3 Reasons Why a Delaware Trust May Be Ideal for Your Business Interest

Halsey Schreier
August 13, 2019

When it comes to transferring your business interest to a trust, choosing the state of Delaware can offer you benefits like reduced taxes, more control and increased flexibility.

This is the second blog in a three-part series that focuses on Delaware law for your trust.

Trusts can be used in a variety of ways to manage wealth and plan for the future. They offer broad flexibility for structuring and managing assets, can help reduce administrative costs and delays at death, and often provide substantial estate and gift tax savings. If you’re considering transferring your interest in a privately held business to a trust, you’ll need to decide where to establish that trust. Delaware is often considered an ideal choice for the governing law of a trust that owns an interest in a privately held business. There are three primary reasons that Delaware may be your trust’s ideal governing law.

  1. STATE INCOME TAX

Transferring an interest in a privately held business to a trust governed by favorable state income tax rules can provide a significant economic advantage to the trust beneficiaries upon the sale of that interest. Delaware offers many tax advantages upon the sale of a privately held business interest, including: 

  • Proceeds from the sale may not be subject to Delaware state income tax if the trust beneficiaries are not Delaware residents
  • The trust may not need to file a Delaware state income tax return

However, 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. You should consult with your tax advisor to determine the impact to your tax situation.

  1. DIRECTED TRUSTS

Delaware permits a grantor to create a directed trust, which bifurcates the traditional responsibilities of a trustee between two or more fiduciaries. This approach has several benefits for owners of privately held business interests, including:

  • Control over the retention and sale of the privately held business interests
  • Ability to direct the trustee on certain decisions without trustee oversight or challenge
  1. FLEXIBILITY

Delaware trust law offers flexibility to the grantor, beneficiaries and trustees, making it a relatively flexible jurisdiction for trusts for several reasons, including:

  • Its decanting statute allows for relatively easy, cost-effective trust modifications
  • Delaware “dynasty” trusts generally allow the trust assets to accumulate for the benefit of one generation to the next, in perpetuity, without the imposition of transfer taxes
  • Delaware “purpose” trusts allow grantors to establish perpetual, non-charitable trusts

If you’re transferring your business interest to a trust, there are several reasons why Delaware is attractive as the state law for that trust. For more information about whether Delaware is the right choice given your circumstances and objectives, visit our CIBC Delaware Trust Company resource page.

Halsey Schreier is a wealth strategist for CIBC Private Wealth Management in New York, with more than nine years of industry experience. In this role, he provides high net worth clients with integrated wealth management services, including comprehensive estate and financial planning solutions, multi-generational legacy planning and fiduciary administration for trusts and probate estates.