How Does a Delaware Asset Protection Trust Work?

    The mechanics of creating a Delaware Asset Protection Trust are straightforward. The trust must be irrevocable, appoint at least one qualified Delaware trustee, contain a spendthrift clause and be governed by Delaware law. A qualified Delaware trustee is a Delaware resident or an entity authorized to act as trustee within the state. The grantor cannot serve as trustee.

    The trust can provide that the grantor receive income or principal pursuant to a standard set forth in the trust, upon the direction of a distribution advisor appointed in the trust, or in the discretion of the trustee. In addition, the grantor can retain various powers such as the power to veto distributions, direct investments or change trustees.

    A Delaware Asset Protection Trust can be structured in a number of ways for income, gift and estate tax purposes. For example, the trust can be structured as a completed gift in an attempt to place the assets, and any growth of the assets, outside of the grantor’s taxable estate. Alternatively, the trust can be established with no gift tax consequences to preserve the grantor’s gift tax exemption. This method will lead to the inclusion of the trust assets in the grantor’s estate. For income tax purposes, the trust may be a grantor trust or, depending on the distribution terms, the trust can be a separate tax entity and may be established to avoid state income tax. The ultimate makeup of the trust will depend upon the grantor’s overall wealth transfer, income and estate planning goals.