Delaware Estate Planning:
Premier Trust Jurisdiction

Delaware Asset Protection Trust (DAPT)

Delaware was one of the first states to enact domestic asset protection trust legislation, codified in 12 Del. C. Ch. 35 (the Qualified Dispositions in Trust Act). I advise clients on whether a Delaware DAPT is appropriate based on their specific creditor exposure profile and domicile state.

Self-Settled Asset Protection

Under traditional trust law, a grantor cannot create a spendthrift trust for their own benefit and shield assets from creditors. Delaware changed this rule. A DAPT allows the grantor to be a discretionary beneficiary of their own irrevocable trust while protecting trust assets from the grantor's future creditors. This is a powerful planning tool for professionals in high-liability fields (physicians, real estate developers, business owners).

4-Year Lookback Period

For creditors whose claims existed before the transfer to the DAPT, Delaware imposes a 4-year statute of limitations. Specifically:

• Existing creditors have 4 years from the date of the qualified disposition to bring a fraudulent transfer claim
• Alternatively, they have 1 year from the date the transfer was or could reasonably have been discovered, whichever is later
• After the lookback period expires, existing creditor claims are barred
• Future creditors (claims arising after the transfer) generally cannot reach trust assets
• Child support and alimony obligations are exceptions and cannot be avoided through a DAPT

Qualified Trustee Requirement

The DAPT must have at least one qualified trustee who is either:

• An individual resident of Delaware (other than the grantor)
• A Delaware entity (bank, trust company, or other entity authorized under Delaware law)

The qualified trustee must maintain or have custody of some trust property in Delaware and must maintain trust records in Delaware.

Cannot Defraud Existing Creditors

Critically, a DAPT cannot be used to defraud known existing creditors. If the transfer is made with actual intent to hinder, delay, or defraud a creditor, or if the grantor was insolvent at the time of transfer (or rendered insolvent by the transfer), the transfer may be set aside under Delaware's fraudulent transfer law. The DAPT protects against future claims — it is not a tool for evading existing obligations.

Multi-State DAPT Comparison

DING Trust: Delaware Incomplete Non-Grantor Trust

The DING trust is one of the most sophisticated state income tax planning vehicles available. I explain the structure, mechanics, and critical limitations including the California SB 131 issue that has closed this strategy for California residents.

Structure and Mechanics

A DING trust is an irrevocable trust established under Delaware law with the following key structural features:

• Incomplete Gift: The grantor retains sufficient powers (typically a limited testamentary power of appointment among a class of beneficiaries, plus the power to substitute assets of equivalent value) so that the transfer is treated as an "incomplete gift" for federal gift tax purposes. No gift tax is due on funding.
• Non-Grantor Trust for State Tax: Despite the retained powers, the trust is structured so that it is treated as a non-grantor trust for state income tax purposes. This means the trust (not the grantor) is the taxpayer.
• Delaware Situs: With a Delaware trustee and Delaware situs, the trust's investment income (interest, dividends, capital gains) is not subject to state income tax because Delaware does not tax non-resident trust income.

Federal Tax Treatment

• Gift Tax: No gift tax because the gift is incomplete (grantor retains sufficient powers)
• Income Tax: The trust is a grantor trust for federal income tax purposes, so income is reported on the grantor's federal return. This is the key distinction — for federal purposes, the grantor pays the tax; for state purposes, the trust is the taxpayer.
• Estate Tax: With proper structuring, trust assets may be excluded from the grantor's estate (though this depends on the specific powers retained and IRS scrutiny is increasing)

Who Benefits from a DING Trust?

