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© 2008 Northern Trust Corporation northerntrust.com The Northern Trust Experience A C C E S S. E X P E R T I S E. S E R V I C E. Daniel F. Lindley, President.

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Presentation on theme: "© 2008 Northern Trust Corporation northerntrust.com The Northern Trust Experience A C C E S S. E X P E R T I S E. S E R V I C E. Daniel F. Lindley, President."— Presentation transcript:

1 © 2008 Northern Trust Corporation northerntrust.com The Northern Trust Experience A C C E S S. E X P E R T I S E. S E R V I C E. Daniel F. Lindley, President The Northern Trust Company of Delaware Delaware: Still Expanding the Boundaries

2 The Northern Trust Experience Delaware Jeopardy Dating to 1682, from a deed to William Penn from the Duke of York, it separates Delaware from Pennsylvania and represents the only territorial border in the U.S. that is a true arc.

3 The Northern Trust Experience Delaware Jeopardy What is the Twelve-Mile Circle?

4 The Northern Trust Experience The Delaware Advantages Wealth Enhancement with Dynasty Trusts Savings on State Fiduciary Income Taxes Administrative Trusts with Third-Party Advisors Asset Protection through Self-Settled Trusts Freedom of Disposition

5 © 2008 Northern Trust Corporation northerntrust.com Dynasty Trusts

6 The Northern Trust Experience Dynasty Trusts: the Effect In 1995 Delaware repealed its Rule against Perpetuities for personal property held in trust. Without RAP, a Delaware dynasty trust can continue for countless generations. Assets transferred to a GST-exempt dynasty trust can benefit each successive generation of the grantors descendants without incurring any additional gift tax, estate tax or generation-skipping transfer tax.

7 The Northern Trust Experience Dynastic Purpose Trusts The dynasty format is useful for so-called purpose trusts. Based on 12 Del. C. § 3556, a purpose trust is a non-charitable trust with no readily identifiable person as a beneficiary. A person appointed by the trust or by the Court of Chancery may enforce the trust. Upon termination, the assets are distributable to designated beneficiaries or under the terms of the grantors will.

8 The Northern Trust Experience Dynastic Purpose Trusts Avoid taxable gift at inception by funding the purpose trust with a GRAT or CLAT remainder. Grantor or non-grantor trust treatment of income should be available during the grantors lifetime. Powers of trust advisors should be limited to avoid estate inclusion. At termination, GST consequences if the assets revert to the benefit of individual family members.

9 © 2008 Northern Trust Corporation northerntrust.com Delaware: Tax-Free Shopping (and Tax-Free Trusts)

10 The Northern Trust Experience Tax-Free Shopping (and Tax-Free Trusts)

11 The Northern Trust Experience Fiduciary Income Tax Savings Delaware does not impose a fiduciary income tax on irrevocable trusts for non-resident beneficiaries. Absent a taxable connection or nexus with another state, capital gains and ordinary income can accumulate in irrevocable Delaware trusts without incurring a state income tax.

12 The Northern Trust Experience Using a DING Trust to Avoid State Income Tax A grantor can contribute highly-appreciated assets to a Delaware asset protection trust to avoid paying state income tax to the grantors state of residence. To qualify for non-grantor treatment, the trust must have an adverse party – usually a Distribution Committee with the authority to approve distributions to the grantor or the grantors spouse.

13 The Northern Trust Experience Using a DING Trust to Avoid State Income Tax To avoid a completed gift on funding the trust, the grantor should retain a limited power of appointment. The Service has issued multiple PLRs supporting the non- grantor, incomplete gift nature of this sort of trust. PLR , , , , , , , and In a 7/07 notice, the Service asked for comment whether members of the Distribution Committee hold a general power of appointment.

14 The Northern Trust Experience Potential Tax Savings with a DING NYC resident owns $50MM of zero-basis stock in a closely-held corporation. Client plans to sell to a private equity firm for cash. Post-sale Value of Asset Delaware Trust = $42,500,000 New York Personal Assets = 37,251,000 Delaware Benefit = $ 5,249,000 Assumptions: Federal capital gains rate: 15.0%; NY state and city income tax rate: %; DE state fiduciary income tax rate: 0%. Actual results may vary from the illustration.

15 © 2008 Northern Trust Corporation northerntrust.com Administrative Trusts

16 The Northern Trust Experience Administrative Trusts Delaware law allows trustees to take direction from advisors (including investment and distribution advisors), without liability for their decisions or results. Administrative trusts represent a bifurcation of the trustees duties, not a delegation under the Uniform Prudent Investor Act.

17 The Northern Trust Experience Client Suitability Non-U.S. grantors who want to maintain a trust with a U.S. trustee but want the trust treated as a foreign trust for U.S. income tax purposes. By giving a non-U.S. person authority over substantial decisions involving a trust, the trust will fail the control test and qualify as a foreign trust (absent U.S. source income).

18 The Northern Trust Experience Client Suitability Non-U.S. grantors who want to create an irrevocable perpetual trust, for the benefit of U.S. beneficiaries, that is not subject to U.S. transfer taxes. In contrast with many offshore jurisdictions, which equate excessive settlor control with a sham trust, a direction trust legitimizes a settlors investment authority.

19 The Northern Trust Experience Asset Protection Trusts

20 The Northern Trust Experience Asset Protection Trusts In 1997 Delaware became the second state to permit an asset protection trust, a trust in which the grantor retains an interest as a beneficiary. Currently, eleven states permit asset protection trusts in some fashion: Delaware, Alaska, Rhode Island, Nevada, Utah, Missouri, Oklahoma, South Dakota, Tennessee, Wyoming and New Hampshire.

