Delaware RAP Tax-Traps

James P. Spica (Attorney, Honigan Miller Schwartz and Cohn Miller LLP) has recently published an article entitled A Trap for the Weary: Delaware’s Anti-Delaware-Tax-Trap Statute is Too Clever by Half (of Infinity), 43 Real Prop. Tr. & Est. L.J. 673 (2009).

Here is a summary of his article:

Any state that repeals its rule against perpetuities (RAP) has to reckon with two federal tax terrors: the Treasury’s effective date regulations for application of the generation skipping transfer (GST) tax and the so-called Delaware tax trap. Delaware addressed the latter terror belatedly, enacting its statutory anti-Delaware-tax-trap provision, title 25 section 504 of the Delaware Code, in July of 2000, five years after repealing the state’s RAP with respect to personal property held in trust. This Article argues that, with respect to personal property held in trust, section 504 is otiose: the section completely fails to disarm the Delaware tax trap for want of a finite perpetuities testing period. To make that argument, this Article examines in detail not only the Delaware tax trap but also the situation in which a state, like Delaware, antecedently lacks a rule against suspension of absolute ownership or the power of alienation and eschews to invent such a rule pursuant to RAP repeal. For that reason, this Article will compare Delaware’s post-RAP-repeal, anti-Delaware-tax-trap provision, section 504, with the post-RAP-repeal, anti-Delaware-tax-trap provision Michigan recently adopted. But first, this Article examines the “trap.”