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What is a Delaware Statutory Trust?
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What is a Delaware Statutory Trust?


By Rick Bell Monday, May 18, 2009

what is a delaware statutory trustWhat is a Delaware Statutory Trust?

As early as the 16th century, the concept of property being held in trust by one person for the benefit of another was part of the English Common Law. For nearly 400 years, the common law trust has been utilized by lawyers, primarily for the benefit of extremely wealthy people who have cultivated a realm of trusts in order to pass ownership of assets from generation to generation with the least amount of taxation and the greatest degree of security in the process.

The Delaware statutory trust (DST), however, is a statutory entity, created by filing a Certificate of Trust with the Delaware Division of Corporations, and governed by Chapter 38, Part V, Title 12 of the annotated Delaware Code (See 12 §§ 3801 through 3862). Delaware is one of the few states in America to have a statutory trust law. Most states still rely upon common law trusts.

Common law trusts, though often still used, have many outdated rules, which can create uncertainty about a number of legal aspects of the trust. Delaware has undertaken the task of modernizing the common law and creating an effective and judicially secure form of entity.

The Statutory Trust Act, similar to the Delaware LLC law, relies on the legal principle of freedom of contract (See 12 § 3823(b)). This grants the power to determine the rights and responsibilities of the various parties to the drafters of the governing instrument, usually referred to as the trust agreement (See 12 §3801(f)). The trust agreement is the private, governing document of the entity. Delaware does not require the trust agreement to be filed (unlike several other states), and therefore the parties to the statutory trust and their relative duties and responsibilities can remain the secret of the parties involved (See 12 §3810).

The trust agreement is a definitive document, and Delaware law provides that the Delaware Court of Chancery will enforce its terms upon the trustees and beneficial owners (See 12 §3804). The trust agreemetn is a contract and it is enforceable. The trust agreement may create various classes or groups of trustees and/or beneficial owners (See 12 §3806). The trust agreement determines the nature of distributions of the trust's assets for the benefit of the beneficial owners (See 12 §3805). Trustees may have very broad powers or very limited powers, per the trust agreement, and they may delegate their duties and authority to officers, committees, agents or others named in the trust agreement (See 12 §3806).

There is no requirement for the trust agreement to be drafted in English, and no requirement to submit the document to any authority in Delaware for approval. There is no restriction as to the specific location in which the trust agreement must be kept, and no specific format or phraseology that must be taken into account. In fact, the drafters possess complete authority to devise the relationship of the trustee and the beneficial owners however they desire.

For example, the voting rights of the trustee or the beneficial owners may be expanded, limited or eliminated with respect to any matter relating to the trust, such as investment decisions or distribution decisions (See 12 §3806). This provides greater flexibility than common law trusts and most alternative forms of business organizations, which often have mandatory provisions on such matters as voting rights and dividend distribution.

The Delaware Statutory Trust Act (DSTA) states the trust is a separate legal entity and no creditor of a beneficial owner has any right to obtain possession of any of the property belonging to the trust (See 12 §3805(b)). The DSTA also states that a beneficial owner has no specific interest in the property of the trust (see 12 §3805(c), and the beneficial owner may not terminate the trust except in accordance with the private trust agreement (See 12 §3803). Thus, other beneficial owners of the trust are protected against any beneficial owner filing for bankruptcy or divorce, or undergoing any major life change.

Beneficial owners can have the same limitations on personal liability for the entity as shareholders of a Delaware corporation (See 12 §3803); that is, beneficial owners may participate in management, or effectively control the statutory trust by directing the trustees, without taking on any personal liability (See 12 §3806(a)).

Beneficial owners may transfer their interests to others, unless prohibited or limited by the trust agreement. Transferability will be permitted by the courts unless specifically limited in the trust agreement (See 12 §3805(d)).

Generally, the entity has two types of participants—trustees and beneficial owners. The trustee holds the legal title to the assets of the trust but is obligated to follow the terms of the trust agreement in managing these assets. The beneficial owners hold equitable ownership and they, too, are governed by the terms of the trust agreement as to their ability to manage, control or utilize the assets. Trustees and beneficial owners cannot be held liable for their good faith reliance on provisions of the trust agreement (See 12 §3802).

At least one trustee must be a resident of Delaware, which can be satisfied by naming a Delaware trust company or by forming a Delaware corporation to act as the trustee (See 12 §3807).

There is no Franchise Tax and no Delaware income tax on statutory trusts formed in Delaware. Under the United States' Internal Revenue Code, a business trust may be treated as a grantor trust, a partnership or an association, just as a corporation, depending on the wording of the trust agreement.  With check-the-box regulations in place, it is possible for a statutory trust to elect which type of tax structure under which it wishes to operate. Further, non-resident alien beneficiaries of self-settled trusts are not required to pay any income tax to or file any tax returns with the United States. See 26 CFR Section 1.6012-1(b)(2).

A Delaware statutory trust may qualify as a REMIC (Real Estate Management Investment Contract), a REIT (Real Estate Investment Trust), or a Regulated Investment Company, such as a mutual fund, under the IRC and receive preferential tax treatment. Mutual funds set up using a Delaware statutory trust may not be required to hold annual shareholder meetings or allow shareholder votes on any matters.

Delaware statutory trusts are often utilized for financing commercial airliners. The trust holds the title to the plane, which is managed administratively by a Delaware trust company. The airline is the beneficial owner, which uses and maintains the plane while paying a lender, who makes a return on the investment. This type of arrangement is sometimes called a leveraged lease; this way, none of the three possess responsibility for the plane itself, should an accident occur. This type of entity illustrates how much flexibility is permitted while still protecting the parties under a statute which respects their trust agreement and the good faith management decisions of the parties involved.

About Rick Bell

 

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