The state of Delaware offers potential income tax advantages and has trust-friendly laws for individuals. These benefits aren’t limited to the residents of the state. Non-residents can use the state’s laws to their advantage by creating a trust fund in Delaware. One type of trust to consider opening is a Delaware grantor trust.
What is a Delaware Grantor Trust?
In simple terms, it’s a grantor trust that is established in the state of Delaware. All states have their laws and regulations regarding trust funds, and Delaware has been reforming their trust laws and regulations since their formal recognition of trusts in 1986.
A grantor trust is a type of living trust where the creator owns the trust’s assets and earnings for tax purposes only. Grantor trusts may be revocable or irrevocable trusts, allowing the grantor and beneficiaries to make that decision at the formation of the trust.
The grantor trust acts as a separate legal entity that protects the grantor’s assets and is used for planning the distribution of your estate after the grantor’s death. The grantor pays the income taxes earned from the trust, but the income is not considered part of their estate. Any income a grantor trust generates is distributed to the beneficiaries of the trust.
The Benefits of a Delaware Grantor Trust
Delaware grantor trusts offer possible benefits to the grantors and non-grantors of trust funds:
Savings on State Income Tax
State income taxes can slow a trust’s growth. Delaware does not treat the contributions of a grantor trust as a taxable gift. This means that income taxes do not have to be paid, which may allow your trust to grow faster. Delaware also doesn’t tax the income from your trust if you distribute it to non-resident beneficiaries.
Delaware trust laws give grantors more flexibility in terms of what can be invested. DE Code § 3302 (b) allows trusts to acquire any type of investment or asset as part of their investment portfolio. Stocks, bonds, mutual funds, and alternative investments can be included in your Delaware grantor trust.
Federal Income Tax Benefits
In Delaware, the grantor is considered the owner of the trust’s assets, income, and any deductions it may qualify for. This shields the non-grantor or beneficiaries of the trust from federal tax liability. Recent reform laws allow the grantor to receive reimbursement for the federal taxes they are liable for.
Other Types of Delaware Grantor Trusts
Some Delaware statutory trusts (DST) are considered a type of grantor trust. To qualify as a grantor trust, your DST must follow strict guidelines.
A DST is only considered a grantor trust when:
- No additional assets are purchased after the formation of the trust
- Leases and loans are not refinanced or renegotiated once the trust is formed
- The trust doesn’t receive any additional forms of capital
- Property assets aren’t sold and reinvested into the trust
- Earnings from the trust must be distributed to trust beneficiaries
Delaware statutory trusts that comply with these regulations are treated like grantor trust for tax purposes and receive the same state and federal tax benefits as Delaware grantor trust.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.