Delaware has had in effect since October 1, 1988, the Business Trust Act which expressly recognizes the Delaware business trust as an alternative form of entity. A Delaware business trust has been used in the place of a common law trust in many forms of asset-backed financing transactions. The certainty of using an entity which is governed by statutory law rather than the common law is an obvious advantage. However, the Business Trust Act offers several other advantages which are not as apparent. 

Common law trusts have been used for centuries to preserve and protect title to property and to minimize taxes on property. However, many of the common law rules of trust law are anachronistic and create uncertainty in the context of modern commercial transactions. The principal purpose of the Business Trust Act is to modernize the common law and provide certainty by codifying Delaware law with respect to the use of trusts in business transactions. 

The foremost advantage of the business trust is flexibility. The Business Trust Act permits the trust agreement of a business trust to establish whatever rights and obligations of the trustees and of the beneficial owners as are desirable. The voting rights of trustees or beneficial owners, or any class or series thereof, may be expanded, limited or eliminated with respect to virtually any matter relating to the business trust. This flexibility provides an advantage over alternative forms of business organizations and common law trusts which often are subject to mandatory provisions. 

A Delaware business trust also has advantages as a "bankruptcy-remote vehicle." The Business Trust Act states that the business trust is a separate legal entity, and that no creditor of a beneficial owner has any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the business trust. In addition, the Business Trust Act states that no beneficial owner has any interest in specific business trust property and may not terminate or revoke the trust except in accordance with the trust agreement. Thus, creditors of and other interested persons in the business trust have greater protection from the possibility of a partition of trust property or the premature termination of the business trust upon the insolvency or bankruptcy of a beneficial owner than in the case of an ordinary common law trust. 

A Delaware business trust may be merged or consolidated with, or converted into, a foreign or Delaware corporation, limited partnership, limited liability company or business trust pursuant to statutory procedures contained in the Business Trust Act. A merger, consolidation or conversion may be pre-authorized, or may be conditioned upon the approval of a specified class or percentage of trustees or beneficial owners, as set forth in the trust agreement of the business trust. 

There is no Delaware franchise tax on business trusts formed under the Business Trust Act. A business trust will be taxed for income tax purposes as a corporation, a partnership, a trust or otherwise as elected by the parties in accordance with the Internal Revenue Code and the check-the-box regulations thereunder. In addition, a Delaware business trust may qualify as a FASIT, a REMIC, a REIT or a regulated investment company under the Internal Revenue Code and receive preferential tax treatment. 

Another benefit of the Delaware business trust is that the beneficial owners can have the same limitations of personal liability as shareholders of a Delaware corporation. Further, the beneficial owners may participate in management and/or effectively control the business trust by directing the trustees without assuming personal liability. 

Except to the extent otherwise provided in the trust agreement, a business trust is managed by or under the direction of its trustees, who are not liable for the obligations of the business trust. The Business Trust Act provides that at least one trustee must be a Delaware resident. This requirement may be satisfied by engaging a trust company with its principal place of business in Delaware. The duties of the trustees may be specified in the trust agreement. Moreover, the trust agreement may provide for the appointment of managers, employees or other persons to manage the business trust with such rights, powers and duties as are set forth therein. 

To the extent that trustees or other persons who are responsible for managing the business trust have duties (including fiduciary duties) and liabilities relating thereto to the business trust or the beneficial owners, such persons duties may be expanded or restricted by the trust agreement. In addition, such persons shall not be liable for their good faith reliance on the provisions of the trust agreement. 

[ Tax News ] [ Income Tax Return 2008 ] [ Creative Year End Tax Planning ]

[ International Tax Planning Overview ] [ International Tax News ]

[ IRS Tax Audit Chances Likelihood ] [ Ground Lease Tax Deduction ]

[ Tax Terms Dictionary ] [ Tax Free Exchange ] [ Domestic Business Trust ]

[ International Business Trust ] [ Private Annuity Agreement ]

[ African Tax Planning ] [ North American Tax Planning ]

[ South American Tax Planning ] [ Tax Planning Websites ]

[ Tax Humor ] [ Tax Client Confidentiality ] [ Professional Fee Payment ]

[ Philippines Real Estate for Sale ]