When planning for the stewardship of family assets, many individuals consider using trusts as a way of meeting their estate and financial planning goals. Trusts can be used to transfer assets to loved ones or charities in a structured manner, reduce taxes and increase privacy, but the benefits can vary significantly from state to state.
As a result, depending upon one’s specific goals, it may be worth considering whether it would be beneficial to establish a trust in a state that offers unique tax and estate planning advantages.
Over several decades, the state of Delaware has developed a reputation among high net worth individuals and their advisors as being a premier location for the establishment and administration of a trust. Just as Delaware is known for its level of sophistication in matters of corporate governance (more than 60% of the Fortune 500 are incorporated here), the state is also known as a leading jurisdiction for matters of family trust governance. Delaware’s reputation in this area has been driven by a number of factors, but there are three key reasons behind its success. Specifically, Delaware:
- Offers the opportunity for significant tax savings since Delaware does not impose a state income tax on income that accumulates in the trust for future distribution to non-Delaware resident beneficiaries.
- Allows a high degree of customization and flexibility in the way that the trust may be structured with the goal of maximizing a trust creator’s freedom to transfer assets as he or she desires.
- Provides a sophisticated infrastructure for the governance of family trusts.
Choosing a trustee located in Delaware, such as First Republic Trust Company of Delaware LLC, may help families structure their trusts in ways that reduce taxes and meet their stewardship goals long into the future.
TAX SAVINGS: Let’s first consider the opportunity for tax savings. Suppose an individual residing in a state with a 10% state income tax rate is holding a stock (whether publicly traded or closely held) worth $2 million that has a tax cost of $500,000. If that individual sells the stock while he or she owns it directly they will pay $150,000 in state income tax. However, if that stock is transferred to a Delaware trust (for the benefit of the individual’s spouse or children, for example), then, depending on the state tax rules of the trust creator’s home state, the $150,000 tax may be avoided.
FLEXIBILITY AND CUSTOMIZATION: Three features of Delaware law allow certain types of trusts that have come to be known as Dynasty Trusts, Directed Trusts and Silent Trusts.
Dynasty Trusts: In Delaware, a trust creator can structure a trust so that it will last as long as the trust creator wishes, and many such trusts are structured to last multiple generations. These trusts are frequently referred to as “Dynasty Trusts.”
Directed Trusts: Delaware law allows a trust creator to divide trustee responsibilities among various individuals and/or professional trustees. For example, an individual creating a trust may wish to structure the trust so that a close confidant holds the power to direct a corporate trustee with respect to investment decisions regarding certain assets, such as closely held business interests.
Silent Trusts: Under the law of many states, a trustee has an obligation to inform adult beneficiaries of the existence of a trust for their benefit. Under Delaware law, a trust creator may include a provision in the trust agreement which restricts a beneficiary’s right to be informed of his or her interest in the trust for a period of time.
SOPHISTICATED INFRASTRUCTURE: Delaware has developed a very modern and sophisticated body of statutory law governing trusts. Additionally, should a dispute arise at some point during the life of the trust that brings the trust into a court proceeding, the Delaware Chancery Court, one of the most respected courts in the country, would hear the matter.
MOVING TRUSTS TO DELAWARE: Existing trusts in other states may frequently benefit from one or more aspects of Delaware law. First Republic Trust Company of Delaware LLC can work with a client’s tax and legal advisors to evaluate and facilitate the transfer of a trust located in another state to Delaware.
Given the many subtle (and some not-so-subtle) reasons why the location of a trust is important, it is worth taking the time to discuss with your advisors which state best meets your goals for the stewardship of your assets.
The views of the authors of these articles do not necessarily represent the views of First Republic Bank.