Is Your Trust Working for You?
The importance of Delaware as a trust jurisdiction has grown exponentially over the last 20-plus years. However, it is likely not something that most wealthy families and individuals have been tuned into. While once a jurisdiction mainly used only by ultra-high net worth families and individuals, the advantages of Delaware trusts have now become much more mainstream. As wealthy Americans look to capitalize on the flexibilities, potential tax advantages, access to best-in-class attorneys and very knowledgeable, specialized judiciary available only in Delaware, they are educating themselves about Delaware trusts.
While those of us in the estate-planning fields are often well versed in the advantages of Delaware as a trust jurisdiction, many conversations focus on those advantages from the perspective of the fiduciary, and not from the client side. There are three key points wealthy families and individuals should understand about Delaware trusts: flexibility, tax planning and the Court of Chancery.
There are two different issues to focus on when it comes to flexibility. One is flexibility as it relates to the trust document itself. Given the broad flexibility presented in Delaware’s decanting, merger and nonjudicial settlement agreement statutes, even irrevocable trusts remain living, breathing documents. You are no longer locked into an inflexible document that cannot be changed. When considering funding an irrevocable trust with millions of dollars, you are understandably concerned with giving up the ability to adjust based on future changes in circumstance. These statutes allow for modification in a variety of circumstances. And while other states may offer one or more “similar” options, when coupled with the other advantages, Delaware’s flexibility in this regard stands out from the rest.
Delaware law also allows great flexibility in how trusts are structured and administered. With your wealth manager, you can choose from no end of combinations of roles and fiduciaries. Do you want a family member making investment decisions about a closely held business, a trusted financial advisor in charge of the liquid investments and a corporate trustee to provide day-to-day administration? Do you want a corporate trustee to make all decisions, either alone or in concert with an individual co-trustee? Are you looking for some combination, with a trust protector who can change fiduciaries as they see fit? All of these possibilities are commonplace in Delaware trusts and allow you to establish long-term trusts that suit your needs now and have the flexibility to continue to suit descendants’ needs for years to come.
Qualifying Delaware trusts will not be subject to state income tax on accumulated income and capital gains. Again, while this is clear to those of us with deep expertise, the nuance can easily be missed. While some high-tax jurisdictions like New York and California have enacted laws attempting to minimize some of the tax advantages, most states have not, making this a powerful option for trusts where income is not required or expected to be distributed regularly. Additionally, even in states like New York and California, the laws to limit this advantage have generally been limited to certain types of trusts, like defective non-grantor trusts. Thus, residents of high tax states can still structure certain trusts to help avoid or at least defer state income tax on undistributed trust income.
Court of Chancery
This is most often discussed as an advantage from a trustee perspective since, as a corporate fiduciary, wealth managers have comfort in knowing that the specialized Court of Chancery has a history of upholding protections for trustees. And while this certainly means the trustee has the ability to administer the trust in a manner more favorable to you, there is another distinct advantage. If, at some point, there is a disagreement among beneficiaries or a matter that requires court intervention, having a judiciary that knows and understands the nuances of Delaware’s sophisticated trust laws means that these matters require less time, less money and less legal wrangling. This gives more certainty in the efficiency and consistency of the court system and the legal outcome.
Understanding these three points can empower you to have constructive conversations with your various advisors. Ask for their take on Delaware trusts and whether they think it is an option you should explore. You and your family have worked hard to build and maintain your wealth, so it is critical that your trust is thoughtfully crafted and protected.
Gina M. Nelson is the senior vice president and head of fiduciary services at Chilton Trust Company, N.A.