Last updated on July 2nd, 2019 at 11:00 am
Creating a new trust in or moving an existing trust to the state of Delaware may be an effective estate and wealth management tool for many high net worth individuals.
Delaware is the second-smallest state, based on population, yet about 60 percent of the Fortune 500 companies are technically “headquartered” there, largely due to the state’s corporate laws and judiciary, said Daniel Lindley, president of The Northern Trust Company of Delaware, the Delaware-based division of Northern Trust Corp. The functioning corporate headquarters and the records of Delaware corporations can be located in any other state or country, as long as they maintain a registered agent to represent them in Delaware. Many owners of Delaware corporations have never set foot in Delaware.
Delaware’s similar legal approach for family and individual trusts makes it worth moving an existing trust or creating a new trust there, Lindley said, largely because the state allows things that other states do not.
For administrative or direction trusts, having the trust established in Delaware provides several advantages, he said.
“We have freedom of disposition (in Delaware),” said Lindley, who recently visited Milwaukee. “That means you can do pretty much what you want with your money as long as it’s clearly stated within the trust.”
Freedom of disposition also means there are virtually no public documents related to the trust, giving high net-worth families protection from the media, creditors or people seeking information the family does not want released, Lindley said. Furthermore, in the event of litigation against a trust, the court documents almost always are sealed, he said.
Delaware’s trust law also allows its creator, or settlor, to be named a beneficiary of an administration trust, Lindley said. This provision has been most suitable for clients creating a trust with interests in closely held entities who want to keep management powers over the trust, he said. In those cases, the creator is able to have direct control over their own assets, even though those assets may benefit other people in the future.
Delaware law allows for third-party trust advisors. This provision allows high net worth families to dedicate an advisor who can make decisions about allocating funds to different investments. That third-party person is then able to directly tell the trust’s administrator where to invest certain assets, Lindley said.
More importantly, the Delaware law does not hold trustees, such as The Northern Trust Company of Delaware, liable for the decisions made by or results of independent advisors.
Administrative trusts established in Delaware also can allow a client to set lifestyle standards for benefactors. Delaware trust law allows for the appointment of a distribution advisor, who can monitor benefactors and enforce any lifestyle standards within the trust, he said.
Before 1999, Delaware trusts allowed protection against Wisconsin income taxes for irrevocable trusts. However, legislation passed that year has allowed Wisconsin to collect taxes on its residents who are named benefactors of Delaware trusts.
Delaware also allows for the creation of asset protection trusts, in which the grantor retains interest as a beneficiary. Such trusts are particularly valuable for individuals who could face large lawsuits, such as physicians, entrepreneurs, attorneys and entertainers. However, one important provision of the state’s law must be kept in mind – that to gain protection from a lawsuit, the infraction must have occurred after the asset protection trust was created.
Asset protection trusts available in Delaware also can work in place of a prenuptial agreement, as long as they are created before the date of the marriage ceremony, Lindley said.
Trusts have become popular with people in their 20s or 30s who have come into large amounts of money but have spent large sums.
“This is a way to lock up some of that money in greater ways than before,” Lindley said.
Part of Delaware’s appeal to both corporations and individuals is the presence of its Court of Chancery, a judiciary that only deals with trusts, Lindley said.
“(The court) has more than 200 years of experience, and it knows trust law,” he said. “States like Alaska and Nevada have only recently revised their trust laws, and they don’t have a separate court.”
By having such generous trust laws that eliminate many of the fees and taxes other states charge, some could say Delaware is missing out on revenue streams. However, the amount of investments being made in the state are more than making up for the potential lost income, Lindley said.
“They (the state) are taxing (trusts) indirectly,” he said. “The trust companies pay franchise taxes.”
Furthermore, the employees of trust administration companies such as The Northern Trust Company of Delaware, attorneys and other professionals who work with those companies, live and work in Delaware, where they pay state income and property taxes.
The corporations headquartered in Delaware also pay corporate franchise taxes, Lindley said.
“The corporate franchise taxes represent a significant percentage of the state budget,” he said. “That is not as big on the trust side, but it’s growing essentially every day. We’re importing workers from out of state – and these are highly stable jobs. There is a lot of inertia with trusts, and they move from providers and states infrequently.”