A comparison of leading trust jurisdictions

Transcription

1 WEALTH ADVISORY The Delaware Advantage A comparison of leading trust jurisdictions Delaware enjoys international renown for its trust and tax law advantages and its innovative estate planning vehicles. Delaware has been a trust-friendly jurisdiction for generations. Even if you don t live in Delaware, there are numerous reasons why you should consider establishing a new trust in Delaware and why you should explore moving an existing trust to the First State. No other state can match Delaware s trust history. Starting early in the 20th century, Delaware began to establish a trust infrastructure. Thus, it has a well-thought-out body of trust laws (which it updates on an ongoing basis); a supportive legislature, executive branch, and legal and banking community; and many institutions that compete for trust business within the state. This publication provides a comparison of Delaware s trusts laws to those in Alaska, Nevada, and South Dakota, three of the more well-known advantageous jurisdictions. While these other states do have favorable trust legislation, Delaware s innovative approach to trusts helps Delaware maintain its position as the premier home for new or existing trusts. To compare Delaware trust law with one of the states shown below, simply rollover and click one of the trust law comparison links below: DELAWARE VS. ALASKA DELAWARE VS. NEVADA DELAWARE VS. SOUTH DAKOTA 2018 Wilmington Trust Corporation and its affiliates. All rights reserved.

2 DELAWARE vs. ALASKA TRUST LAW COMPARISON March 13, 2018 KEY DELAWARE ADVANTAGES Directed trust under long-standing Delaware practice/statute upheld by court trust instrument can bifurcate trustee s duties. Alaska statute new and untested Self-settled asset protection trust (APT) Delaware and Alaska permit; Alaska APTs set aside by two bankruptcy courts; Delaware APTs upheld by Delaware court Lifetime marital-deduction and other trusts Delaware provides creditor protection for lifetime marital-deduction, credit-shelter, and other trusts Silent trust Delaware trust instrument may restrict disclosure of information to beneficiary for period of time; Alaska law less flexible Perpetual trust Delaware and Alaska permit; Alaska limits trust created by power of appointment to 1,000 years and has not abolished rule against accumulations Delaware tax trap Delaware allows donee to exercise nongeneral power of appointment to spring Delaware tax trap and get stepped-up income-tax basis Trust modification Delaware allows by merger or nonjudicial settlement agreement as well as by decanting or court petition Lifetime validation of trust under Delaware statute upheld by Delaware Supreme Court notified person must act within 120 days; Alaska statute relatively new and untested Trust provisions Delaware more flexible Court system Delaware courts address trust matters promptly and efficiently Power to adjust Delaware statute more flexible Noncharitable purpose trust Delaware permits perpetual trust for any noncharitable purpose Insurance trust Delaware has lowest premium tax in U.S. for large private placement policy Trust laws Delaware updates more promptly 2

3 DELAWARE vs. ALASKA TRUST LAW COMPARISON POINT OF LAW DELAWARE ALASKA Directed Trust Division of Trustee Duties Self-Settled Spendthrift Trust Since 1986 (codifying practice dating from early 20 th century) trust may designate person to direct trustee on investment, distribution, and other decisions. Directed trustee not liable for following direction or not taking specified action without direction of adviser except for wilful misconduct and has no duty to monitor adviser s activities. Adviser is fiduciary unless instrument provides otherwise and must furnish directed trustee with specified information (12 Del. C. 3301(g), 3313, 3317). Del. Court of Chancery enforced statute (Duemler, 2004 WL (Del. Ch. 2004)) statute extended directed trust to arrangement in which co-trustee rather than adviser holds power to direct (12 Del. C. 3313A). Since 2013 trust may designate cotrustee or advisor to direct trustee on trust decisions. Directed trustee not liable for following direction and has no duty to monitor activities. Advisor is fiduciary (Alaska Stat (c), (c)). Asset Protection Trust (APT) Del. law recognizes domestic APT. Since 1997 creditor may reach settlor s interest only in limited circumstances under Qualified Dispositions in Trust Act (12 Del. C ). Del. Court of Chancery held creditors attempt to reach assets of Del. APTs created by nonresident to be time-barred (TrustCo, 2015 WL (Del. Ch. 2015)). Alaska law recognizes domestic APT. Since 1997 creditor may reach settlor s interest only in limited circumstances (Alaska Stat ). Two federal bankruptcy courts set aside Alaska APTs (Mortensen, 2011 WL (Bankr. D. Alaska 2011); Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013)). Lifetime Marital- Deduction, Credit- Shelter, and Other Trusts Since 2009 creditor may not reach settlor s contingent interest in lifetime marital-deduction trust, credit-shelter trust, or other trust (12 Del. C. 3536(c)(1)). No statute. 1 Delaware courts give unpublished opinions substantial precedential weight (Crystallex, 879 F.3d 79, 85 n.8 (3d Cir. 2018)). 3

