Hoping to join the ranks of the Cayman Islands and Guernsey, or more realistically, to compete effectively with South Dakota, Nevada, Wyoming, Delaware, Alaska and other states, for trust business, New Hampshire is in the process of radically revising its trust laws. The New Hampshire "Trust Modernization and Competition Act of 2006," which has unanimously passed both houses in differing versions, is awaiting reconciliation and the governor's signature, which should come by late May.
"Our explicit goal is to make New Hampshire the most attractive place for trusts and providing trusts services in the country, insofar as you can do it by statutes," says the act's primary draftsman, John Duncan of Duncan Associates in Chicago.
The act, at its core, contains several novel -- proponents say revolutionary -- provisions, which are making nationwide waves in the trust world.
First, trustees won't be liable for "reasonably determining" to diversify or concentrate as long as the decision is made in good faith. "As things go in trust law, this good faith provision for diversification decisions is dramatic," Duncan claims. Second, the act insists that all trustees and fiduciaries communicate information, something currently lacking from common law or even the Uniform Trust Code. Additionally, though the Uniform Trust Code has sanctioned the fiduciary power of nontrustees, only the New Hampshire act clarifies they have duties to the beneficiaries that correspond to their powers.
"In our view the breadth of this act is really what makes it different," says Duncan. "We have looked at all the other states, adopting what is best. And no other state has all of our provisions."
Hope...or Hype?
This quest for the best is based on an underlying economic hope: that New Hampshire can be the "go to" state for those seeking to establish trusts. The overall project is the brainchild of the Trust New Hampshire First, LLC, a consortium of individuals, corporations and business groups who wanted to modernize the state's trust laws to catapult the Granite State to the forefront of the trust business.
The economic rationale for such a project is bolstered by an analysis prepared by RKG associates, which the consortium commissioned. RKG found that if NH adopted trust laws similar to those of North Dakota or Delaware, it would generate between 900 and 3,000 new jobs, with new tax revenues of up to $ 3.6 million, relatively large numbers for a small state.
This analysis rests on key assumptions: New Hampshire will have the best statutes for a minimum of 18 months, and will revisit them when needed.
The changes by New Hampshire will undoubtedly trigger a legislative arms race as other states revise their laws to leapfrog NH's efforts. As these countermoves ripple across the country, experts in competing states are monitoring New Hamshire's move, offering their view of the likely fallout in their own states states, as well as the public policy implications for the nation.
STATES RESPOND
So what's the reaction in the three states known for their beneficial trust laws: Delaware, Alaska and South Dakota?
Delaware, known as the "first state" because it was the first to ratify the constitution, could have equally earned this nickname for its historic role in the trust world. The reason is obvious: "Delaware has been pioneering because of the DuPont family," says Peter Gordon of Gordon, Fournaris & Mammarella, PA, in Wilmington.
(Delaware has lagged a bit though in the private trust company arena for families. Out-of-state critics point to requirements -- for capital and the need to have an office in Delaware -- which are generally tailored to institutions not individuals). But in terms of commercial or institutional trusts, Delaware remains first-tier, allowing trustees unusual freedom to write agreements and to invest how they want. Most notably, according to Gordon, the settler of a Delaware trust can dictate the terms of the trust, and know that a trustee will implement those terms without fear of liability.
Thomas R. Pulsifer, partner at Morris, Nichols, Arsht & Tunnell LLP in Wilmington, offers details of what this flexibility can mean in practice. If the settler so desires, "trustees don't have to be constrained by 'prudence' in Delaware trusts. In most states trustees have to act financially prudently. In Delaware if you want to put all the assets in lottery tickets, you can do that." He points out that the DuPonts invested in the new and unsafe technology of gunpowder and did quite well.
Regarding New Hampshire's move, without commenting on specifics, Pulsifer notes that the Delaware legislature meets frequently and remains committed to keeping their jurisdiction attractive for trusts. "If we think they have made an improvement, we will match it."
