For years, Delaware has been regarded as one of the most favorable states for businesses, and a great resource for many individuals. Do Delaware benefits extend to the creation of trusts and asset protection?
The answer is yes. In 1997, the Delaware Qualified Disposition in Trust Act (commonly known as “The Delaware Act”) was enacted to provide an alternative to complex foreign trust arrangements.
Trusts are often used to reduce income and estate taxes because the property placed in a trust is not legally owned by you. However, when a trust is used for tax advantages, the trustor has limited power over the trust. These Tax Trusts cost the government money, and so they are more rigidly controlled.
Trusts used for asset protection, on the other hand, have greater flexibility in their structure. Delaware now permits the creation of Asset Protection Trusts, allowing you to shelter your assets from potential creditor claims without the inconvenience of creating a typical offshore trust.
Asset protection is recognized as a legitimate business planning tool, and Alaska and Delaware are the first to allow the protection of assets from future claims.scales
What exactly is the Delaware Asset Protection Trust?
A trust in which an individual creates an irrevocable trust (it can’t be changed or terminated without the permission of the beneficiary) with an independent Delaware trustee. The grantor maintains some control over the assets, such as:
- the right to receive discretionary income and principal
- a testamentary power of appointment
- veto power over distributions
- the right to act as investment advisor
- the ability to designate a trust protector
The assets of the trust are protected from any future claims with a few exceptions, such as child support, fraudulent transfers, and claims for personal injury or property damage that occurred before the transfer to the trust.
Not a Delaware resident? No problem! Here are some additional benefits of protecting your assets in Delaware:
- it offers protection similar to an offshore trust without the cost or complexity
- interest can be held in an LLC or FLP (Family Limited Partnership) while the grantor retains control of assets
- you don’t have to be a Delaware resident to have a Delaware trust. Only the trustee has to be located in DE.
- citizens living outside the U.S. can set up a Foreign Delaware Trust if their beneficiaries are U.S. citizens or residents. These trusts are exempt from gift-estate and generation-skipping taxes, and can also be perpetual.
Here are some strategies that are often employed in creating a Delaware Trust:
- The client can serve as a co-trustee with a Delaware trust company. Only a minimal amount needs to be deposited in a Delaware institution in order to comply with the statute.
- The formation of a Family Limited Partnership to secure family assets. This allows the client to manage and control the trust.
- Another approach would be the use of an offshore Asset Protection Trust as an additional beneficiary of a Delaware Trust. This provides a safety net to easily transfer the assets to the offshore entity if necessary and eliminates reliance on the U.S. court system.
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This document has been prepared using the best available sources. However, tax laws and interpretations of tax laws are always changing. Inc. Plan (USA) cannot guarantee or warrant the accuracy of the information contained herein. In legal and accounting matters, seek the advice of an attorney or an accountant.