Delaware Advantage

Delaware's Court of Chancery

With over 200 years of experience in trust and corporate law, the Delaware Chancery Court is a court of equity, as opposed to a court of law. Most states do not separate the types of legal remedies available to litigants into equity and law the way that Delaware does. The Court of Chancery consists of one Chancellor and four Vice Chancellors, as well as, Masters. The Chancellor and Vice Chancellors are nominated by the Governor and must be confirmed by the Senate for 12-year terms. The Delaware Court of Chancery is a non-jury trial court that serves as Delaware's court of original jurisdiction in corporate and trust matters.

Because the Court of Chancery is able to focus exclusively on fiduciary and commercial matters, this court system does not experience the same backlog that other state court systems do. This court system has been ranked number one every year since 2002 by the U.S. Chamber of Commerce state liability systems ranking study. A premium is placed on confidentiality throughout the court system. Unless asked, Delaware courts do not supervise the administration of trusts. In the event a dispute arises, the parties can easily obtain a court order to seal the record, keeping the trust agreement, the parties, and their dispute out of the public eye. Delaware's statutes also allow a settlor, by express direction to the trustee, to maintain the secrecy of a trust's existence for a designated period of time, allowing a settlor to limit beneficiary notification.

Delaware has a long history of well reasoned court rulings and it has consistently demonstrated its commitment to safeguarding the advantages of Delaware's laws. All trust administration and trust interpretation cases are exclusively within the jurisdiction of Delaware Court of Chancery, and upon appeal, the Delaware Supreme Court.

Delaware's State Legislature

In addition to its unique court system, Delaware also has a very progressive state legislature that is very knowledgeable about trust law. The legislature benefits from a strong and influential state Bar Association and Banker's Association that work together to keep Delaware's trust legislation on the cutting edge. Delaware's laws are focused on carrying out the settlor's intent. The Delaware legislature has historically been a leader in trust legislation with many other states following Delaware's lead. A timeline of important Delaware trust legislation starts with the 1933 enactment of law allowing the beginning of a new perpetuities period upon the exercise of a power of appointment, the pre-cursor to the repeal of the Rule Against Perpetuities. Additional significant legislative enactments can be found on our timeline.

Delaware's law permitted directed trusts and bifurcation of trust duties in 1994 to allow the grantor to separate the duties traditionally held by a trustee into clearly defined roles for two or more fiduciaries. This legislation permitted the separation of investment duties from the Trustee's other duties by giving those duties to an Investment Adviser. The decision as to whom the adviser will be and the extent of the adviser's power is determined by the trust document. The use of these separated fiduciaries allows the Trustee to focus on its separate duties and be removed from decisions with regard to investments; instead taking direction from Advisers as to trust investments. It also allows the Trustee to act upon the direction of the adviser without being responsible for the adviser's decisions. This flexible approach to allocating separate fiduciary duties is very different from traditional trusts where the Trustee may delegate trust duties, but still remains liable for some level of oversight as to both the choice of fiduciary and decisions made by the same.

In 1995, Delaware repealed its Rule Against Perpetuities, thus allowing for the Delaware Dynasty Trust. This legislation opened the flood gates for trust planning in Delaware since it allowed a grantor to set up a trust using transfer tax exemptions that could remain in existence forever and continue to accumulate income transfer tax free for future generations. This legislation was followed by legislation enacting the Delaware Qualified Dispositions in Trust Act in 1997 to allow for self settled trusts sometimes referred to as asset protection trusts. These self settled trusts must established within certain parameters, such as they must be irrevocable; contain a spendthrift clause; provide that Delaware law govern the trust's validity, construction, and administration; and appoint at least one Delaware trustee.

Other significant legislation has followed, such as the codification of the common law doctrine of virtual representation in 2000, the total return trust statute in 2001, and the decanting statute in 2003 which established that a trustee, who could distribute principal outright to one or more beneficiaries, may also exercise that power in further trust unless the governing instrument provided otherwise, thus providing a method for non-judicial reformation of a trust. Legislation establishing Purpose Trusts was enacted in 2004, allowing for trusts to be set up without beneficiaries to achieve a specific purpose, such as a cemetery trusts or other non-charitable purpose trusts. And most recently, in 2010 the Delaware legislature passed a law that allows tenancy by the entireties property to retain its character when contributed to a Delaware trust.

Delaware Income Tax Advantages

Delaware permits a trustee of a resident trust to deduct income (including capital gains) set aside for future distribution to nonresident beneficiaries, thus allowing for a trust to have a significantly reduced state income tax burden so long as its beneficiaries reside outside of the State of Delaware. As the burden of state income taxes can be a significant drain on the growth of an irrevocable trust, this can be a substantial benefit. This aspect of Delaware law may be of significant use to those establishing a Delaware Incomplete Gift Nongrantor Trust or "DING," in eliminating state income taxes on capital gains realized upon the sale of trust assets, making it attractive to closely held business owners who are considering selling their interest in the business at a future date.