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Podcast: New Hampshire's Trust Advantages

Thanda Fields Brassard

By Thanda Fields Brassard

Vice President & Trust Counsel; General Counsel, Fiduciary Trust of New England

New Hampshire Mountain

For families with assets to protect or a desire to pass wealth to future generations, trusts are a common estate planning vehicle. However, many individuals are not aware of the benefits a New Hampshire trust can offer, regardless of a grantor or beneficiary’s state of residence. The advantages range from no state income or capital gains tax to perpetual trusts and beyond.

In this podcast, Thanda Brassard, General Counsel of New Hampshire-chartered Fiduciary Trust of New England, details the benefits of New Hampshire trusts.

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Transcript

 

Todd Eckler – Welcome to this edition of Fiduciary Insights. Today we’ll be discussing the tax and other advantages of establishing or migrating a trust to New Hampshire, an approach that can benefit individuals nationwide. I’m Todd Eckler, Chief Marketing Officer at Fiduciary Trust Company, which is headquartered in Boston, and I’m joined today by Thanda Brassard, the General Counsel of Fiduciary Trust of New England, our New Hampshire affiliate. Thanda, when choosing a trust jurisdiction, clearly it’s important to understand the advantages today, which we’ll discuss in a moment. But I think it’s equally important to understand what the future holds. What’s been the motivation of the New Hampshire legislature in terms of evolving its trust law over time?

Thanda Fields Brassard – Thanks, Todd. Well, New Hampshire has always been a state with progressive trust laws that focus on carrying out donor intent. New Hampshire has always had good case law, too, which supports this. But in 2006 the New Hampshire legislature passed the Trust Modernization and Competitiveness Act, and that really catapulted New Hampshire into the front of the pack of states with some of the best trust laws in the nation. And over the past decade, New Hampshire has continued to thoughtfully and carefully improve its trust laws every year to become one of the top states to administer a trust.

Todd– It’s great to hear that the New Hampshire legislature has embraced staying on the forefront of the advantageous trust laws. So what are the key advantages of New Hampshire trusts today?

Thanda– Today in 2019, clients establish New Hampshire trusts or migrate trusts to New Hampshire to take advantage of the numerous benefits available for trusts administered there, which include: no tax on accumulated income or capital gains for irrevocable, non-grantor trusts; some of the best, most progressive trust laws in the nation, which allow for creation of the following types of trusts and wealth-management vehicles: perpetual or dynasty trusts (those are trusts which continue indefinitely and do not terminate within a mandated time period); quiet trusts; self-settled protection trusts; civil law foundations (New Hampshire was the first state to permit creation of these, we’ll talk about them a little later); regulated and unregulated family trust companies; directed and divided trusts; and total return trusts.

Thanda– New Hampshire also has some of the best laws for administering trusts, which allow for such concepts as virtual representation; trustee modification by statute without beneficiary consent; pre-mortem validation of trusts (so that’s validating a trust prior to death through a statutory process); unitrusts and the trustee power to adjust under the New Hampshire Principle and Income Act; non-judicial settlement agreements; and decanting.

Thanda– And there are actually two other unique features of New Hampshire that give it an advantage. First, New Hampshire has a dedicated trust court, so when judicial intervention is required to resolve issues relating to a trust, a specialized court with experience dealing with these complex issues can be very helpful for all parties in getting their dispute resolved efficiently and effectively. And second, New Hampshire has a very active and nimble legislature that’s constantly improving New Hampshire’s trust laws with great involvement by the New Hampshire Bar.

Thanda– Every year, new legislation is proposed that improves upon existing trust laws or which creates new laws, which the New Hampshire bar and other interested groups propose, in order to continue to provide the best solutions to the financial and planning issues of individuals and families all over the world.

Todd– Thanks for that overview of all the New Hampshire trust advantages. I wanted to go a little deeper on the New Hampshire tax benefits. Do you have to be a New Hampshire resident to realize the tax benefits in New Hampshire trusts?

Thanda– No, you don’t. In New Hampshire, there’s no state income tax on accumulated income or capital gains in irrevocable trusts. New Hampshire has an interest and dividends tax for individuals, but not for New Hampshire irrevocable trusts, and there is no state filing requirement. This advantage allows New Hampshire trusts to grow without being depleted by state income tax. Not only does it save money, but the savings can be deployed for investment in asset classes where huge growth is expected. Of course, New Hampshire trusts are still subject to federal income tax, income distributed to a beneficiary from a New Hampshire trust is taxed to the beneficiary under the rules of their state of residence, and New Hampshire grantor trusts are taxed to the donor.

