Delaware Trusts: A Brief Overview
Delaware trusts are estate-planning and business-organization tools that are very popular among wealthy individuals and families, and business-entity owners. Certain trusts can save estate taxes and enhance your estate plan by providing protections for beneficiaries and trust assets from mandatory distributions and creditors. Other trusts are used for asset protection and privacy purposes. Delaware trusts also allow the settlor to choose the laws of a U.S. state and the location of the court that will oversee the trust.
The Delaware Trust Act (12 Del. C. Ch. 3301 et seq.) and the Delaware Administrative Trust Code (12 Del. C. Ch. 3501 et seq.) provide among the country’s most flexible rules for setting up and administering a trust, including the following:
• No "rule against perpetuities" (no maximum length of existence)
• Decanting rights
• Asset protection for self-settled trusts and trustees
• Administrative powers
• Charitable lead trusts and charitable remainder trusts
• Directed trusts
• Flexible and discretionary distributions and trust terms
• Spendthrift clauses , including for creditors
• Revocable trusts
• Irrevocable trusts
• Retractable trusts
• Protector trusts
• Private letter ruling process, with the Delaware Department of Finance
• Certain statutory trust provisions
• Increased court involvement and oversight, if desired by the trustee or beneficiary (every Delaware trust must provide for at least an annual accounting to each beneficiary)
• Modern trust code meant to be used in conjunction with the Delaware LLC statute
• Procedural rules, including registration and trustee qualification
• Alternative remedies in places of business in addition to Delaware
• Working groups and task forces in the Delaware Judiciary, the Office of the Delaware State Treasurer and the Delaware Economic Development Office
The Basics of Filing a Delaware Trust
When establishing a trust in Delaware (i.e., a Delaware Trust), a trust creator (also known as a settlor) must first prepare and execute a trust agreement. The trust agreement will name the trust’s initial trustee(s), the trust beneficiaries, and the assets that the trust is to hold (if any). The trust agreement may also include additional provisions or restrictions on the administration of the trust assets. (Note – As a convenient shorthand for a set of initiatives, courts are starting to use the term "Trust Terms" to incorporate all provisions in a trust agreement).
Delaware does not require a filing with the Superior Court when a simple residential trust agreement is prepared using one of the popular forms. Further, Delaware does not have any filing fees or taxes associated with the creation of a trust.
Trusts where Delaware real estate is the only asset and the trustee will hold the property for 120 days or less don’t need a Delaware trust filing. They also don’t need a Delaware registered agent, making it easy to complete the transaction.
The trust created by a trust agreement may own Delaware and non-Delaware property. So, if the property being transferred to the owner is located outside of Delaware, there should be no concerns about trust tax or filing requirements as long as there is no need to file a Delaware Certificate of Trust. However, if the property going into the trust is a Delaware asset, contact your attorney, as there may be additional paperwork to complete.
Filing Requirements For the Future
Delaware resident trusts must file Form 320 which is the Delaware state income tax return. This requirement also must be fulfilled if the Trustee decides to elect out of the Delaware state income tax and has assets valued at $75,000 or more. An election out has to be filed with the Delaware state income tax return for the taxable year.
An annual report and payment of $100 is due each year for a Delaware resident trust. In order to remain active as a Delaware resident the Trustee must pay both the annual report fee and pay all the taxes due for the property in the trust. Whenever property is added to the trust, the Trustee must file an amended report for that tax year, and pay the annual report fee for each tax year the assets are held in trust.
Foreign (Non-resident) trust’s that do not make an election to be a Delaware resident and having no physical presence or real property in Delaware have no annual filing requirements. A "foreign" trust will be subject to Delaware tax if the Trustee exercise discretionary authority over the trust assets in Delaware.
Legal Issues and Filing Compliance
In addition to filing the initial Certificate of Trust, the trustee may be required to provide information to others about components of the trust. For example, if a corporation is holding funds in escrow, it may require a statement from the trustee that it can act as escrow agent. Likewise, the state may need a statement confirming that the personal representative of a deceased trustee has authorized the trustee or successor to act.
Common compliance issues include both fiduciary tax compliance and the administration of an irrevocable trust. The trustee should determine whether the trust will be subject to a state income tax return (most likely requiring a Federal 1041 form) due to the decedent’s non-residency. This may involve working with the predecessor trustee to obtain the correct EIN (Employer Identification Number) for the trust. The trustee also should review the trust accounting for discretionary and mandatory distributions to the beneficiary. It is important to remember that distributions do not put an end to any applicable "spendthrift" provision; thus periodic distributions to a married beneficiary does not mean that the trust will lose its protection against general creditors. The trustee should carefully follow the "prudent investor" standard of care in making investment decisions. Accounting to the beneficiaries is required, including the calculation of any distributions. Perhaps one of the most common issues involves the authority of a trust protector. While a trust may vest full authority in a successor trustee or have the settlor serve as a trust protector, the trustee should make certain that his/her powers are limited to those specifically mentioned in the trust document. Otherwise the extent of a trustee’s authority could be challenged.