4 DELAWARE vs. ALASKA TRUST LAW COMPARISON continued POINT OF LAW DELAWARE ALASKA Disclosure to Beneficiary Silent Trust Rule Against Perpetuities Since 2003 trust instrument may restrict disclosure of information to beneficiary for period of time such as until beneficiary reaches specified age, death of settlor or spouse, end of term of years or arrival of specified date, or occurrence of specified event. Designated representative may represent and bind beneficiary in judicial or nonjudicial proceeding (12 Del. C. 3303, 3339). Absent such language, trustee must provide current beneficiary with relevant information about trust (McNeil, 798 A.2d 503 (Del. 2002)). Trustee has general duty to keep beneficiary informed. Since 2000 settlor may exempt trustee from duty to provide notification or information to nonmandatory beneficiary until earlier of settlor s death or incapacity (Alaska Stat ). Permissible Duration of Trust Since 1933 statute perpetual trust possible through exercise of Del. nongeneral power of appointment. Since 1995 statute trust interest in personal property may be perpetual; trust interest in real property must vest within 110 years after creation of interest (limitation may be avoided by putting interest in FLP, LLC, or other entity) (25 Del. C ). Since 1997 perpetual trust permitted; trust created by exercise of power of appointment may last 1,000 years (Alaska Stat , ). Delaware Tax Trap Nongeneral power of appointment may be exercised to spring Del. tax trap and get stepped-up income-tax basis (25 Del. C ). Nongeneral power of appointment may not be exercised to spring Del. tax trap and get stepped-up income-tax basis (Alaska Stat , ). 4

5 DELAWARE vs. ALASKA TRUST LAW COMPARISON continued POINT OF LAW DELAWARE ALASKA Modification of Trust Merger/ Combination Since 2005 trustee may merge old and new trusts unless merger would result in material change in dispositive terms of trust defining nature and extent of beneficiary s interest (12 Del. C. 3325(29)). No statute. Decanting Since 2003 trustee of testamentary or irrevocable inter vivos trust (including revocable trust in which settlor is incapacitated) with power to invade principal/income may distribute principal/income into second trust (which may be separate trust or first trust as modified) with same or more limited distribution standards and for benefit of all or fewer of beneficiaries of first trust (12 Del. C. 3528). Since 1998 trustee may distribute principal into another trust. Statute completely revised in 2013 (Alaska Stat ). Nonjudicial Settlement Agreement Since 2013 modification may not violate material purpose of trust and must be of type otherwise approvable by court. Trustee, specified beneficiaries, and other interested persons must consent (12 Del. C. 3338). Since 2016 irrevocable trust may be modified to include provision that could have been included in governing instrument created upon date of modification even if modification violates material purpose of trust. Settlor, all then serving fiduciaries, and all beneficiaries must provide written consent or nonobjection (12 Del. C. 3342). No statute. Court Petition Formalized in 2012 via Del. Ct. Ch. Rs , Del. Court of Chancery may modify trust under consent-petition procedure. Del. Court of Chancery denied petition to modify trust where modification would have departed from testator s intent (Flint, 118 A.3d 182 (Del. Ch. 2015)). Court may modify or terminate irrevocable trust if all beneficiaries consent unless continuance of trust is necessary to carry out material purpose of trust and court does not determine that modification or termination still is warranted (Alaska Stat (a)). 5

6 DELAWARE vs. ALASKA TRUST LAW COMPARISON continued POINT OF LAW DELAWARE ALASKA No-Contest (In Terrorem) Clause Taxation of Trust Income Enforcement during lifetime of settlor. Since 2003 person barred from bringing judicial proceeding to contest validity of revocable trust, amendment to revocable trust, or irrevocable trust 120 days after notice by trustee (12 Del. C. 3546). Del. Supreme Court enforced statute (Ravet, 2015 WL (Del. 2015)). No-contest clause generally enforceable in Will or trust (12 Del. C. 3329). For nongrantor trust, tax is not payable and return is not due if trust has no Del. resident beneficiary. Combination of Del. s small population and its favorable rule for determining residence of future beneficiary means that few trusts created by nonresidents pay Del. income tax. For trust subject to tax, highest rate in 2018 is 6.60% (30 Del. C. 1102(a)(14), 1601(8), 1605(b), 1636). Enforcement during lifetime of settlor. Since 2010, court may determine validity of Will or trust before death. No-contest clause enforceable in Will or trust even if probable cause exists for instituting proceeding to challenge (Alaska Stat , , ). No income tax imposed. Flexibility in Drafting Trust Provisions Since 2003 regardless of common law or other statute, governing instrument may expand, restrict, eliminate, or otherwise vary rights and interests of beneficiary. Specifically, trust may negate duty to diversify investments or defer age at which trustee must notify beneficiary of trust interest. Rule that statutes in derogation of common law are to be strictly construed not applicable. Policy is to give maximum effect to principle of freedom of disposition and to enforceability of governing instruments (12 Del. C. 3303(a)). No statute. 6

7 DELAWARE vs. ALASKA TRUST LAW COMPARISON continued POINT OF LAW DELAWARE ALASKA 2017 State Lawsuit Climate Ranking 2 Unitrust # 11. Judges are appointed by Governor with consent of Senate and must come as equally as possible from two major political parties (Del. Const. Art. IV, 3). Judges decide all trust issues. Del. trustee must be in office for Del. court to adjudicate trust matter (Peierls, 77 A.3d 223, 228 (Del. 2013)). Once Del. trustee is in place, Del. law governs administration unless governing instrument says another state s law applies in all circumstances (Peierls, 77 A.3d 249, 259 (Del. 2013)). Punitive damages may not be awarded in trust case. # 6. Recognition of Trust Created as Unitrust Since % 5% range permitted includes tax-ordering rule (12 Del. C ). Since % 5% range permitted includes tax-ordering rule (Alaska Stat ). Procedure for Converting Income Trust into Total- Return Unitrust Since % 5% range permitted includes tax-ordering rule (12 Del. C ). Since % 5% range permitted includes tax-ordering rule (Alaska Stat ). Power to Adjust Between Income and Principal Under 104 of 1997 Uniform Principal and Income Act Rule Against Accumulations Since 2005 includes tax-ordering rule (12 Del. C ). Since 1986 no provision directing or authorizing accumulation of trust income is invalid (25 Del. C. 506). Since 2003 (Alaska Stat ). No statute. 2 Based on data in U.S. Chamber of Commerce survey available at (last visited Feb. 23, 2018). 7