Todd– Now, one of the other things you mentioned is asset protection, and clearly one of the reasons that some families establish trusts is to protect assets in the event of a family member’s divorce or from future creditors. How do New Hampshire trusts work in this dimension?

Thanda– Well, in New Hampshire we have self-settled asset protection trusts, which are very useful and in great demand these days. These are irrevocable trusts that are established by a donor who is also a discretionary beneficiary of the trust. The donor can retain a power to appoint the assets either during his or her lifetime or at his or her death, but because the donor is not a trustee and has irrevocably transferred assets to the trust, the assets in the trust are treated as a separate legal entity from the donor and out of the donor’s control for credit or protection purposes. And this is the purpose of setting up these trusts. These assets are not excluded from the donor’s control for estate-tax purposes, so assets in these trusts are usually still includable in the donor’s estate to some degree, because the donor has retained an interest in them.

Thanda– The trustee of a New Hampshire asset protection trust doesn’t need to be a New Hampshire resident, but it is probably best to name a New Hampshire trustee to support the structure and to limit the states in which creditor claims may be brought. There is a limit on time to bring claims that are transferred into these trusts. The general rule is that trust assets are protected for most creditors four years after the assets are transferred into the trust, or for creditors that exist at the time of the transfer, one year after those creditors knew or should have known of the transfer. There are two exceptions to this rule: child support and basic alimony claims. It is important to note that even with these exception creditors, they can only attach present or future trust distributions.

Todd– That’s good to know. That’s quite a nice protection provision there. Now on another dimension, grantors sometimes don’t want a beneficiary to be aware of a trust’s existence before it begins distributing assets. How much trust disclosure is required in New Hampshire?

Thanda– That’s a great question, Todd. In many states, under certain circumstances, trustees must give beneficiaries notice of a certain number of things. First of all, that a trust exists for their benefit. Second, the trustee’s name and contact information, and, in some cases, a copy of the trust document. These are the uniform trust code notices that are written into a lot of states’ laws, which require trustees to inform beneficiaries when there’s either a change in trusteeship, or when a trust becomes irrevocable. In New Hampshire, this default rule can be overridden by the trust terms, making it a “quiet trust.” The trust instrument can eliminate any or all parts of these statutory notice requirements, and the trust can designate a notice recipient to determine who actually receives notice instead of the statutory default, which is usually qualified beneficiaries of the trust.

Todd– For a while, New Hampshire has been a great trust jurisdiction for families who reside across the country, but I understand there’s also increasing interest from families outside the U.S. What’s attracting these individuals?

Thanda– You’re right, Todd. So in addition to all the wonderful advantages that you can receive by having a trust established and administered in New Hampshire, New Hampshire was the first state in the United States to allow for creation of civil law foundations. Civil law foundations, not to be confused with charitable foundations, are wealth management vehicles that include features of corporations and limited liability companies, but they act like a trust. These structures are utilized in many civil law countries (so outside the United States) instead of trusts, to manage, protect, and distribute family wealth. Civil law foundations can be a great way for international clients to hold and manage wealth, especially if they want to hold U.S. assets in a vehicle that will be recognized in their home country. Foundations are great because they allow assets to be held independently from the founders, directors, and beneficiaries, and this limits liability for them, and for U.S. tax purposes, a foundation is generally treated as a trust for tax purposes.

Todd– Terrific, that’s great to understand and clearly it’s something that a lot of people outside the United States are going to increasingly take advantage of. On another front, equity markets have been strong over the past several years in general, but interest rates and dividend payouts have been low by historical standards. This can be a challenge for beneficiaries who are receiving only income payments from a trust. However, New Hampshire has progressive rules that enable a trustee to take a broader view in making distributions. Could you tell us how that works, Thanda?

Thanda– Sure. Well, in New Hampshire we have laws regarding total return investing. You can, for example, take a trust and convert it to a unitrust, or the trustee can use the power to adjust under the New Hampshire Principle and Income Act, and this will allow a trustee to transfer principal to income, so that the trustee can then invest for total return while still allowing a reasonable payout to trust beneficiaries, and in this economic environment, these are really great tools for administering trusts.

Todd– That’s great that they have that flexibility to really help out beneficiaries who are relying on that income coming out of the trust. There are a few other benefits of New Hampshire trust and one of them is the ability to have different fiduciaries serve in different roles. Could you tell us how that works?

