The state of Delaware has long been the corporate friendly haven for both U.S. and world business. It’s now fast becoming a center for the creation of asset protection trusts for Americans and for foreigners
For several decades, U.S. corporations have set up operations in Delaware in order to take advantage of the state’s tax code, friendly business climate and sophisticated legal environment. Increasingly, families who are looking to protect their fortunes from onerous tax burdens and complicated trust law are following corporate America’s lead.
The best news about Deleware is that non-Dupont families don’t have to move there in order to set up a trust. As long as the trustee has a base in Delaware, families can enjoy the financial benefits of the state from anywhere in the US and, in some circumstances, the world.
“Delaware has enacted legislation to attract wealthy rich people and private-wealth banks to set up shop in the state,” says Jack a. Bass , wealth advisor for clients around the globe.
The tax-free status in Delaware make it something of a duty-free zone between New York and Washington. But Mr Bass said the state holds many other attractions for family trusts. Hear are some examples.
A Generation Skipping Trust (GST): This is also called a dynasty trust. This trust allows individuals, while they are alive, to pass part of their estate down to future generations while minimising the tax. In the majority of states, the trusts have a terminus point at which future generations will be taxed. They typically extend 21 years beyond the death of the last trust beneficiary alive when the trust was created. If the youngest beneficiary is 21 and lives to 90, the trust will run 90 years. It’s a great tool for wealthy families but the massive tax bill down the road is a punishment.
A Delaware Dynasty Trust overcomes this issue because the state allows perpetual trusts without an end date. The trusts face no future estate, gift or generation-skipping taxes as long as the assets stay in trust. A JPMorgan report estimated that a $2 million investment in a standard dynaty trust, which is the most a married couple can give and still be exempt from gift tax, would yield $98 million after 90 years. A perpetual Delaware Dynasty trust would yield $266 million, based on projected investment returns.
A Foreign Trust: Foreign trusts are useful tools for citizens of the world who reside outside the U.S. but want to pass on more of their estate to beneficiaries who are either residents or citizens of the U.S. A foreign trust is exempt from gift-estate and GST taxes and can be set up so that, while alive, the individual pays no taxes on it. It is a useful tool made even better with a Delaware-sited foreign trust.
First, it can be a perpetual trust, as with a dynasty trust. Second, Delaware law prevents creditors from taking possession of the assets in the trust, similar to an offshore haven. Third, many countries have adopted anti-tax deferral legislation, and have drawn up “black lists” of countries that are tax havens. Trusts in a tax haven country may be taxable under these rules. But, Delaware foreign trusts are likely to avert anti-tax deferral legislation because the U.S. is unlikely to turn up on such black lists.
Delaware Statutory Trust: Delaware statutory trusts are great tools for individuals who wish to set up a tax-advantaged trust with diverse objectives because they can be designed for multiple participants with different needs. For example, if an individual wanted to use a portion of the trust to provide income for himself, his portion of the trust can have an asset allocation heavy on cash and fixed-income instruments. His grandchildren’s portion of the trust can be directed towards stocks since they will not need the income for many years. As usual, Delaware statutory trusts enjoy all the benefits of the state’s tax laws.
Total Return Trusts: A challenge with wealth management is that income-producing assets have become less fecund, with average dividend yields falling and fixed-income near low yield levels. In 2001, Delaware adopted a statute allowing for total return trusts. These trusts permit a trustee to convert a mandatory pay-out trust to deliver a combination of income and principal. So, if the trust with $50 million has a yield of only 1.5 per cent, the trust can be structured to pay out 4 per cent a year by taking a portion of the principal. Therefore, the beneficiary receives $2 million a year annually instead of $800,000.
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