8 DELAWARE vs. ALASKA TRUST LAW COMPARISON continued POINT OF LAW DELAWARE ALASKA Third-Party Trust Enforcement of Spendthrift Clause By statute, trust income and principal not subject to voluntary or involuntary transfer. Amount that may be protected is not limited (12 Del. C. 3536). By caselaw, trust income may be reached for separate maintenance of current but not divorced spouse (Garretson, 306 A.2d 737 (Del. 1973)); possessor of tort claim is creditor barred by spendthrift clause, no publicpolicy exception for such claim, impoundment remedy not available (Mennen, 2017 WL (Del. 2017)). Trust income and principal not subject to voluntary or involuntary transfer (Alaska Stat ). Discretionary Interest Since 2007 creditor may not compel distribution of discretionary interest. Court may change trustee s exercise of discretion only for abuse of discretion within meaning of Second Restatement of Trusts (12 Del. C. 3315, 3536). Since 2013 discretionary interest is expectancy not property interest or enforceable right. Creditor may not compel distribution of discretionary interest (Alaska Stat ). Noncharitable Purpose Trust Insurance Trust Since 2007 perpetual trust for any noncharitable purpose is valid; separate common-law rule limiting duration of noncharitable purpose trust has been repealed (12 Del. C. 3556, 25 Del. C. 503(a)). Since 1996 trust for any noncharitable purpose is valid for 21 years (Alaska Stat (a)). Trustee Has Insurable Interest Since 1998 (18 Del. C. 2704(c)(5)). Since 2013 (Alaska Stat (d) (e)). Premium Tax Since 2016 has lowest premium tax in country for large private placement policy 0.0% on net premium over $100,000 (18 Del. C. 702(c)(3)). Since % of policy year premium exceeding $100,000 (Alaska Stat (m)(2)). Acquisition and Administration Since 2003 special rules set for acquisition and administration of life insurance by trustee (12 Del. C. 3302(d)). Since 2013 special rules set for acquisition and administration of life insurance by trustee (Alaska Stat ). 8

9 DELAWARE vs. ALASKA TRUST LAW COMPARISON continued POINT OF LAW DELAWARE ALASKA Investment Rules In 1986 prudent-investor rule was adopted. Trustee may consider other resources and trust interests in determining investment policy for trust (12 Del. C. 3302). In 1998 Uniform Prudent Investor Act was adopted (Alaska Stat ). This document, with commentary, is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management, and other services. International corporate and institutional services are offered through Wilmington Trust Corporation s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Wilmington Trust Company operates offices in Delaware only. Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts and directed trusts. IRS CIRCULAR 230: To ensure compliance with requirements imposed by the IRS, we inform you that, while this document is not intended to provide tax advice, in the event that any information contained in this document is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein Wilmington Trust Company. All rights reserved. 9

10 DELAWARE vs. NEVADA TRUST LAW COMPARISON December 29, 2017 KEY DELAWARE ADVANTAGES Directed trust under long-standing Delaware practice/statute upheld by court trust instrument can bifurcate trustee s duties; Nevada s statute relatively new and untested Self-settled asset protection trust (APT) Delaware and Nevada permit; circumstances in which creditor may reach interest in Nevada trust unclear Alter-ego theory under Nevada statute, trustee of irrevocable trust may be deemed to be settlor s alter ego Lifetime marital-deduction and other trusts Delaware provides creditor protection for lifetime marital-deduction, credit-shelter, and other trusts Silent trust Delaware and Nevada permit; Delaware legislation more comprehensive Perpetual trust Delaware permits; Nevada 365-year trust might be invalid because of constitutional prohibition and uncertain status of rule against accumulations Delaware tax trap Delaware allows donee to exercise nongeneral power of appointment to spring Delaware tax trap and get stepped-up income-tax basis Lifetime validation of trust under Delaware statute upheld by Delaware Supreme Court notified person must act within 120 days; Nevada statute relatively new and untested Court system Delaware courts address trust matters promptly and efficiently Unitrust Delaware statute allows creation of new trust as unitrust Noncharitable purpose trust Delaware permits perpetual trust for any noncharitable purpose Insurance trust Delaware has lowest premium tax in U.S. for large private placement policy and has special rules for acquisition and administration of policy Trust laws Delaware updates more promptly 10

