© 2008 northern trust corporation northerntrust.com the northern trust experience a c c e s s. e x...

© 2008 Northern Trust Corporation northerntrust.com

The Northern Trust ExperienceThe Northern Trust ExperienceA C C E S S . E X P E R T I S E . S E R V I C E .

Daniel F. Lindley, PresidentThe Northern Trust Company of Delaware302-428-8704

dfl2@ntrs.com

Delaware: Still Expanding the Boundaries

The Northern Trust Experience

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 Trusts with Third-Party Advisors

Asset Protection through Self-Settled Trusts

Freedom of Disposition

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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In 1995 Delaware repealed its Rule against Perpetuities for personal property held in trust.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.

Based on 12 Del. C. § 3556, a purpose trust is a non-charitable trust with no readily identifiable person as a beneficiary.

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 non-grantor, 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 it to chance (and the judicial system)

Use a revocable living trust

Negotiate a prenuptial agreement

Create a domestic asset protection trust

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Planning Considerations: The Context

DE APT

A DE trust is unilateral in nature, with the client working out the details of the trust with counsel.

PRENUPTIAL K

A 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

The client need not disclose the existence of the APT or provide a schedule of pre-marital assets.

PRENUPTIAL K

Fair, reasonable and full disclosure of all assets is essential to validity of the agreement.

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Planning Considerations: Emotional Aspects

DE APT

Without the need to disclose the existence of the trust, the client avoids the risk of an emotional discussion with the client’s fiancé.

PRENUPTIAL K

Discussions of prenuptial agreements are often fraught with risk to the relationship, and may engender distrust and hostility.

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Planning Considerations: Lifestyle Issues

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Planning Considerations: Lifestyle Issues

DE APT

A trust provides protection for premarital assets without delving into a host of unrelated social issues.

PRENUPTIAL K

It 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.

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Planning Consideration: Estate Issues

DE APT

Under Delaware law, a trust is not subject to a spouse’s claims for an elective share or forced heirship. 12 Del. C. § 3573.

PRENUPTIAL K

Unless 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.

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Enforcement: Bases for Challenge

DE APT

A premarital APT is subject only to a claim that the grantor actually intended to defraud his or her future spouse.

PRENUPTIAL K

A prenup can be challenged if it was involuntary (duress, fraud, undue influence or lack of capacity), unconscionable or lacking in meaningful financial disclosure.

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Enforcement: Duration of the Solution

DE APT

A premarital APT is subject to challenge only during the four-year tail period.

PRENUPTIAL K

A 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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Delaware: Still Expanding the Boundaries