Delaware as Best Trust Law State

According to Lauren Foster, Fortunes of the Blue Hen State, Fin. Times, March 12, 2007,

When the rich go “jurisdiction shopping” for the state with the most favourable trust laws, they often end up in Delaware. * * *

“The real advantage of Delaware is it is a jurisdiction that has always been friendly to businesses, trusts and investment throughout its history and at the same time there are a lot of [trust companies] to choose from,” says Don Weigandt, a wealth adviser at JPMorgan Private Bank.

Daniel Lindley, president of The Northern Trust Company of Delaware, a limited purpose trust company in Wilmington, Delaware, says one important reason for establishing a trust in Delaware is the state’s Court of Chancery. It was established in 1750 and is well known for its corporate law decisions and expertise in trust matters. * * *

The court also respects the confidentiality of matters that are being adjudicated. “In those occasional instances in which a trust is involved in a court proceeding, the Court of Chancery is generally amenable to sealing the record of one of the parties, to preserve the confidentiality of the details of the trust and the family’s financial affairs,” Mr Lindley says.

Moreover, neither Delaware trust agreements nor trust accountings have to be filed with a court in the ordinary course, thereby ensuring privacy. * * *

There are other reasons why Delaware appeals to the affluent and their advisers.

The first is that the state – like several others – permits the formation of perpetual “dynasty” trusts that may be exempt from certain federal generation-skipping transfer taxes (also known as the GST tax). In 1995 Delaware became the first state to repeal its Rule Against Perpetuities, in effect allowing trusts of personal property to potentially last forever. * * *

A second factor is Delaware irrevocable trusts are exempt from income tax on accumulated earnings and capital gains if there are no remainder beneficiaries who are Delaware residents and if the trust is not treated as a grantor trust for federal income-tax purposes. * * *

A third consideration is the asset protection trust statute, which provides protection from creditors’ claims. While a Delaware asset protection trust (APT) allows a person to legally shelter assets from creditor claims, these trusts can also serve other purposes. They are sometimes set up in lieu of a pre-nuptial contract or by parents who do not want to fund a child’s profligate spending.

Special thanks to Prof. Joel C. Dobris of the University of California-Davis for bringing this article to my attention.