21 The Northern Trust Experience Asset Protection Trusts With a properly structured Delaware asset protection trust, the grantor may be a beneficiary of the trust and retain certain powers over the trust. A creditor of the grantor will not be able to reach the trust assets unless its claim is filed within the applicable tail period and it establishes that the funding of the trust was a fraudulent transfer.

22 The Northern Trust Experience Asset Protection Trusts A future creditor can prevail only by showing, with clear and convincing evidence, that the grantor actually intended to defraud that particular creditor by making a transfer of assets to the trust. A beneficiarys discretionary interest in a trust is not an enforceable property right and is not subject to compulsory distributions in favor of a creditor.

23 The Northern Trust Experience Exempt Claims Can Reach Trust A spouse or child with claims for alimony, support or a share of marital property is not subject to the tail period and does not have to prove a fraudulent transfer. A spouse does not include one who marries the grantor after the transfer to the trust.

24 The Northern Trust Experience The Problem

25 The Northern Trust Experience The Solution To Avoid

26 The Northern Trust Experience Premarital Planning Options Leave it to chance (and the judicial system) Use a revocable living trust Negotiate a prenuptial agreement Create a domestic asset protection trust

27 The Northern Trust Experience Planning Considerations: The Context DE APT A DE trust is unilateral in nature, with the client working out the details of the trust with counsel. PRENUPTIAL K A prenup requires the cooperation of both parties and their counsel to negotiate a host of delicate issues. Absence of independent counsel can render an agreement involuntary.

28 The Northern Trust Experience Planning Considerations: Disclosure DE APT The client need not disclose the existence of the APT or provide a schedule of pre- marital assets. PRENUPTIAL K Fair, reasonable and full disclosure of all assets is essential to validity of the agreement.

29 The Northern Trust Experience Planning Considerations: Emotional Aspects DE APT Without the need to disclose the existence of the trust, the client avoids the risk of an emotional discussion with the clients fiancé. PRENUPTIAL K Discussions of prenuptial agreements are often fraught with risk to the relationship, and may engender distrust and hostility.

30 The Northern Trust Experience Planning Considerations: Lifestyle Issues

31 The Northern Trust Experience Planning Considerations: Lifestyle Issues DE APT A trust provides protection for premarital assets without delving into a host of unrelated social issues. PRENUPTIAL K It is not unusual for a prenup to encompass lifestyle issues such as parenting obligations, use of last names, relations with in-laws, birth control (or not), and other assorted areas of contention.

32 The Northern Trust Experience Planning Consideration: Estate Issues DE APT Under Delaware law, a trust is not subject to a spouses claims for an elective share or forced heirship. 12 Del. C. § PRENUPTIAL K Unless an agreement specifically excludes a spouses elective share, the estate of a deceased client remains subject to spousal claims, potentially up to 50% of decedents estate.

33 The Northern Trust Experience Enforcement: Bases for Challenge DE APT A premarital APT is subject only to a claim that the grantor actually intended to defraud his or her future spouse. PRENUPTIAL K A prenup can be challenged if it was involuntary (duress, fraud, undue influence or lack of capacity), unconscionable or lacking in meaningful financial disclosure.

34 The Northern Trust Experience Enforcement: Duration of the Solution DE APT A premarital APT is subject to challenge only during the four-year tail period. PRENUPTIAL K A prenup will remain vulnerable to challenge throughout the marriage. State law often tolls the statute of limitations. One party may seek a sunset clause to terminate the prenup after, say, 5 years of marriage.

35 The Northern Trust Experience Freedom of Disposition

36 The Northern Trust Experience Freedom of Disposition: Confidentiality

37 The Northern Trust Experience Freedom of Disposition: Confidentiality Delaware trusts are not subject to any public registration or filing requirements. In the event of litigation, the Court of Chancery routinely seals the record of trust proceedings. Delaware law even permits a trustee to withhold knowledge of a trusts existence from future or discretionary beneficiaries, if the grantor so directs. 12 Del. C. § 3303(a).

38 The Northern Trust Experience Freedom of Disposition Enforcement of in terrorem clauses: 12 Del. C. § Beneficiary must substantially prevail to avoid disqualifying effect. Decanting Existing Trusts: 12 Del. C. § Using discretionary power to distribute principal into a follow-on trust for the benefit of one or more proper objects.

39 The Northern Trust Experience Decanting Trusts Dividing an existing trust into separate trusts to preserve NOLs that the trusts primary asset would have had to forfeit. Eliminating mandatory principal distributions with a trust whose value had grown unexpectedly large. Eliminating an estranged daughters eligibility as a potential taker after the income beneficiarys death.

40 The Northern Trust Experience Concluding Thoughts

41 The Northern Trust Experience Other Jurisdictions (AK? NV? SD?) In contrast to the judicial system in other states, Delaware has a separate court of equity, a non-jury court, with exclusive jurisdiction over trust matters. The Delaware General Assembly revises Delawares trust laws annually to ensure that they remain effective and flexible.

42 The Northern Trust Experience Profile of Delaware Office The Delaware office opened September 30, 2004 as a trust office of Northern Trust Bank, FSB. Since 1/1/06 Northerns Delaware office has operated as a Delaware limited purpose trust company – The Northern Trust Company of Delaware. As of June 30, 2008, the Delaware office held in excess of $4.3 billion in assets under administration.

43 © 2008 Northern Trust Corporation northerntrust.com Thank You Delaware: Still Expanding the Boundaries


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