The state of Delaware has long been one of the most favorable places to establish a business. But what many business owners don’t recognize is that Delaware can also be a good place to create a personal trust for estate planning or asset protection purposes, even if neither the business nor the business owner resides in Delaware.
Business owners typically face special challenges in structuring estate plans because of their unique need for control, asset protection, and confidentiality regarding their main asset, the family business. Home-state tax mitigation is also a common goal for many business owners. Fortunately, Delaware provides some special advantages to business owners who establish personal trusts under its laws. While not all of these advantages are unique to the state of Delaware, utilizing them with a trust located in Delaware may afford the business owner access to other benefits that this trust-friendly state has to offer.
Directed trusts help business owners maintain control of their greatest asset: the business
One of the biggest hurdles for business owners considering estate planning using personal trusts is the fear of giving up control over their most significant asset. After many years of leading their company, they are understandably reluctant to let anyone else make decisions about how it is managed as an asset.
Under most traditional trust structures, the trustee becomes responsible for assets placed in trust. The trustee has to make regular decisions about how to manage these assets—which can be particularly challenging when the primary asset is a closely held business. Because of its fiduciary duty to diversify the trust’s investments, a trustee may decide that a closely held business is not an appropriate investment for the trust, because it is undiversified and illiquid, and may decide to sell all or part of the ownership interest or manage it in a manner that is contrary to the family’s goals. This, typically, is not what most business owners want. However, these issues can be addressed by establishing a trust with a directed trustee feature. With this feature, the business owner may designate one or more advisors to make investment decisions for the trust that holds the business as its main asset, while having a Delaware administrative trustee perform the remaining duties of a trustee.
Delaware’s directed trust law provides:
- Freedom to engage in estate planning or asset protection planning using illiquid assets, such as stock in the family business, real estate, or hedge fund/private equity investments, when a trustee may otherwise be reluctant to hold these types of assets
- Flexibility for a trusted advisor or family member to retain control over a trustee’s investment or distribution decisions so that they can do what is best for the family/beneficiaries
Essentially, the directed trust splits fiduciary responsibilities, allowing the person who establishes the trust, often referred to as the settlor or grantor, to name his or her own investment advisor to manage the assets, while the trustee is responsible for other aspects of administering the trust. In many cases, the business owner-settlor may serve as his or her own investment advisor. The trustee can’t be held liable for the investment advisor’s actions unless the trustee engages in willful misconduct related to the investment process.
This structure is particularly beneficial for business owners who do not wish to divest the business interests held in the trust. The directed trust feature provides flexibility since it can be added to virtually any type of Delaware trust structure. Whether the goal is asset protection or a perpetual trust to save estate taxes, these trusts can be set up with an investment advisor directing the holdings and investment process.
Please see important disclosures at the end of the article.
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.