The Northern Trust Experience
ACCESS. EXPERTISE. SERVICE.
Delaware: Still Expanding the Boundaries
Daniel F. Lindley, President
The Northern Trust Company of Delaware
302-428-8704
dfl2@ntrs.com
© 2008 Northern Trust Corporation
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Delaware Jeopardy
Dating to 1682, from a deed to William Penn
from the Duke of York, it separates Delaware
from Pennsylvania and represents the only
territorial border in the U.S. that is a true arc.
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Delaware Jeopardy
What is the Twelve-Mile Circle?
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The Delaware Advantages
 Wealth
Enhancement with Dynasty Trusts
 Savings
on State Fiduciary Income Taxes
 Administrative
 Asset
Trusts with Third-Party Advisors
Protection through Self-Settled Trusts
 Freedom
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of Disposition
Dynasty Trusts
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Dynasty Trusts: the Effect

In 1995 Delaware repealed its Rule against Perpetuities
for personal property held in trust.

Without RAP, a Delaware “dynasty” trust can continue
for countless generations.

Assets transferred to a GST-exempt dynasty trust can
benefit each successive generation of the grantor’s
descendants without incurring any additional gift tax,
estate tax or generation-skipping transfer tax.
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Dynastic Purpose Trusts
 The
dynasty format is useful for so-called “purpose” trusts.
on 12 Del. C. § 3556, a purpose trust is a non-charitable
trust with no readily identifiable person as a beneficiary.
 Based
A
person appointed by the trust or by the Court of Chancery
may enforce the trust.
 Upon
termination, the assets are distributable to designated
beneficiaries or under the terms of the grantor’s will.
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Dynastic Purpose Trusts
 Avoid
taxable gift at inception by funding the
purpose trust with a GRAT or CLAT remainder.
 Grantor
or non-grantor trust treatment of income
should be available during the grantor’s lifetime.
 Powers
of trust advisors should be limited to avoid
estate inclusion.
 At
termination, GST consequences if the assets
revert to the benefit of individual family members.
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Delaware: Tax-Free Shopping (and Tax-Free Trusts)
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Tax-Free Shopping (and Tax-Free Trusts)
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Fiduciary Income Tax Savings
 Delaware
does not impose a fiduciary income tax
on irrevocable trusts for non-resident beneficiaries.
 Absent
a taxable connection or “nexus” with
another state, capital gains and ordinary income
can accumulate in irrevocable Delaware trusts
without incurring a state income tax.
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Using a DING Trust to Avoid State Income Tax
A
grantor can contribute highly-appreciated assets to
a Delaware asset protection trust to avoid paying
state income tax to the grantor’s state of residence.
 To
qualify for non-grantor treatment, the trust must
have an “adverse party” – usually a Distribution
Committee ― with the authority to approve
distributions to the grantor or the grantor’s spouse.
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Using a DING Trust to Avoid State Income Tax
 To
avoid a completed gift on funding the trust, the grantor
should retain a limited power of appointment.
 The
Service has issued multiple PLRs supporting the nongrantor, incomplete gift nature of this sort of trust. PLR
200729025, 200731019, 200715005, 200647001, 200637025,
200612002, 200502014, 200247013 and 200148028.
 In
a 7/07 notice, the Service asked for comment whether
members of the Distribution Committee hold a general power
of appointment.
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Potential Tax Savings with a DING