DING trusts are most beneficial for residents of high-income-tax states who have significant investment income. The primary candidates include residents of:

• New York (10.9%) — currently the primary market for DING trusts
• New Jersey (10.75%) — significant savings potential
• Minnesota (9.85%) — effective for high-income taxpayers
• Oregon (9.9%) — particularly for capital gains income
• Massachusetts (9% with surtax) — new surtax makes DING trusts more attractive
• Connecticut (6.99%) — moderate but meaningful savings on large portfolios

New York Considerations

New York remains the largest market for DING trusts, but practitioners should be aware of increasing scrutiny. The New York Department of Taxation and Finance has issued guidance (TSB-A-15(4)I) acknowledging that properly structured DING trusts can avoid New York income tax, but the IRS position on the federal side (particularly regarding estate inclusion) continues to evolve. Private letter rulings (including PLR 200148028 and PLR 200729005) have addressed various aspects of incomplete gift trust structures.

IRS Scrutiny

The IRS has increased scrutiny of DING trusts in recent years. Key considerations include:

• The IRS may challenge the characterization of the gift as "incomplete" if the retained powers are insufficient
• Estate inclusion under IRC §§ 2036 or 2038 is a risk if the grantor retains too much control
• Obtaining a private letter ruling is recommended but not required
• Proper drafting by experienced trust counsel is essential

Delaware Dynasty Trust Planning

Delaware's abolition of the Rule Against Perpetuities makes it the premier jurisdiction for dynasty trust planning. I help clients structure perpetual trusts that preserve wealth across unlimited generations with maximum tax efficiency.

No Rule Against Perpetuities

Under 25 Del. C. § 503(a), Delaware has abolished the Rule Against Perpetuities for personal property held in trust. This means:

• Trusts can last indefinitely — there is no maximum duration
• Real property in Delaware is also exempt from RAP restrictions
• Trusts created in other states can be migrated to Delaware through decanting or trust modification to take advantage of perpetual duration

GST Exemption Allocation Strategy

The generation-skipping transfer (GST) tax exemption is the key to dynasty trust planning. Here is how the allocation works:

• The grantor allocates their GST exemption ($13.61 million in 2024 / $13.99 million in 2025) to the dynasty trust on a timely filed Form 709 (gift tax return)
• Once allocated, the trust has an "inclusion ratio" of zero, meaning all distributions to skip persons (grandchildren and below) are GST-tax-free
• All future growth, income, and appreciation inside the trust compounds free of GST tax
• In a perpetual trust, this tax-free compounding can shelter hundreds of millions (or billions) of dollars over multiple generations

Directed Trust Structure

I typically recommend structuring Delaware dynasty trusts as directed trusts under 12 Del. C. Ch. 33A:

• Corporate Trustee (Delaware trust company) handles administrative duties, custody, and tax reporting
• Investment Direction Advisor (family member, family office, or investment advisor) makes investment decisions — this keeps investment control within the family
• Distribution Direction Advisor (family member or trusted advisor) directs distributions to beneficiaries based on evolving family needs
• Trust Protector adapts the trust to changing laws, family circumstances, and tax environments over the trust's perpetual duration

Trust Protector Powers

For a dynasty trust designed to last indefinitely, the trust protector role is critical. Typical powers include:

• Amending administrative and investment provisions
• Changing trust situs and governing law
• Adding or removing beneficiaries
• Converting between grantor and non-grantor trust status
• Modifying distribution standards
• Replacing trustees and advisors
• Vetoing distributions

Multi-State Dynasty Trust Comparison

Delaware Transfer Tax & Real Property

While Delaware excels as a trust jurisdiction, its realty transfer tax is among the highest in the nation. I help clients understand and plan for the 4% state transfer tax plus county taxes on real property transactions.

State Transfer Tax: 4%

Delaware imposes a 4% realty transfer tax on transfers of real property. This rate applies to the full consideration (sale price) or fair market value of the property. The tax is among the highest state transfer tax rates in the United States.

• Standard split: 2.5% from the seller, 1.5% from the buyer
• Customizable: The buyer-seller split can be negotiated and modified by agreement
• Applies to: Deeds, transfers of controlling interests in entities holding real property, and certain long-term leases

County Transfer Tax

Each of Delaware's three counties imposes an additional 1.5% transfer tax:

• New Castle County: 1.5% (additional)
• Kent County: 1.5% (additional)
• Sussex County: 1.5% (additional)

Combined state + county rate is typically 5.5% for most residential transactions in all three counties.