11 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS POINT OF LAW DELAWARE NEVADA Directed Trust Division of Trustee Duties Self-Settled Spendthrift Trust Since 1986 (codifying practice dating from early 20 th century) trust may designate person to direct trustee on investment, distribution, and other decisions. Directed trustee not liable for following direction or not taking specified action without direction of adviser except for wilful misconduct and has no duty to monitor adviser s activities. Adviser is fiduciary unless instrument provides otherwise and must furnish directed trustee with specified information (12 Del. C. 3301(g), 3313, 3317). Del. Court of Chancery enforced statute in unpublished decision (Duemler, 2004 WL (Del. Ch. 2004)) statute extended directed trust to arrangement in which co-trustee rather than adviser holds power to direct (12 Del. C. 3313A). Since 2009 trust may designate person to direct fiduciary on investment and distribution decisions. Directed fiduciary not liable for following direction and has no duty to monitor adviser s activities. Investment trust adviser is fiduciary unless instrument provides otherwise (Nev. Rev. Stat , , , , , , , , , , , , , ). Nev. Supreme Court confirmed that Nev. courts have personal jurisdiction over nonresident investment trust adviser who accepted appointment in Nev. trust (Davis, 394 P.3d 1203 (Nev. 2017)). Asset Protection Trust (APT) Del. law recognizes domestic APT. Since 1997 creditor may reach settlor s interest only in limited circumstances under Qualified Dispositions in Trust Act (12 Del. C ). Del. Court of Chancery held creditors attempt to reach assets of Del. APTs created by nonresident to be time-barred in unpublished decision (TrustCo, 2015 WL (Del. Ch. 2015)). Since 1999 Nev. law recognizes APT (Nev. Rev. Stat ). Creditor may reach transferor s interest if transfer to APT was fraudulent transfer or if transfer violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor (Nev. Rev. Stat (3)). Utah Supreme Court allowed Utah resident wife to reach assets of poorly designed Nev. APT created by Utah resident husband in divorce proceeding (Dahl, 345 P.3d 566 (UT 2015)). Nev. Supreme Court held assets of Nev. resident husband s Nev. APT not reachable by Nev. resident wife for court-ordered child support and spousal support obligations not known when trust was created (Klabacka, 394 P.3d 940 (Nev. 2017)). Alter-Ego Theory No Del. case/statute provides that trustee of irrevocable trust may be deemed to be settlor s alter ego. Since 2009 trustee of irrevocable trust may be deemed to be settlor s alter ego in certain circumstances (Nev. Rev. Stat ). 11

12 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS continued POINT OF LAW DELAWARE NEVADA Lifetime Marital- Deduction, Credit- Shelter, and Other Trusts Since 2009 creditor may not reach settlor s contingent interest in lifetime marital-deduction trust, credit-shelter trust, or other trust (12 Del. C. 3536(c)(1)). No statute. Disclosure to Beneficiary Silent Trust Rule Against Perpetuities Since 2003 trust instrument may restrict disclosure of information to beneficiary for period of time such as until beneficiary reaches specified age, death of settlor or spouse, end of term of years or arrival of specified date, or occurrence of specified event. Designated representative may represent and bind beneficiary in judicial or nonjudicial proceeding (12 Del. C. 3303, 3339). Absent such language, trustee must provide current beneficiary with relevant information about trust (McNeil, 798 A.2d 503 (Del. 2002)). Since 2011 trust instrument may restrict disclosure of information to beneficiary for period of time (Nev. Rev. Stat (1)(a), (1)(a)). Absent such language, trustee of testamentary trust and nontestamentary trust must provide account and copy of trust instrument to current beneficiary or remainder beneficiary upon request (Nev. Rev. Stat , , ). Permissible Duration of Trust Since 1933 statute perpetual trust possible through exercise of Del. nongeneral power of appointment. Since 1995 statute trust interest in personal property may be perpetual; trust interest in real property must vest within 110 years after creation of interest (limitation may be avoided by putting interest in FLP, LLC, or other entity) (25 Del. C ). Since year trust permitted (Nev. Rev. Stat ). Statute might be invalid because Nev. Constitution provides that No perpetuities shall be allowed except for eleemosynary purposes (Nev. Const. Art. 15, 4) and because 2002 ballot initiative to repeal prohibition was disapproved by voters (Horowitz & Sitkoff, Unconstitutional Perpetual Trusts, 67 Vand. L. Rev. 1769, 1773, 1803 (Nov. 2014)). Delaware Tax Trap Nongeneral power of appointment may be exercised to spring Del. tax trap and get stepped-up income-tax basis (25 Del. C ). Nongeneral power of appointment may not be exercised to spring Del. tax trap and get stepped-up incometax basis (Nev. Rev. Stat (3)). 12

13 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS continued POINT OF LAW DELAWARE NEVADA Modification of Trust Merger/ Combination Since 2005 trustee may merge old and new trusts unless merger would result in material change in dispositive terms of trust defining nature and extent of beneficiary s interest (12 Del. C. 3325(29)). Since 2015 trustee may combine trusts after giving notice if does not impair beneficiaries rights, substantially affect accomplishment of trusts purposes, or violate rule against perpetuities (Nev. Rev. Stat ). Decanting Since 2003 trustee of testamentary or irrevocable inter vivos trust (including revocable trust in which settlor is incapacitated) with power to invade principal/income may distribute principal/income into second trust (which may be separate trust or first trust as modified) with same or more limited distribution standards and for benefit of all or fewer of beneficiaries of first trust (12 Del. C. 3528). Since 2009 trustee of testamentary or irrevocable trust with power to invade income/principal may distribute income/principal into another trust with same or more limited distribution standards and for benefit of all or fewer of beneficiaries of first trust (Nev. Rev. Stat ). Nonjudicial Settlement Agreement Since 2013 modification may not violate material purpose of trust and must be of type otherwise approvable by court. Trustee, specified beneficiaries, and other interested persons must consent (12 Del. C. 3338). Since 2016 irrevocable trust may be modified to include provision that could have been included in governing instrument created upon date of modification even if modification violates material purpose of trust. Settlor, all then serving fiduciaries, and all beneficiaries must provide written consent or nonobjection (12 Del. C. 3342). Since 2015 modification may not violate material purpose of trust and must be of type otherwise approvable by court. All indispensable parties must consent (Nev. Rev. Stat , ). Also, irrevocable trust, spendthrift or not, may be modified with the consent of the surviving settlor(s) and any beneficiaries whose interests will be directly prejudiced (Frei, 390 P.3d 646, (Nev. 2017)). Court Petition Formalized in 2012 via Del. Ct. Ch. Rs , Del. Court of Chancery may modify trust under consent-petition procedure. Del. Court of Chancery denied petition to modify trust where modification would have departed from testator s intent (Flint, 118 A.3d 182 (Del. Ch. 2015)). Trustee or beneficiary may petition court regarding modification or termination of trust (Nev. Rev. Stat (n), ). 13

