Citywealth IFC insights: Delaware – all the need to know information
In this IFC update, Citywealth focuses in on Delaware. We uncover the need-to-know information on DE, to understand why the majority of U.S. companies are incorporated in this small state on America’s east coast. An additional 250,000 new businesses were incorporated in Delaware in 2020, sending the total number of businesses registered in the state to over 1.6 million. For those outside of the U.S., it may seem a bit bizarre that the second smallest state is home to so many enormous businesses (Amazon, Google, American Express and Disney, to name a few), but Delaware has been laying the groundwork to become a business mecca since the early 1900s. Incorporating in Delaware affords tax benefits, privacy, speed of business, and a dedicated corporation court. For companies based in the U.S., it is hard to resist the pull of Delaware’s lenient tax policies and reduced restrictions.
Home to so many businesses: Amazon, Google, American Express and Disney
A quick Q&A
To gain a better understanding of the private client industry in Delaware, we spoke to Gregg Homan from JTC, who is based in their Wilmington office. As Head of Domestic Business Development in the Americas Private Client Services team, Gregg focuses on implementing strategies, complex trust structures, tax and estate planning.
What type of people use Delaware as a financial centre? Is it only Americans? If there is an international client base, which countries are most represented?
“While DE is certainly a financial centre – most of the companies in the US are incorporated in DE – JTC’s focus is primarily on the trust and estate space. DE is considered a top trust jurisdiction not just in the US but globally. Most of the people working with JTC in DE are attorneys, financial advisors, wire houses (GS, UBS, MS), RIAs and accountants and their personal clients.”
Gregg added that Delaware sees clients from all 50 states, but particularly those who are moving assets from high tax jurisdictions like California, New York, New Jersey and Illinois. Additionally, Delaware is seeing an increase in international clients moving assets to the U.S.
What is the temperature from advisors and clients regarding the upcoming election? How is it impacting future planning/instructions from clients?
“Wirehouse firms, planners and advisors are very interested in the upcoming election. The Trump tax cuts expire at the end of 2025 and given the political issues in Washington DC, there is a feeling that those tax cuts will expire lowering the exemption amount from $15m to $5m or $6m. They are planning for this today and we are encouraging clients and their advisors to take advantage of what they know in 2024 versus what could play out in 2025 or 2026. There is a general feeling that Trump will win but it be complicated by which party controls the House of Representatives and the Senate. US government debt, spending and international wars will remain a key theme throughout this year.”
What is contributing to Delaware’s growth as a financial centre?
“Delaware is growing a financial centre for a number of reasons:
- The Chancery Court. This is a special court overseeing both corporate matters and trust matters. Advisors and clients like having a court steeped in the matters that come before it – they are looking for a presumed outcome. DE has a body of law.
- The DE state legislature is very proactive and engaged.
- DE has modern trust provisions.
- DE has 0% capital gains tax.
- DE has the most trust professionals in the states – top drafting attorneys, top trust litigation attorneys, top trust officers and the top court.
- DE has never been black listed by any foreign government.”
How popular is crypto/digital assets as an investment area?
“While we have had conversations with advisors, we do not see much if anything in this space. Wyoming and Nevada have specific state statutes to deal with crypto / digital assets. Crypto and digital assets present a host of issues that create both reporting issues and source of funds issues.”
Are there any general developments regarding estate planning or tax planning?
“I highlighted above the political environment that will cause some issues later this year and next. States also continue to raise state income tax forcing people to consider moving or moving a majority of their assets out of that state.”
Significant growth in trusts
We also spoke to J. Zachary Haupt, Special Counsel at Morris Nichols Arsht & Tunnell. Zach’s practice focuses on advising individuals, institutional fiduciaries, private wealth managers, and their counsel on matters involving Delaware trusts and estates. He examines Delaware’s popularity through a trusts lens:
“While Delaware has been a popular trust jurisdiction for many decades, we have continued to see significant growth in recent years and expect that trend to continue for years to come for a variety of reasons. First, due to Delaware’s long history as a popular jurisdiction, the trust industry’s infrastructure is very well established. Delaware is home to many reputable trust companies, ranging from some of the world’s largest financial institutions to smaller, boutique companies that specialize in certain types of trusts. Additionally, many Delaware lawyers and law firms specialize in providing advice related to trust planning and administration, so there’s no shortage of highly capable advisers here in the First State.
Next, Delaware has a robust body of statutory and case law that both honors settlor intent and provides flexibility to deal with unforeseen circumstances and developments in the law. Due to Delaware’s size and political climate, Delaware is relatively nimble at updating its laws to remain on the cutting edge, but always in a way that is mindful of maintaining its reputation as a stable and reliable jurisdiction. Delaware law is consistently favored by settlors and beneficiaries for myriad reasons, chief among them being strong asset protection, the ability to create perpetual dynastic trusts, the ability to control what information is made available to beneficiaries, and the ability to bifurcate responsibilities among more than one fiduciary so that additional offices (such as investment advisers, distribution advisers and trust protectors) can be created and filled with the people who are best suited to fill those roles.
Court of Chancery has jurisdiction over trust-related matters
Delaware’s Court of Chancery has jurisdiction over trust matters in Delaware, further contributing to the state’s favorability as trust jurisdiction. Delaware’s Court of Chancery is the court that also presides over corporate disputes involving many Fortune 500 companies. So, when a trust becomes the subject of litigation in Delaware, the matter will invariably be presided over by a highly-esteemed jurist who will be very capable of understanding complex issues.