First-Time Homebuyer Program

First-time homebuyers in Delaware may qualify for a realty transfer tax credit under the Delaware State Housing Authority (DSHA) program. Key requirements include:

• Buyer must not have owned a home in the past 3 years
• Property must be the buyer's primary residence
• Income and purchase price limits may apply depending on the specific program
• The credit can significantly reduce the buyer's 1.5% share of the state transfer tax

Exemptions from Transfer Tax

Certain transfers are exempt from Delaware's realty transfer tax in whole or in part:

• Spousal transfers: Transfers between spouses are generally exempt
• Divorce transfers: Transfers incident to a divorce decree are exempt
• Family death transfers: Transfers to certain family members upon death may be exempt from the county portion of the transfer tax
• Government transfers: Transfers to or from governmental entities
• Charitable transfers: Transfers to qualified charitable organizations
• Trust transfers: Certain transfers involving trusts where beneficial ownership does not change (e.g., transfers to a revocable living trust)
• Nominal consideration: Transfers for $0 or nominal consideration may still be taxed on fair market value — consult before assuming an exemption applies

Planning Considerations

Given the high combined transfer tax rate (5.5%), real property planning in Delaware requires careful consideration:

• Structure entity transfers carefully — transfers of controlling interests in entities holding Delaware real property trigger transfer tax
• Consider holding periods and exit strategies when acquiring Delaware investment property
• Negotiate the buyer-seller split as part of the purchase agreement
• Factor the 5.5% rate into investment property return calculations

Court of Chancery & Trust Administration

The Delaware Court of Chancery is one of the most significant advantages of establishing trust situs in Delaware. I consider the availability of this court system a major factor when recommending Delaware over competing trust jurisdictions.

Expert Court for Trust and Entity Disputes

Established in 1792, the Court of Chancery is a dedicated equity court that handles corporate governance, trust, fiduciary, and partnership disputes. Key features:

• No jury trials: All cases are decided by the chancellor and four vice-chancellors, who are experienced equity judges with deep expertise in trust, fiduciary, and entity law
• Specialized expertise: The judges handle trust and entity disputes daily, resulting in sophisticated and well-reasoned opinions
• Extensive precedent: Over 200 years of trust and equity jurisprudence provides predictability that no other state can match
• Expedited proceedings: The court can accommodate expedited schedules for urgent trust matters, including temporary restraining orders and injunctions

Privacy Protections

Trust proceedings in the Court of Chancery can be conducted with significant privacy protections:

• Trust accountings and inventories are not public records
• Parties can seek confidential treatment of sensitive financial information
• Settlement agreements can remain sealed
• Compared to states where probate records are entirely public, Delaware offers meaningful privacy for high-net-worth families

Why This Matters for Trust Planning

For trusts designed to last perpetually (dynasty trusts), disputes are inevitable over decades and centuries. Having access to the Court of Chancery means:

• Trust construction disputes are resolved by judges who understand complex trust instruments
• Fiduciary duty claims against trustees are evaluated against a well-developed body of law
• Trust modification and reformation petitions are handled by judges familiar with modern trust law
• Investment standard disputes (prudent investor rule) benefit from sophisticated judicial analysis
• Trust decanting disputes have meaningful precedent to guide outcomes

Trust Administration in Delaware

Delaware's trust administration framework is designed for efficiency:

• No registration requirement: Delaware does not require trusts to be registered with a court or government agency
• Flexible trustee succession: Trust instruments can provide for trustee succession without court involvement
• Nonjudicial settlement agreements: Under 12 Del. C. § 3338, interested parties can resolve trust disputes through nonjudicial settlement agreements without court approval
• Virtual representation: Delaware's virtual representation statute allows fewer parties to bind the interests of future or unascertainable beneficiaries, simplifying trust proceedings