When it’s time to choose the best trust jurisdiction, there is only one choice: DELAWAREOctober, 2013
By Richard P. Trumpler, TEP.
Each year several experts create lists of the most favorable trust jurisdictions. These lists currently conclude that approximately a dozen jurisdictions are “best”. They then attempt to parse the nuances of each of the top jurisdictions’ laws to create a ranking within the list of the “best”. These rankings typically delve deeply into the crevices of various asset protection statutes or the relative merits of 1000 year dynasty trusts versus 365 year dynasty trusts.
These comparisons are legal exercises that fascinate law professors and those who enjoy attending the proliferation of webinars they engender; however they completely miss the point of trust jurisdiction selection. The point of the exercise is to choose a jurisdiction for families who are making financial decisions that will affect several generations. Such families and their lawyers simply want to know which is the best jurisdiction to house their trust.
Only one state, Delaware, has the combination of characteristics that makes it the hands down winner in this competition for trust business.
The primary intent of the more progressive states’ legislators and trust and estates bar is a conscious economic decision to create jobs in those states. Delaware, for example, has a population of approximately 900,000 people. This population does not need 53 financial institutions with trust powers to serve its needs. Delaware has very consciously created a legal, statutory and judicial environment to attract trust business as a tool for economic development. For example, the Delaware legislature has led the way in:
- allowing trustees to share their duties with investment advisors, distribution advisors and trust protectors through the creation of the “Directed” trustee
- allowing perpetual trusts, thereby eliminating the rule against perpetuities as it applies to trusts
- enacting the prudent investor rule, long before the Uniform Prudent Investors Act
- allowing self-settled and other asset protection trusts
- allowing traditional net income trusts to easily convert to total return trusts without court intervention
- allowing perpetual non-charitable purpose trusts
- allowing trusts for non-residents to accumulate income free from Delaware state income tax
- allowing the modification of existing trusts to create new, flexible, revised trusts through “decanting”
- allowing the grantor to determine whether to maintain the confidentiality or to disclosure trust information.
Delaware’s decision to become the leading trust jurisdiction did not occur in a vacuum. Not only does Delaware have a long history of legislating fiduciary affairs in a variety of contexts, it has consciously decided as a matter of public policy to lead the country in a number of fiduciary and financial service areas to support its economy during the last 100 years.
- Delaware is well known as the leading jurisdiction for incorporation, serving as the home for more than 1 million corporations operating around the globe. More than half of new corporations have international roots.
- It has led the way in the development of alternative entities such as LLCs, LPs, LLPs and statutory trusts. Its Division of Corporations is the acknowledged leader of government corporate services.
- One of the many collateral effects of Delaware’s status as the best place to incorporate is that it has also become a leading jurisdiction for companies to file bankruptcy petitions. Under federal bankruptcy law the jurisdiction where a company is incorporated is one of the jurisdictions it may choose for bankruptcy protection. The Delaware bankruptcy court, with the support of the Delaware bar, has aggressively sought to facilitate these filings with expedited procedures. Delaware’s congressional delegation has also contributed to this advantage by assuring that the court includes competent judges and has worked to expand the size of the court to meet the demand.
- Delaware has aggressively established a reputation as the jurisdiction to settle intellectual property disputes for Delaware incorporated companies. Its bench and bar are acknowledged leaders in intellectual property jurisprudence.
- In the early ‘80s Delaware decided that it should become the leading jurisdiction for the issuance of credit cards. It passed the Financial Center Development Act in 1981 for this purpose and every major credit card company chose to issue their cards from Delaware. At its peak, this industry created 30,000 Delaware jobs.
- Delaware has no state sales tax. This legislative decision draws shoppers from neighboring states and creates an ideal environment for retail stores to locate in Delaware.
However, the primary reason that Delaware is the best jurisdiction for trust situs is its Chancery Court. Delaware’s Chancery Court began in 1792, before the other top tier states’ trust statutes existed.
- The Chancellor and four Vice-chancellors are chosen to twelve year terms by the Governor, but the composition of the court must be politically balanced between political parties and among Delaware’s three counties.
- The Court has exclusive jurisdiction over disputes involving trusts and estates. Its docket does not include any cases seeking money damages and it handles no criminal matters.
- It does not allow jury trials,
- It allows for the sealing of confidential records
- It has the capacity to bring cases to trial and decision very quickly
- It is a part of a judicial system that is routinely ranked as best in the country by the U.S. Chamber of Commerce.
- It has been hearing cases about trust and estate disputes for more than 200 years. All of its decisions are eligible for review by the Delaware Supreme Court. When other courts look for guidance about fiduciary disputes, they turn to Delaware’s Chancery Court.
If there are any doubts about Delaware’s standing as the leading jurisdiction for trust administration, those doubts can be quickly dismissed by reviewing the market’s acceptance of Delaware’s leadership:
- Fifty three financial institutions with trust powers have an office in Delaware to provide trust services. They include all of the leaders in the industry. No other jurisdiction can match the expertise, breadth and scope of services provided by these firms.
- Non-resident personal trusts contribute $1.1 billion to Delaware’s economy. Delaware institutions receive $300 million in trustee fees each year from personal trusts.
- The Delaware Bankers Association sponsors an annual two day conference for its membership which only discusses Delaware trust law. In 2012, it was attended by over 250 Delaware trust professionals.
Perhaps there can be technical quibbling about which state has the best asset protection statute or the best dynasty trust statute. There can be no quibbling about the best state to situs a personal trust when the entire package of issues, beyond the technical confines of statutory minutiae is considered. Just as Delaware led all other states to approve the U.S. Constitution, Delaware has led all efforts to modernize the law of personal trusts. Delaware has the best court to resolve trust disputes. Delaware is the best location for a trust company. Delaware is the best situs for a personal trust.
When it’s time to choose the best trust jurisdiction, there is only one choice: DELAWARE