Author’s Synopsis: Section 2041(a)(3) of the Internal Revenue Code is referred to as the Delaware Tax Trap. Despite its pejorative name, the Delaware Tax Trap can be a great tool for generating tax savings with respect to trust assets under the right circumstances. However, it is not as readily available as one might think. This Article explores important and often overlooked obstacles that limit its applicability so that practitioners can better identify circumstances in which springing the Trap is an option.
The Delaware Tax Trap was originally viewed as a highly punitive provision of the Internal Revenue Code (Code) that was to be avoided at all costs. Over time, however, as exemption amounts have increased, it has been re-branded as a clever estate planning tool that can generate significant tax savings under the right circumstances. In light of its newfound popularity and the frequency with which it is now discussed in articles and presentations, one would be forgiven for thinking that the Delaware Tax Trap is a ubiquitous planning device used by trust and estate attorneys on a regular basis. In reality, however, there are two important and often over-looked obstacles that limit its applicability. This Article will describe those obstacles so that practitioners can better identify circumstances in which springing the Delaware Tax Trap is a viable option.