Typical mistakes include failure to update the Certificate of Trust each time a new asset is acquired or sold. Careful records should be kept of all inventory of assets owned by the trust. It also is a common error for a successor trustee to fail to provide the beneficiaries with the required information. Obviously, a common sense mistake for a successor trustee to make is to take control of the trust bank accounts without a proper accounting. Other words to the wise: A trustee should not take possession of all of the trust assets immediately after the settlor’s death. Since the settlor’s death terminates the revocable trust, the successor trustee is only responsible to direct the distribution of assets – not distribution itself, according to law. Also, while the trust must be Managed Solely in Delaware, the physical location of assets is irrelevant.
Filing Costs for Delaware Trusts
Dealing with the costs of filing a Delaware trust is complicated; it’s easy to be misled by the fees you see coming up on a random search, since legal fees can vary widely. Here we will explain some of the filing costs relating to a Delaware trust, as well as continuing costs for the administration of the trust once it is set up.
There are several different fees – such as court fees, agent fees, and government costs – that apply to a variety of different processes, but while the costs may seem high, most people will not need to pay or handle all of them. The most basic fee will be for filing at the Chancery Court in Delaware, which will depend on what business form you are making. A trusts registration fee will vary essentially on the size of the trust; generally the more valuable the trust, the more expensive it will be to file. Alternative entities such as limited liability companies (LLCs) will have a registration fee of $250, and a corporation will cost $50 or $9 per $1 , 000 in shares.
One of the best reasons for establishing a Delaware trust is that the ongoing costs are much lower than many other states. Ongoing state costs will be around $250 yearly, while in high tax states like California the costs can reach as much as $50,000 to maintain fellowship in offshore trusts. Other expenses like property taxes and maintenance must also be considered; a small house could cost around $200 a month in general costs, while utilities and general upkeep could make a large property as expensive as $2,500 a month to maintain. This does vary significantly from state to state; typically speaking, the more rural an area the cheaper the costs.
In addition to these costs, there are other expenses including maintenance and accounting fees in order to work with the trust, as well as taxes. Depending on how the trust is structured, if the trust beneficiary resides in another state, they may be subject to income or property tax there instead.
Changes in Recent Years Affecting Filings
The Delaware trust filing requirement landscape has changed in the past year. Recent amendments to the Delaware statutory trust code have increased the number of trusts that are subject to filing requirements. The Legislative Joint Sunset Committee (also known simply as the Sunset Committee) reviews each of the laws and codified regulations of the State of Delaware on a periodic basis and files written reports to the Delaware General Assembly on the need to continue, modify, or terminate various laws. One of the laws reviewed by the Sunset Committee this last time was the Delaware statutory trusts code.
One of the Sunset Committee’s recommendations was to add provisions to the Delaware statutory trust code to require the filing with the Delaware Division of Corporations of trust agreements of all newly created statutory trusts as well as certain amendments to trust agreements of existing Delaware statutory trusts. This recommendation was based, in part, on concern that not all stakeholders were aware of the intricacies of Delaware statutory trusts. Of particular concern was that some trustees of Delaware statutory trusts have organized business operations for companies in other states under a trust that was created at the same time in Delaware and was administered by a Delaware trustee. The Sunset Committee was concerned that the trust operating in another state was an outlier and could be operating in a noncompliant manner.
In response to this recommendation, the Delaware statutory trust code was amended (effective August 1, 2017) to require the filing with the Secretary of State of the trust agreement of each new Delaware statutory trust. In addition, trust agreements of existing statutory trusts must now be filed effective August 1, 2018. If an existing statutory trust had a trust agreement in place prior to August 1, 2017, that trust is not required to file that original trust agreement but will need to file any amended trust agreement or amended articles of incorporation or organization after August 1, 2017. Busy Delaware Division of Corporations staff will soon be working through a tidal wave of filings as existing trusts come due to file their agreements.
It is helpful to have advance knowledge of what is coming down the pike and I will be doing my best to keep you apprised of the changes affecting trusts in future posts.
The Value of Professional Assistance
The complexities of Delaware trust filing requirements are best navigated with the assistance of a legal advisor experienced in this area. Although there is no legal obligation to have a lawyer prepare and/or file the Certificate of Trust or other required documents, there are numerous advantages to doing so.
First, although reports of noncompliance, especially regarding state taxation, tend to be over-stated, the risk of audit by the State of Delaware and/or a state tax authority, as well as possible reputation and publicity issues arising from an audit, are significantly reduced if an experienced Delaware lawyer has drafted the documents, advised you on the steps necessary for compliance, and filed the documents on your behalf, rather than just providing you with forms . Second, given the technical nature of the various reports that may be required, experienced lawyers will often have standardized procedures to address these issues, thus reducing costs. While price varies among professionals, drafting the Certificate of Trust takes less than an hour (typically 20 minutes). Finally, while most lawyers will advise you on proper and timely compliance, in some cases the lawyer can be held legally responsible for any problems that occur due to the lawyer’s negligence.