14 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS continued POINT OF LAW DELAWARE NEVADA No-Contest (In Terrorem) Clause Taxation of Trust Income Enforcement during lifetime of settlor. Since 2003 person barred from bringing judicial proceeding to contest validity of revocable trust, amendment to revocable trust, or irrevocable trust 120 days after notice by trustee (12 Del. C. 3546). Del. Supreme Court enforced statute in unpublished decision (Ravet, 2015 WL (Del. 2015)). Nocontest clause generally enforceable in Will or trust (12 Del. C. 3329). For nongrantor trust, tax is not payable and return is not due if trust has no Del. resident beneficiary. Combination of Del. s small population and its favorable rule for determining residence of future beneficiary means that few trusts created by nonresidents pay Del. income tax. For trust subject to tax, highest rate in 2018 is 6.60% (30 Del. C. 1102(a)(14), 1601(8), 1605(b), 1636). Enforcement during lifetime of settlor. Since 2009 person barred from bringing judicial proceeding to contest validity of irrevocable trust 120 days after service of notice (Nev. Rev. Stat (4)). Since 2009 no-contest clause generally enforceable in Will or trust (Nev. Rev. Stat , ). No income tax imposed. Implications of 2015 commerce tax for trusts unclear (Nev. Rev. Stat. 363c c.700). Flexibility in Drafting Trust Provisions Since 2003 regardless of common law or other statute, governing instrument may expand, restrict, eliminate, or otherwise vary rights and interests of beneficiary. Specifically, trust may negate duty to diversify investments or defer age at which trustee must notify beneficiary of trust interest. Rule that statutes in derogation of common law are to be strictly construed not applicable. Policy is to give maximum effect to principle of freedom of disposition and to enforceability of governing instruments (12 Del. C. 3303(a)). Since 2011 regardless of common law or other statute, governing instrument may expand, restrict, eliminate, or otherwise vary rights and interests of beneficiary. Specifically, trust may negate duty to diversify investments or defer age at which trustee must notify beneficiary of trust interest. Rule that statutes in derogation of common law are to be strictly construed not applicable. Policy is to give maximum effect to principle of freedom of disposition and to enforceability of governing instruments (Nev. Rev. Stat (1), (1)). 14

15 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS continued POINT OF LAW DELAWARE NEVADA 2017 State Lawsuit Climate Ranking1 Unitrust # 11. Judges are appointed by Governor with consent of Senate and must come as equally as possible from two major political parties (Del. Const. Art. IV, 3). Judges decide all trust issues. Del. trustee must be in office for Del. court to adjudicate trust matter (Peierls, 77 A.3d 223, 228 (Del. 2013)). Once Del. trustee is in place, Del. law governs administration unless governing instrument says another state s law applies in all circumstances (Peierls, 77 A.3d 249, 259 (Del. 2013)). Punitive damages may not be awarded in trust case. # 37. Recognition of Trust Created as Unitrust Since % 5% range permitted includes tax-ordering rule (12 Del. C ). No statute. Procedure for Converting Income Trust into Total- Return Unitrust Since % 5% range permitted includes tax-ordering rule (12 Del. C ). Since % 5% range permitted trustee may cause capital gains to be included in DNI (Nev. Rev. Stat , (9), ). Power to Adjust Between Income and Principal Under 104 of 1997 Uniform Principal and Income Act Rule Against Accumulations Since 2005 includes tax-ordering rule (12 Del. C ). Since 1986 no provision directing or authorizing accumulation of trust income is invalid (25 Del. C. 506). Since 2003 trustee may cause capital gains to be included in DNI (Nev. Rev. Stat , (9), ). Provision directing accumulation of trust income beyond perpetuities period is invalid (Nev. Rev. Stat ). 1 Based on data in U.S. Chamber of Commerce survey available at (last visited Dec. 29, 2017). 15

