By Stephen J. Augstell , MS, CFP
For many years, the state of Delaware
has developed the reputation as a friendly
jurisdiction for U.S. business because of its
advantageous tax code and pro-business legal
However, in recent years Delaware has
become popular with estate and wealth planning
professionals, who consider the state
one of the best places to help clients with
their wealth management needs.
In simple terms, a trust is a legal agreement
in which ownership of assets is transferred
from one party (grantor) to another
party (trustee). Delaware Trusts are so appealing
because they allow wealthy individuals,
business owners and those in high-risk
professions to preserve wealth for themselves
and future generations.
More specifically, Delaware Trusts, because of Delaware’s progressive trust laws, allow trustees to develop an advantageous wealth planning strategy that offers greater asset protection, wealth transfer and tax savings.
A properly planned Delaware Trust can benefit many people, including:
â€¢ Doctors, lawyers, CPAs and other professionals who are concerned about professional liability and want to protect some of their assets against a potential future claim.
â€¢ Corporate officers or directors of publicly traded companies whose activities are under increased scrutiny and who wish to protect some of their assets against potential creditor claims.
â€¢ Business owners who need to protect some of their assets against potential liability arising from high-risk business ventures.
â€¢ Entrepreneurs who spend years building a business and eventually sell the business -and are concerned about potential liability from purchasers and/or others.
â€¢ Couples getting married who are uncomfortable with prenuptial agreements.
â€¢ Individuals who establish a trust to their own benefit, such as a charitable remainder trust, and want to protect trust assets from future creditors.
â€¢ The elderly, disabled and young adults who are or may become mentally, physically or financially impaired and need protection against their assets being diminished against their will.
â€¢ Those who receive gifts, inheritances or a marital estate and want the benefit of financial privacy and tax avoidance
Conveniently, it is not necessary to live in or even to visit Delaware to benefit from its trust laws. In fact, Delaware Trusts are most beneficial to people who live elsewhere because they offer significant protection of assets and a high level of privacy. For example, personal trusts can be structured to shield assets from creditors, trust court filings are generally not required and proceedings can be confidential.
The state tax trust structure provides significant benefits as well: assets held in Delaware irrevocable trusts with out-of-state beneficiaries are not subject to income taxes in Delaware–or possibly anywhere else, depending on the individual’s state of residence.
As for flexibility, Delaware law provides for varied approaches to the investment and administrative management of trusts. The following are some examples of the most commonly used Delaware Trust strategies:
â€¢ Dynasty trusts: Many individuals and families transfer their wealth to future generations in trusts. This strategy allows them to protect assets from beneficiaries’ creditors or even an ex-spouse, while preserving wealth for future generations. A Delaware Dynasty Trust enhances the benefits of these types of trusts.
While many states place a limit on the duration of trusts (typically about 100 years), Delaware law allows trusts to last forever while offering increased control and flexibility. A properly planned Dynasty Trust maximizes the benefits to future generations by eliminating gift, estate and generation skipping taxes.
â€¢ Delaware Asset Protection Trusts: Business owners, physicians, professionals and other wealthy individuals want to protect their hard-earned assets from loss due to frivolous and devastating lawsuits. A properly planned Delaware Asset Protection Trust can protect assets–including interests in closely held businesses–from future creditors. It can also be used as an effective premarital planning solution to protect assets in the event of a future divorce.
â€¢ Delaware Tax Advantaged Trusts: Business owners may be able to save state income tax on the capital gain realized on the sale of closely held business interests with the use of a properly structured Delaware Trust. A Delaware Tax Advantaged Trust can be used in certain circumstances to minimize or even eliminate state income tax on accumulated trust income and capital gains. This type of trust may also result in state income tax savings on the sale of a concentrated stock position or on the income accumulated in a Dynasty Trust.
â€¢ Directed Trusts: Delaware law permits great flexibility in personal trusts. For instance, Delaware law permits the grantor– the person who creates the trust–to appoint advisors with power over the investments, distribution of trust assets and/or other trust decisions. In most cases, the grantor can retain investment control. The grantor may also choose to retain a trusted investment advisor to make investment decisions.
For example, a business owner who transfers stock in a closely held business can retain the power to direct the trustee in all investment decisions, such as the retention and sale of the stock.
There are many reasons why wealthy families, business owners or professionals might consider Delaware Trusts as part of their estate and tax planning strategy. To learn more about the benefits and requirements of establishing a Delaware Trust, meet with a wealth management professional.
Not only should your estate or wealth planning professional be able to work with you to help analyze and assess specific financial and estate planning situations, as well as current needs and long-term goals, they can also guide you through the establishment and management of your Delaware Trust.
Augstell is a senior vice president for Key Private Bank.
Photo Courtesy Key Private Bank