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Financial Planning > Trusts and Estates > Trust Planning

Wealth-Friendly Delaware

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Four of the independent trust companies in our directory (out of 68 respondents) are based in Delaware. Due to the many advantages The First State has to offer companies in financial services, it’s a wonder there aren’t more. Each state determines its own trust laws. Delaware trust law started with the formation of the Delaware Court of Chancery in 1792. The court rules on major business decisions, as well as trust decisions. With roots reaching back to the King’s Chapel in feudal England, it is recognized as one of the most efficient and effective court systems in the world–one of the reasons why Delaware is home to so many large corporations.

“The court gives Delaware a huge advantage in terms of its efficiency and its court system. And its smallness makes it very easy to get things accomplished,” says Jim McMackin Jr., VP of marketing for Wilmington, Delaware-based Commonwealth Trust Company, which was formed in 1931. “It’s amazing how quickly they can react and get things done.” For example, he cites trust cases taking three to four years for a hearing in Philadelphia’s Orphans’ Court (which among other duties has jurisdiction over most estate administration matters, including trusts). “In Wilmington, you’d get it done in three or four days,” he says.

Efficiencies aside, Jeffrey Lauterbach, chairman, president, and CEO of The Capital Trust Company of Delaware, also based in Wilmington, calls Delaware laws “the most wealth-friendly of any state in the country.” Of special interest to advisors, it’s also a state that allows someone other than the trustee to be named as the investment advisor for the trust, which means they become a co-fiduciary (of course an advisor already is a fiduciary if operating as an RIA). A few other states have similar statutes, such as Ohio and South Dakota. “But when you combine that with all the other advantages of Delaware, it makes it extremely attractive,” Lauterbach says.

Another advantage, again not unique to but initiated by Delaware, is that there is no rule against perpetuities. Delaware in 1995 passed dynasty trust provisions, altering the old Elizabethan rules that limited the term of a trust. “At last count, 15 or 16 states have basically emulated Delaware,” explains McMackin. “But there are still some very big states, like New York, Connecticut, and Pennsylvania, where attorneys say these legislatures and court systems are so ineffective they’ll never catch up and never get that same ruling against perpetuities eliminated.”

Unlike some states, Delaware offers tremendous privacy. According to Lauterbach, there is no requirement for public filings of any kind, so clients can maintain confidentiality of their affairs. “There are some states where a trust is a public document,” he notes. In addition, Delaware does not tax assets held for out-of-state beneficiaries. “This can be extremely useful as a planning technique, if you have someone in New York, for example, that has very high taxes, or California or Massachusetts, or New Jersey. Some states have 6%, 7%, or 8% income taxes, and trusts are taxpaying citizens. So if you can get the trust assets into a state where there’s no state income tax, you can save a substantial amount of money every year. The trust will, however, typically pay tax on the capital gains in the portfolio, since this is principal that’s normally not distributed.”–Cort Smith


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