16 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS continued POINT OF LAW DELAWARE NEVADA Third-Party Trust Enforcement of Spendthrift Clause By statute, trust income and principal not subject to voluntary or involuntary transfer. Amount that may be protected is not limited (12 Del. C. 3536). By caselaw, trust income may be reached for separate maintenance of current but not divorced spouse (Garretson, 306 A.2d 737 (Del. 1973)); possessor of tort claim is creditor barred by spendthrift clause, no publicpolicy exception for such claim, impoundment remedy not available (Mennen, 2017 WL (Del. 2017)). Trust income and principal not subject to voluntary or involuntary transfer (Nev. Rev. Stat ). Discretionary Interest Since 2007 creditor may not compel distribution of discretionary interest. Court may change trustee s exercise of discretion only for abuse of discretion within meaning of Second Restatement of Trusts (12 Del. C. 3315, 3536). Since 2009 no one may interfere with trustee s exercise of discretion. Trustee s exercise of absolute discretion not subject to reasonableness standard (Nev. Rev. Stat , , ). Noncharitable Purpose Trust Insurance Trust Since 2007 perpetual trust for any noncharitable purpose is valid; separate common-law rule limiting duration of noncharitable purpose trust has been repealed (12 Del. C. 3556, 25 Del. C. 503(a)). Since 2017 perpetual trust for any noncharitable purpose is valid for 365 years (Nev. Rev. Stat (6), 2017 Nev. Stat. 314, 39). But, 365-year trust might not be possible because separate commonlaw rule limiting duration of noncharitable purpose trust has not been repealed. Trustee Has Insurable Interest Since 1998 (18 Del. C. 2704(c)(5)). Since 2009 (Nev. Rev. Stat. 687B.040(2)). Premium Tax Since 2016 has lowest premium tax in country for large private placement policy 0.0% on net premium over $100,000 (18 Del. C. 702(c)(3)). 3.50% (157 Tr. & Est. 73, 94 (Jan. 2018)). Acquisition and Administration Since 2003 special rules set for acquisition and administration of life insurance by trustee (12 Del. C. 3302(d)). No statute. 16

17 COMPARISON OF DELAWARE AND NEVADA TRUST LAWS continued POINT OF LAW DELAWARE NEVADA Investment Rules In 1986 prudent-investor rule was adopted. Trustee may consider other resources and trust interests in determining investment policy for trust (12 Del. C. 3302). In 2003 Uniform Prudent Investor Act was adopted (Nev. Rev. Stat ). This document, with commentary, is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management, and other services. International corporate and institutional services are offered through Wilmington Trust Corporation s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Wilmington Trust Company operates offices in Delaware only. Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts and directed trusts. IRS CIRCULAR 230: To ensure compliance with requirements imposed by the IRS, we inform you that, while this document is not intended to provide tax advice, in the event that any information contained in this document is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein Wilmington Trust Company. All rights reserved. 17

18 DELAWARE vs. SOUTH DAKOTA TRUST LAW COMPARISON February 22, 2018 KEY DELAWARE ADVANTAGES Directed trust under long-standing Delaware practice/statute upheld by court trust instrument can bifurcate trustee s duties. South Dakota s statutes relatively new and untested Alter-ego theory under South Dakota statute, trustee of irrevocable trust may be deemed to be settlor s alter ego Lifetime marital-deduction and other trusts Delaware provides creditor protection for lifetime marital-deduction, credit-shelter, and other trusts Silent trust Delaware and South Dakota permit; Delaware legislation more comprehensive Delaware tax trap Delaware allows donee to exercise nongeneral power of appointment to spring Delaware tax trap and get stepped-up income-tax basis Nonjudicial settlement agreement/court petition trustee and other interested persons as well as beneficiaries must consent in Delaware; beneficiaries alone may modify or terminate trust in South Dakota so that testator s/settlor s wishes might be defeated Trust provisions Delaware more flexible Court system Delaware courts address trust matters promptly and efficiently Insurance trust Delaware has lowest premium tax in U.S. for large private placement policy Trust laws Delaware updates more promptly; South Dakota often copies Delaware legislation 18

19 COMPARISON OF DELAWARE AND SOUTH DAKOTA TRUST LAWS POINT OF LAW DELAWARE SOUTH DAKOTA Directed Trust Division of Trustee Duties Self-Settled Spendthrift Trust Since 1986 (codifying practice dating from early 20 th century) trust may designate person to direct trustee on investment, distribution, and other decisions. Directed trustee not liable for following direction or not taking specified action without direction of adviser except for wilful misconduct and has no duty to monitor adviser s activities. Adviser is fiduciary unless instrument provides otherwise and must furnish directed trustee with specified information (12 Del. C. 3301(g), 3313, 3317). Del. Court of Chancery enforced statute (Duemler, 2004 WL (Del. Ch. 2004)) statute extended directed trust to arrangement in which co-trustee rather than adviser holds power to direct (12 Del. C. 3313A). Since 1997 trust may designate person to direct trustee on investment, distribution, and other decisions. Directed trustee not liable for following direction and has no duty to monitor advisor s activities. Advisor is fiduciary unless instrument provides otherwise and must furnish directed trustee with specified information (S.D. Codified Laws 55-1B B-12, ). Asset Protection Trust (APT) Del. law recognizes domestic APT. Since 1997 creditor may reach settlor s interest only in limited circumstances under Qualified Dispositions in Trust Act (12 Del. C ). Del. Court of Chancery held creditors attempt to reach assets of Del. APTs created by nonresident to be time-barred (TrustCo, 2015 WL (Del. Ch. 2015)). South Dakota law recognizes domestic APT. Since 2005 creditor may reach settlor s interest only in limited circumstances under Delaware-based statutes (S.D. Codified Laws , , ). Alter-Ego Theory No Del. case/statute provides that trustee of irrevocable trust may be deemed to be settlor s alter ego. Since 2007 trustee of irrevocable trust may be deemed to be settlor s alter ego in certain circumstances (S.D. Codified Laws , ). Lifetime Marital- Deduction, Credit- Shelter, and Other Trusts Since 2009 creditor may not reach settlor s contingent interest in lifetime marital-deduction trust, credit-shelter trust, or other trust (12 Del. C. 3536(c)(1)). No statute. 1 Delaware courts give unpublished opinions substantial precedential weight (Crystallex, 879 F.3d 79, 85 n.8 (3d Cir. 2018)). 19

