Delaware: Still A Great State, Just Don't Live There

Taking More of Your Money. When you and I have less income coming in, we cut our expenses and maybe use some savings. But, when government has less income, they take more of our income by raising taxes.

Reinstated Estate Tax. The Delaware legislature effective July 1, 2009 raised taxes by reinstituting an estate tax on its residents. There was a trend of some states, such as Virginia, in eliminating state estate taxes. This means that Delaware may no longer be a safe haven for retirees fleeing high tax Maryland and the District of Columbia.

Have they lost their minds? Does this mean Delaware is no longer a good place to set up a corporation, limited liability company or a trust? Most know that Delaware is where many major US corporations are “Delaware Corporations” to take advantage of Delaware corporate laws and a specialty court system well trained in commercial law. Delaware is also a top state for forming limited liability companies; we will discuss the advantages of Delaware LLCs in future blogs. We rely on Delaware politicians to provide us better law than we can get from our own politicians where we live. Delaware government receives substantial revenue from out of state business registrations and the selling of Delaware law employs thousands of people in Delaware. There is hot competition between Delaware and Alaska, Nevada and South Dakota for this business. It does raise suspicions about the ability of politicians in Delaware to keep from ruining the status of Delaware as one of the top tier states for planning.

Advantages. Delaware has many advantages for setting up your trust in Delaware:

*Keep the Family Business. The ability to use an Administrative Trustee which enables family to retain control of a real estate portfolio or a family business after the death of founder of the business or of a mini real estate empire.

*Avoid State Taxes. In Virginia, New York and certain other states, with a properly structured Delaware non grantor trust, you are able to avoid state capital gain taxes on sales of stocks held in a Delaware Trust by non residents.

*No Frontier Justice. The Delaware Court of Chancery has judges that enforce the law (not make it up as they go), understand complex structures, do not pander to local prejudices, and do not have their own agenda to “share the wealth”.

*Protect Your Assets. The ability to set up a trust and obtain certain asset protection and a limited ability to benefit from the income from the trust, available in only a hand full of other states.

*Build Generations of Accomplishment. The ability to have a trust that will last for several generations, something that can be done in Virginia and Maryland, and a minority of other states.

*Stop the Greedy Son in Law. The ability to set up a trust for a child and to avoid claims of the spouse of the child against the Delaware trust assets.

*A Century of Performance. Delaware has been a leader in trust law for over a century, unlike its competitors in Alaska and Nevada.

*Protect Bank Accounts. Establishment of bank accounts that may not be subject to the claims of creditors.

*Motivate New Wife and Kids of Former Wife to Cooperate. The opportunity to use total return trusts to reconcile the interests of a spouse of a second marriage and children of a prior marriage.

Residents Pay an Estate Tax. Is this all ruined by the new Delaware tax on estates? The Delaware tax applies to residents of Delaware. As a resident, you will be exempt from estate taxes on the first $3.5 million of assets in 2009, certainly better than the $1,000,000 limits of DC and Maryland. But, if the federal government allows the federal tax exemption go to $1,000,000 in 2011, then residents of Delaware will pay taxes on their estates greater than $1,000,000. The tax will range from 9.6% to 16%, should be deductable from federal tax, and results in an effective rate of 8.8% for the estates paying at the 45% federal rate.

Beware of the Non Resident Tax. It only applies to a non resident to the extent that the non resident has real estate or “tangible” property in Delaware and the non resident has an estate greater than the federal exemption. Tangible property are things you can touch such as an antique pool table, a mint condition yellow Edsel, a record cover autographed by Elvis, a 3rd century hand decorated Turkish bible, 12th century Japanese Samurai armor, first addition movie posters, platinum necklaces and your gun collection. Because of this new Delaware estate tax, you may want to avoid having a beach house in Delaware and will want to keep your collectables in Florida, where there is no estate tax, if you are subject to a federal estate tax. As a non resident, your stocks, bonds, checking accounts, insurance policies inside your Delaware Trust are not subject to this new estate tax.

Delaware is still a great state for planning, just don’t live there.