Technical article

Why Delaware Taxes Some Trusts but Not Income Kept for Heirs Who Live Elsewhere

Under section 1636, a resident trust may deduct income set aside for future distribution to heirs who are not Delaware residents.

By Neil Solomon · 3 min read

Picture a couple in Florida with a trust and three grandchildren, one in Canada and two in England. The trust names a Delaware trust company as trustee. They wonder how the state treats the trust's income if the heirs all live elsewhere.

Delaware is different from the other states in this group. It applies its individual income tax to the taxable income of trusts. The fiduciary pays it. A resident trust starts from its federal taxable income and makes Delaware adjustments.

Then comes the deduction. Under section 1636, a resident trust may deduct income set aside for future distribution to heirs who are not Delaware residents. It applies under the trust's governing instrument. Income that is distributed is already relieved through the federal base. So income either paid out or kept for heirs elsewhere is not taxed by Delaware. The rules on living beneficiaries and classes of beneficiaries are set out in subsection (b) of that section.

What makes a trust resident. Delaware counts a trust as resident by three routes, in section 1601(8).

A Delaware trust company serving as sole trustee meets the trustee route. So the state of the settlor and the state of the trustee can each bring a trust under Delaware tax.

Who files. A resident trust files a Delaware return if it must file federally and has not distributed or set aside its whole taxable income to heirs outside the state. A non-resident trust files only if it has income from Delaware sources. So a trust that sends or sets aside all of its income for non-resident heirs may have nothing to file.

At death. Delaware has no estate tax for deaths after 31 December 2017, and no inheritance tax. This comes from a 2026 summary by Key Wealth, which is a tier B source. The residence and deduction rules come from the Delaware Code itself, tier A.

You might say: "A Delaware trustee means a Delaware tax bill." Not always. The sources show the trustee's home is only one route to resident status, and the deduction then removes the tax on income kept for heirs elsewhere. The federal side stays in place. Whether the trust counts as American or foreign for federal tax follows court supervision and who controls substantial decisions, not the state.

You could ask a few things. Does the trust meet any of the three routes? Which heirs are non-resident, and does the governing instrument describe them? How much income is set aside and how much is paid out? A comparison against Nevada, South Dakota and others can help, since eight of the nine states studied charge no income tax on trusts.

This touches the heirs abroad, who may owe tax in their own country on what they receive. It touches the trustee, whose address may decide residence. It touches the papers, because the instrument's wording decides what counts as set aside.

If you have used a Delaware trustee with heirs elsewhere, what did you learn from the first return? Share it here. Someone with the same setup may be glad to read it.

Figures are estimates for planning, based on public data. Date read: October 2026.