Finally, in addition to Delaware’s robust infrastructure, favorable laws and the Delaware Court of Chancery, another driver of Delaware’s consistent growth is the ability to use Delaware trusts in connection with tax planning. As a result of recent federal tax law changes, the United States transfer tax exemption was temporarily increased but will sunset under current law back to prior levels (tied to inflation) at the end of 2025. Consequently, high net worth clients with assets that are subject to the United States transfer tax regime have a temporary opportunity to utilize the greater exemption amount to transfer valuable assets from their estates transfer tax-free. Savvy clients aware of the coming changes are taking advantage of this opportunity by planning now using Delaware trusts to get ahead of the rush that will take place in 2025. Additionally, uncertainty regarding how the tax laws may change following the 2024 presidential election has caused clients to focus more acutely on their wealth and tax planning needs.”
Diving deeper – franchise taxation
As Gregg outlined above, incorporating in Delaware affords numerous benefits. As of 2023, Delaware’s corporate income tax is 8.70%, but there is no sales, personal property, VAT, inheritance, capital shares nor stock transfer taxation. Corporate income tax may not even apply, if a business does not conduct its operations in Delaware itself. Instead of owing income tax, Delaware corporations are able to pay franchise tax, which is a much lower rate.
In-state purchases are not subject to tax, whether the company’s physical location is in the state or not. Additionally, there is no state corporate income tax on goods and services provided by Delaware corporations to those operating outside of the state. Occasionally there may be county-level real estate property tax, but it is very low comparatively so corporations can own their own office spaces and reduce the amount of property tax compared to other states.
Banks and credit card companies incorporated in Delaware have more freedom to charge higher interest rates on loans, thanks to business-friendly usury laws in the state.
Corporations and the Chancery Court
Delaware’s Court of Chancery is a court of equity which resolves disputes between corporations in the state. It’s extensive set of precedents, statutes and case studies have evolved since its inception in 1792, making it an incredibly well-established court that provides an alternative to the traditional trial system. The court uses judges, who specialise in corporate law, instead of juries and allows for the prioritisation of corporate-related cases. Many of the decisions from the Court of Chancery have set precedents and benchmarks for corporate law across the U.S.
Instead of a traditional trial system, corporate lawsuits in Delaware are resolved by the Court of Chancery, a court made up of judges who specialize in corporate law. Because of this, Delaware has well-developed and predictable legal precedents that may benefit corporations. Where civil lawsuits may take years to determine, Court of Chancery cases can be in-and-out quickly.
Efficiency and privacy
Same-day business filings are common, with some incorporation processes taking place in less than an hour. Additionally, the law in Delaware allows one individual to hold multiple positions in the company, something that is only possible in other states with LLCs or sole proprietorships.
Privacy is also prioritised, as it is possible for businesses to choose not to disclose who their officers and directors are when they file documents at the time of the company’s formation.
Mr. Musk vs DE
As fantastic as Delaware can be for businesses, it has caught some heat in the media recently thanks to Elon Musk. Elon Musk‘s brain implant company, Neuralink Corp., has switched its incorporation from Delaware to Nevada following recent legal disputes. Most recently, a Delaware judge denied Musk’s $56bn Tesla Inc. pay package, leading to Musk taking to X to advise founders not to incorporate in DE.
The incorporation of X was also transferred from Delaware to Nevada when Musk acquired and rebranded it from Twitter. Nevada is likely the favoured option in this instance as its corporate laws provide more protection for executives against lawsuits from investors. Texas is also an option for those who are becoming frustrated with Delaware’s Court of Chancery. However, the general consensus seems to be that Delaware won’t be relinquishing its crown to Nevada or Texas anytime soon, as there are sure to be teething problems with these alternative options.
Corporate headlines aside, it is worth noting that Delaware might not be for everyone. For smaller businesses, the tax savings may not be significant. Whilst Delaware won’t come calling for tax payments from companies not doing business in the state, home states can still tax company income. For those who need to register their business in their home state, dealing in Delaware may result in twice the work and expense as home states will still expect annual reports to be filed with them (and payment of the accompanying filing fees). There may also be out-of-state business tax costs to consider, coming from the home state, on top of Delaware’s franchise tax. Whilst a fantastic option for many companies, it would be amiss for some companies to simply default to Delaware.
Citywealth recommends
For those looking for wealth management professionals in Delaware, Citywealth also recommends Jenny Smith, MDSU and Scott Swenson, Connolly Gallagher.
Jenny is a founding partner of MDSU and practices in the areas of estate planning, estate and trust administration, and wealth preservation. She advises clients on all aspects of estate planning, including wills, durable powers of attorney, healthcare directives, revocable trusts and probate. Jenny counsels families across the country about the advantages of Delaware trusts as part of a sophisticated plan for high net worth clients.
Scott focuses his practice on estate planning and settlement, estate and trust litigation, and advising trustees and other fiduciaries on matters including trust administration, trust modification, and risk management. He has represented a variety of institutional and individual clients, as fiduciaries and as beneficiaries, in trust and estate matters before the Court of Chancery and the Supreme Court of Delaware. His practice also includes taxation, alternative entities, non-profit organizations, tax controversies, and guardianship.
Key Takeaways
- Delaware is a leading jurisdiction for business incorporation due to its tax benefits, privacy, and fast processing times.
- The state registered over 1.6 million businesses, including major companies like Amazon and Google, highlighting its status as an IFC international financial centre.
- Delaware’s specialized Chancery Court and proactive legislature contribute to its growth as a financial hub.
- Advisors increasingly focus on wealth and estate planning, especially ahead of potential tax law changes in the 2024 election.
- Recent corporate controversies involving Elon Musk suggest Delaware may face competition but remains a top choice for many businesses.
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