic does not provide tax or legal advice. Information is provided to you as is, does not constitute legal or tax advice and we are not acting as your attorney or tax advisor. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. This information is governed by our Terms and Conditions of Use.