Peter Gordon is equally untroubled. He points to Delaware's other not so secret weapon: its courts. "Our judicial system is ranked number one in the nation," he claims. Delaware judges have a long experience applying trust law. "In NH you may have to deal with judges who are new to this, you don't know what kind of decision you are going to get," Gordon says. "There is reason everyone is coming to Delaware."
Well, not everyone. Some head west -- far west.
Alaska jumped to the front of the trust-friendly pack when it enacted the landmark Alaska Trust Act in 1997 (the governor signed it on April Fool's day, points out Tom Pulsifer). In doing so, Alaska became the first state to codify a "self-settled spendthrift trust" a/k/a/ "Domestic Asset Protection Trust (DAPT)". The act provided breakthroughs in asset protection as well as tax reduction.
"Alaska's laws have been designed to attract persons who aren't Alaska residents who want to set up trusts in Alaska, as well as to benefit Alaskans," says David Shaftel of The Law Offices of David G. Shaftel, PC, in Anchorage. Though no longer the only state with DAPT legislation -- Delaware and then other states quickly copied it -- Shaftel asserts Alaska will remain competitive in designing laws to bring trust business in.
"States -- particularly smaller states -- seem to be watching each other and changing their laws in response" he notes, adding: "We are going to study New Hampshire and see if we can find ways to improve on them."
They won't be alone. Along with Delaware, South Dakota is particularly threatened by New Hampshire's bold play for trust business. New Hampshire is positioned to provide an alternative for commercial trust institutions to Delaware, and an alternative for private trust companies to South Dakota. .
"To be honest, when dealing with private family trust companies, catering to those families with over $100 million in assets has been the bulk of our business, says Al W. King III, Co-CEO of the South Dakota Trust Company, LLC. He points to specific aspects of South Dakotan law that make the state so attractive for these trusts: In addition to no state income tax and low tax on insurance premiums, he says "light regulation" and resident board member requirements decrease the chance of the corporate veil being pierced, compared to unregulated or non resident board member states. King asks, "Do families with that degree of wealth want to take any chances?"
Regulatory reform doesn't automatically translate into economic growth: There are now 23 dynasty trust jurisdictions, but the overwhelming majority of the dynasty business goes to just three or four states like South Dakota, Nevada and Wyoming. Similarly, even if New Hampshire matches all of South Dakota's laws, King questions whether the dynasty trust scenario will repeat itself in the family trust corporation arena, with South Dakota retaining most of its business, given New Hamphire's relative lack of experience.
However, he does concede that New Hampshire may be attractive for wealthy families from the region looking for local alternatives to family trust corporate states. Geography is destiny, and regionalism plays a role in the trust business. But, according to King, geography may work against New Hamphshire in the long, long run: "Do you really want to be in a coastal state, with the possible advent of global warming?
RACE TO THE BOTTOM?
Ultimately the quest to attract trust business is a zero sum game. Or negative sum for many of the attorneys involved, as trust lawyers will have to work with lawyers in other states, increasing the complexity of planning as well as cost to the clients, while decreasing their amount of control.
The larger issue is one of public policy: Is the competition essentially a race to the bottom, with damaging implications for the country on the whole?
John Duncan strongly disagrees: "Everything being proposed here is really good law in addition to being good for trust companies, trustees, families and beneficiaries." He adds the any unsafe or lax law is a risk not worth taking by any state -- it could result in a disaster, destroying or damaging the relatively new private trust company industry.
And the new New Hampshire provisions, as other states copy from the best of them, could lead to improvements nationwide, resulting in modernized laws. William Ardinger, legal and legislative counsel to Trust New Hampshire First says, "New Hampshire isn't leading a race to the bottom, it's leading a race to reform that is long overdue."
The act's immediate goals are less high-minded -- and very realizable. Says John Duncan, "every family looking for the best trust law, and every trust institution looking to deliver the best trust law, will need to consider New Hampshire."
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