20 COMPARISON OF DELAWARE AND SOUTH DAKOTA TRUST LAWS continued POINT OF LAW DELAWARE South Dakota Disclosure to Beneficiary Silent Trust Rule Against Perpetuities Since 2003 trust instrument may restrict disclosure of information to beneficiary for period of time such as until beneficiary reaches specified age, death of settlor or spouse, end of term of years or arrival of specified date, or occurrence of specified event. Designated representative may represent and bind beneficiary in judicial or nonjudicial proceeding (12 Del. C. 3303, 3339). Absent such language, trustee must provide current beneficiary with relevant information about trust (McNeil, 798 A.2d 503 (Del. 2002)). Since 2009 trust instrument, settlor, distribution advisor, or trust protector may restrict disclosure of information to beneficiary. Absent such restriction, trustee must provide qualified beneficiary with relevant information about trust (S.D. Codified Laws ). Permissible Duration of Trust Since 1933 statute perpetual trust possible through exercise of Del. nongeneral power of appointment. Since 1995 statute trust interest in personal property may be perpetual; trust interest in real property must vest within 110 years after creation of interest (limitation may be avoided by putting interest in FLP, LLC, or other entity) (25 Del. C ). Since 1983 perpetual trust permitted (S.D. Codified Laws ). Delaware Tax Trap Nongeneral power of appointment may be exercised to spring Del. tax trap and get stepped-up income-tax basis (25 Del. C ). Nongeneral power of appointment may not be exercised to spring Del. tax trap and get stepped-up income-tax basis (S.D. Codified Laws ). 20

21 COMPARISON OF DELAWARE AND SOUTH DAKOTA TRUST LAWS continued POINT OF LAW DELAWARE SOUTH DAKOTA Modification of Trust Merger/ Combination Since 2005 trustee may merge old and new trusts unless merger would result in material change in dispositive terms of trust defining nature and extent of beneficiary s interest (12 Del. C. 3325(29)). Since 1998 trustee may merge trusts if does not impair beneficiaries rights or substantially affect accomplishment of trust purposes (S.D. Codified Laws ). Decanting Since 2003 trustee of testamentary or irrevocable inter vivos trust (including revocable trust in which settlor is incapacitated) with power to invade principal/income may distribute principal/income into second trust (which may be separate trust or first trust as modified) with same or more limited distribution standards and for benefit of all or fewer of beneficiaries of first trust (12 Del. C. 3528). Since 2007 trustee under governing instrument with power to invade income/principal may distribute income/principal into another trust with same or more limited distribution standards and for benefit of all or fewer of beneficiaries of first trust (S.D. Codified Laws ). Nonjudicial Settlement Agreement Since 2013 modification may not violate material purpose of trust and must be of type otherwise approvable by court. Trustee, specified beneficiaries, and other interested persons must consent (12 Del. C. 3338). Since 2016 irrevocable trust may be modified to include provision that could have been included in governing instrument created upon date of modification even if modification violates material purpose of trust. Settlor, all then serving fiduciaries, and all beneficiaries must provide written consent or nonobjection (12 Del. C. 3342). Since 1998 irrevocable trust may be modified or terminated if continuance of trust not necessary to carry out material purpose. All beneficiaries must consent (S.D. Codified Laws ). Because approval of settlor, trustee, or protector not required, beneficiaries might be able to undo perpetual trust, incentive provisions, or other wishes even if settlor objects. Also since 1998 irrevocable trust may be modified or terminated even if modification violates material purpose of trust. Settlor and all beneficiaries must consent (S.D. Codified Laws ). Court Petition Formalized in 2012 via Del. Ct. Ch. Rs , Del. Court of Chancery may modify trust under consent-petition procedure. Del. Court of Chancery denied petition to modify trust where modification would have departed from testator s intent (Flint, 118 A.3d 182 (Del. Ch. 2015)). Since 1998 court must affirm modification or termination of trust agreed to by all beneficiaries or may modify or partially terminate trust if not all beneficiaries consent (S.D. Codified Laws ). 21