NYC resident owns $50MM of zero-basis stock in a closely-held
corporation. Client plans to sell to a private equity firm for cash.
Post-sale Value of Asset
Delaware Trust =
$42,500,000
New York Personal Assets =
37,251,000
Delaware Benefit =
$ 5,249,000
Assumptions: Federal capital gains rate: 15.0%; NY state and city income tax rate: 10.498%; DE state fiduciary income tax rate:
0%. Actual results may vary from the illustration.
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Administrative Trusts
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Administrative Trusts
 Delaware
law allows trustees to take direction from
advisors (including investment and distribution
advisors), without liability for their decisions or results.
 Administrative
trusts represent a bifurcation of the
trustee’s duties, not a delegation under the Uniform
Prudent Investor Act.
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Client Suitability
 Non-U.S.
grantors who want to maintain a trust with a U.S.
trustee but want the trust treated as a foreign trust for U.S.
income tax purposes. By giving a non-U.S. person authority
over substantial decisions involving a trust, the trust will fail
the “control” test and qualify as a foreign trust (absent U.S.
source income).
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Client Suitability
 Non-U.S.
grantors who want to create an irrevocable
perpetual trust, for the benefit of U.S. beneficiaries, that is
not subject to U.S. transfer taxes. In contrast with many
offshore jurisdictions, which equate excessive settlor
control with a “sham” trust, a direction trust legitimizes a
settlor’s investment authority.
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Asset Protection Trusts
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Asset Protection Trusts
 In
1997 Delaware became the second state to permit
an “asset protection” trust, a trust in which the grantor
retains an interest as a beneficiary.
 Currently,
eleven states permit asset protection trusts
in some fashion: Delaware, Alaska, Rhode Island,
Nevada, Utah, Missouri, Oklahoma, South Dakota,
Tennessee, Wyoming and New Hampshire.
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Asset Protection Trusts
 With
a properly structured Delaware asset
protection trust, the grantor may be a beneficiary of
the trust and retain certain powers over the trust.
A
creditor of the grantor will not be able to reach the
trust assets unless its claim is filed within the
applicable tail period and it establishes that the
funding of the trust was a fraudulent transfer.
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Asset Protection Trusts
A
“future creditor” can prevail only by showing, with
clear and convincing evidence, that the grantor
actually intended to defraud that particular creditor by
making a transfer of assets to the trust.
A
beneficiary’s discretionary interest in a trust is not
an enforceable property right and is not subject to
compulsory distributions in favor of a creditor.
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Exempt Claims Can Reach Trust
A
spouse or child with claims for alimony, support or a
share of marital property is not subject to the tail period
and does not have to prove a fraudulent transfer.
A
“spouse” does not include one who marries the
grantor after the transfer to the trust.
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The Problem
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The Solution To Avoid
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Premarital Planning Options
 Leave
 Use
it to chance (and the judicial system)
a revocable living trust
 Negotiate
 Create
The Northern Trust Experience
a prenuptial agreement
a domestic asset protection trust
Planning Considerations: The Context
DE APT
PRENUPTIAL K
A
A
DE trust is unilateral
in nature, with the client
working out the details of the
trust with counsel.
prenup requires the
cooperation of both parties
and their counsel to negotiate
a host of delicate issues.
 Absence
of independent
counsel can render an
agreement involuntary.
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Planning Considerations: Disclosure
DE APT
PRENUPTIAL K
 The
 Fair,
client need not disclose
the existence of the APT or
provide a schedule of premarital assets.
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reasonable and full
disclosure of all assets is
essential to validity of the
agreement.
Planning Considerations: Emotional Aspects
DE APT
PRENUPTIAL K
 Without
 Discussions
the need to disclose
the existence of the trust, the
client avoids the risk of an
emotional discussion with the
client’s fiancé.
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of prenuptial
agreements are often fraught
with risk to the relationship,
and may engender distrust
and hostility.
Planning Considerations: Lifestyle Issues
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Planning Considerations: Lifestyle Issues
DE APT
PRENUPTIAL K
A
 It
trust provides protection for
premarital assets without
delving into a host of unrelated
social issues.
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is not unusual for a prenup
to encompass lifestyle issues
such as parenting obligations,
use of last names, relations
with in-laws, birth control (or
not), and other assorted areas
of contention.
Planning Consideration: Estate Issues
DE APT
PRENUPTIAL K
 Under
 Unless
Delaware law, a trust is
not subject to a spouse’s
claims for an elective share or
forced heirship.
12 Del. C. § 3573.
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an agreement
specifically excludes a
spouse’s elective share, the
estate of a deceased client
remains subject to spousal
claims, potentially up to 50%
of decedent’s estate.
Enforcement: Bases for Challenge
DE APT
PRENUPTIAL K
A
A
premarital APT is subject only
to a claim that the grantor
actually intended to defraud his
or her future spouse.
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prenup can be challenged
if it was involuntary (duress,
fraud, undue influence or lack
of capacity), unconscionable
or lacking in meaningful
financial disclosure.
Enforcement: Duration of the Solution
DE APT
PRENUPTIAL K
A
A
premarital APT is subject
to challenge only during the
four-year tail period.
prenup will remain vulnerable
to challenge throughout the
marriage. State law often tolls
the statute of limitations.
 One
party may seek a sunset
clause to terminate the prenup
after, say, 5 years of marriage.
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Freedom of Disposition
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Freedom of Disposition: Confidentiality
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Freedom of Disposition: Confidentiality
 Delaware
trusts are not subject to any public
registration or filing requirements.
 In
the event of litigation, the Court of Chancery
routinely seals the record of trust proceedings.
 Delaware
law even permits a trustee to withhold
knowledge of a trust’s existence from future or
discretionary beneficiaries, if the grantor so directs.
12 Del. C. § 3303(a).
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Freedom of Disposition
 Enforcement
of in terrorem clauses:
12 Del. C. § 3329. Beneficiary must “substantially prevail”
to avoid disqualifying effect.
 Decanting
Existing Trusts:
12 Del. C. § 3528. Using discretionary power to distribute
principal into a follow-on trust for the benefit of one or
more “proper objects.”
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Decanting Trusts
 Dividing
an existing trust into separate trusts to
preserve NOLs that the trust’s primary asset would
have had to forfeit.
 Eliminating
mandatory principal distributions with a
trust whose value had grown unexpectedly large.
 Eliminating
an estranged daughter’s eligibility as a
potential taker after the income beneficiary’s death.
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Concluding Thoughts
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Other Jurisdictions (AK? NV? SD?)
 In
contrast to the judicial system in other states,
Delaware has a separate court of equity, a non-jury
court, with exclusive jurisdiction over trust matters.
 The
Delaware General Assembly revises
Delaware’s trust laws annually to ensure that they
remain effective and flexible.
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Profile of Delaware Office
 The
Delaware office opened September 30, 2004 as
a trust office of Northern Trust Bank, FSB.
 Since
1/1/06 Northern’s Delaware office has operated
as a Delaware limited purpose trust company –
The Northern Trust Company of Delaware.
 As
of June 30, 2008, the Delaware office held in
excess of $4.3 billion in assets under administration.
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Thank You
Delaware: Still Expanding the Boundaries
© 2008 Northern Trust Corporation
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