5 Reasons You Should Consider Delaware Law for Your Trust

Halsey Schreier
August 06, 2019

When creating a trust, there are many factors that you may want to consider, and choosing a jurisdiction is among the critical first steps.

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

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 for you and your beneficiaries. Delaware has long been the state law of choice for grantors. So, what makes Delaware law so special, and how can it benefit you and your family?

  1. STATE INCOME TAX

Establishing a trust in a state that permits the trust assets to grow without payment of fiduciary income tax can provide a significant economic advantage to the trust beneficiaries. Delaware is known as a tax-friendly state for trusts for many reasons, including: 

  • Trusts may not be subject to Delaware state income tax if beneficiaries aren’t Delaware residents—whether earning interest or dividend income or selling a capital asset
  • Trusts 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. 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
  1. QUIET TRUSTS

Traditional trust law requires a trustee to keep a beneficiary informed; however, under Delaware law the grantor can change that rule and provide for a “quiet” trust which can provide for the following:

  • Grantors can direct trustees to not inform a beneficiary of his or her interest in the trust for a period of time specified in the trust document
  • Grantors can specify the age or time at which the beneficiary should be informed
  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, including:

  • Flexibility and control with respect to investments, especially when concentrated positions or privately held business interests are owned by the trust
  • Discretionary distribution decisions can be directed by the family or a third party who may better know the family and their intentions
  1. ASSET PROTECTION TRUSTS

Traditionally, an individual could not create an irrevocable trust for his or her own benefit while also protecting those assets from claims of creditors. However, Delaware allows for such asset protection trusts that can be advantageous to many, including:

  • Grantors with significant wealth in their own name who want the ability to protect assets from future creditors while maintaining a beneficial interest in the trust
  • Anyone engaged in high-risk activities or professions, such as physicians and attorneys

There are many reasons why Delaware is attractive as the state law of choice for a trust. For more information about why Delaware may be right for your trust, visit our CIBC Delaware Trust Company resource page.

Case Study - Comparing Outright
Gifts and Dynasty Trusts

 

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.