22 COMPARISON OF DELAWARE AND SOUTH DAKOTA TRUST LAWS continued POINT OF LAW DELAWARE SOUTH DAKOTA No-Contest (In Terrorem) Clause Taxation of Trust Income Enforcement during lifetime of settlor. Since 2003 person barred from bringing judicial proceeding to contest validity of revocable trust, amendment to revocable trust, or irrevocable trust 120 days after notice by trustee (12 Del. C. 3546). Del. Supreme Court enforced statute (Ravet, 2015 WL (Del. 2015)). No-contest clause generally enforceable in Will or trust (12 Del. C. 3329). For nongrantor trust, tax is not payable and return is not due if trust has no Del. resident beneficiary. Combination of Del. s small population and its favorable rule for determining residence of future beneficiary means that few trusts created by nonresidents pay Del. income tax. For trust subject to tax, highest rate in 2018 is 6.60% (30 Del. C. 1102(a)(14), 1601(8), 1605(b), 1636). Enforcement during lifetime of settlor. Since 2013 person barred from bringing judicial proceeding to contest validity of revocable trust, amendment to revocable trust, or irrevocable trust 60 days after notice by trustee, trust advisor, trust protector, or settlor (S.D. Codified Laws ). S.D. Supreme Court enforced statute (Briggs, 898 N.W.2d 465 (S.D. 2017)). Since 1994 no-contest clause generally enforceable in Will (S.D. Codified Laws 29A-2-517, 29A-3-905); since 2012 nocontest clause generally enforceable in trust (S.D. Codified Laws ). No income tax imposed. Flexibility in Drafting Trust Provisions Since 2003 regardless of common law or other statute, governing instrument may expand, restrict, eliminate, or otherwise vary rights and interests of beneficiary. Specifically, trust may negate duty to diversify investments or defer age at which trustee must notify beneficiary of trust interest. Rule that statutes in derogation of common law are to be strictly construed not applicable. Policy is to give maximum effect to principle of freedom of disposition and to enforceability of governing instruments (12 Del. C. 3303(a)). Since 2015 governing instrument may expand, restrict, or eliminate provision of general application to trusts and trust administration (S.D. Codified Laws , ). 22

23 COMPARISON OF DELAWARE AND SOUTH DAKOTA TRUST LAWS continued POINT OF LAW DELAWARE SOUTH DAKOTA 2017 State Lawsuit Climate Ranking 2 Unitrust # 11. Judges are appointed by Governor with consent of Senate and must come as equally as possible from two major political parties (Del. Const. Art. IV, 3). Judges decide all trust issues. Del. trustee must be in office for Del. court to adjudicate trust matter (Peierls, 77 A.3d 223, 228 (Del. 2013)). Once Del. trustee is in place, Del. law governs administration unless governing instrument says another state s law applies in all circumstances (Peierls, 77 A.3d 249, 259 (Del. 2013)). Punitive damages may not be awarded in trust case. # 1. South Dakota law might not prevent individual trustees/beneficiaries from terminating $150,000,000 South Dakota dynasty trust within four years of creation (McDevitt, 2016 WL (D. S.C. 2016)), or hold individual trustees accountable for $600,000,000 of admitted investment losses in $1,000,000,000 charitable trust (Schwan, 880 N.W. 2d 88 (SD 2016)). Recognition of Trust Created as Unitrust Since % 5% range permitted includes tax-ordering rule (12 Del. C ). Since % 5% range permitted includes tax-ordering rule (S.D. Codified Laws ). Procedure for Converting Income Trust into Total- Return Unitrust Since % 5% range permitted includes tax-ordering rule (12 Del. C ). Since % 5% range permitted includes tax-ordering rule (S.D. Codified Laws ). Power to Adjust Between Income and Principal Under 104 of 1997 Uniform Principal and Income Act Rule Against Accumulations Since 2005 includes tax-ordering rule (12 Del. C ). Since 1986 no provision directing or authorizing accumulation of trust income is invalid (25 Del. C. 506). Since 2007 includes tax-ordering rule (S.D. Codified Laws 55-13A A-105). Since 2012 no provision directing or authorizing accumulation of trust income is invalid (S.D. Codified Laws ). 2 Based on data in U.S. Chamber of Commerce survey available at (last visited Feb. 22, 2018). 23

24 COMPARISON OF DELAWARE AND SOUTH DAKOTA TRUST LAWS continued POINT OF LAW DELAWARE SOUTH DAKOTA Third-Party Trust Enforcement of Spendthrift Clause By statute, trust income and principal not subject to voluntary or involuntary transfer. Amount that may be protected is not limited (12 Del. C. 3536). By caselaw, trust income may be reached for separate maintenance of current but not divorced spouse (Garretson, 306 A.2d 737 (Del. 1973)); possessor of tort claim is creditor barred by spendthrift clause, no publicpolicy exception for such claim, impoundment remedy not available (Mennen, 2017 WL (Del. 2017)). Trust income and principal not subject to voluntary or involuntary transfer. Amount that may be protected is not limited (S.D. Codified Laws , , , ). Discretionary Interest Since 2007 creditor may not compel distribution of discretionary interest. Court may change trustee s exercise of discretion only for abuse of discretion within meaning of Second Restatement of Trusts (12 Del. C. 3315, 3536). Since 2007 discretionary interest is not property interest or enforceable right it is mere expectancy. Creditor may not require trustee to make distribution or cause court to foreclose discretionary interest. Court may review trustee s distribution discretion only if trustee acts dishonestly, acts with improper motive, or fails to act (S.D. Codified Laws , , , ). Noncharitable Purpose Trust Insurance Trust Since 2007 perpetual trust for any noncharitable purpose is valid; separate common-law rule limiting duration of noncharitable purpose trust has been repealed (12 Del. C. 3556, 25 Del. C. 503(a)). Since 2008 perpetual purpose trust permitted; separate common-law rule limiting duration of noncharitable purpose trust has been repealed (S.D. Codified Laws , ; 2018 SD HB 1072, 2 20). Trustee Has Insurable Interest Since 1998 (18 Del. C. 2704(c)(5)). Since 2006 (S.D. Codified Laws (6)). Premium Tax Since 2016 has lowest premium tax in country for large private placement policy 0.0% on net premium over $100,000 (18 Del. C. 702(c)(3)). Since % on annual life premium over $100,000 (S.D. Codified Laws ). 24