Thanda– Yes, New Hampshire has very, very strong laws regarding directed and divided trusts. A divided trust is when different fiduciaries carry out tasks without actually interacting with one another. In a directed trust, one fiduciary is directed by another to take an action regarding the trust. So for example, an investment advisor or investment trustee directs the administrative trustee to sign documents, which will allow the trust to invest in a private partnership. These trusts allow for clear division of trust administration tasks and responsibilities, so clients like them. It’s very clear which fiduciaries are performing what tasks. This also creates an open architecture approach to trust administration. Clients with multiple advisors like this approach because they can deploy different companies and different individuals to perform specific functions in the management of their family’s wealth. The fiduciaries like these rules because there are only liable for their own actions by statute, and not for the actions of the other fiduciaries. And finally, directed and divided trusts are permitted by statute, but it is really important to note that the structure and, frankly, the limited liability amongst the different fiduciaries is supported by New Hampshire case law.

Todd– Terrific. That really helps enable a trustee to play different roles and to have different people involved with different levels of expertise and so forth. I know there are a couple of final provisions you wanted to touch on that relate to validating and modifying trusts. Could you comment on what options are available in New Hampshire?

Thanda– Sure, so I get really excited about this. New Hampshire has a pre-mortem validation statute for trusts. In other words, New Hampshire has created a process by which a donor can initiate a suit to prove the validity of a trust before his or her death, and this can be really useful if the donor is anticipating a contest after his or her death. New Hampshire law also limits the time for contesting the validity of a trust, and these rules are very helpful, like I said, for people who are concerned about a potential contest in the future. I’m also really excited about New Hampshire’s trust modification tools, and so these tools come into play after a trust has been established and after the trustee realizes that the trust is broken, it needs to be fixed, because it’s no longer working as the donor intended. New Hampshire has some of the best tools for fixing trusts that are broken.

Thanda– For example, New Hampshire has a trustee modification statute which allows trustees to amend administrative provisions in a trust without beneficiary consent. New Hampshire is unique for having such a statute; it sets us apart. New Hampshire also has nonjudicial settlement agreements, which allows interested persons to enter into a binding agreement regarding provisions in a trust, including construction of trust terms, termination, or modification of a trust. This is very useful compared to bringing an action in court to reform a trust, which can be expensive and time consuming. New Hampshire also has some of the best decanting laws in the nation. I get really excited about this. Decanting is the act of taking assets from one trust and transferring them to another trust with better provisions, similar to decanting a bottle of wine. Usually these provisions in the second trust make the trust easier to administer and better carry out the donor’s intent.

Thanda– New Hampshire allows decanting by statute and not case law, which is how it works in some other states, and this is hard because the rules are usually less clear when you’re relying on case law. The New Hampshire statute permits decanting, even if distributions of principal are limited. This is very important and this is a big reason why clients and advisors come to New Hampshire for their decantings. New Hampshire is the only state that will still permit a decanting where distributions of principal are not currently permitted or are severely restricted, as long as the decanting is consistent with the donor’s intent and does not undermine a material purpose of the trust.

Thanda– Of course, the New Hampshire statute contains reasonable limitations to this power, including: the decanting cannot eliminate beneficiaries with vested interests, and the trustee cannot add new beneficiaries in a decanting. However, it’s important to note that you can add a power of appointment to be exercisable by a current trust beneficiary in favor of people or organizations that are not beneficiaries of the first trust. For these reasons, I think that New Hampshire’s decanting statute is one of the best and most popular tools in the nation for fixing a broken trust. And the last modification tool that I’ll mention, and I touched on earlier, is our dedicated trust court to hear any trust litigation that exists.

Todd– Thank you for going through all those New Hampshire trust benefits, Thanda. You mentioned earlier that you don’t have to be a New Hampshire resident to benefit from New Hampshire’s trust laws. So how does one access these advantages?

Thanda– That’s correct, Todd. To take advantage of New Hampshire trust law, you can do a number of things. First of all, you can create a new trust, name a New Hampshire trustee, and apply New Hampshire trust law. You can also migrate a trust to New Hampshire by changing the situs of the trust using the rules provided in the trust, and appoint a New Hampshire trustee to ensure administration in New Hampshire. And finally, you could decant the trust from the old trust into a new trust that applies New Hampshire law, and then you can appoint a New Hampshire trustee to ensure administration in New Hampshire. As I said, a New Hampshire trustee is usually required to utilize the benefits of New Hampshire trust law, and Fiduciary Trust Company of New England is a New Hampshire corporate trustee. In fact, Fiduciary Trust of New England is an affiliate of Fiduciary Trust Company in Boston, and together we’ve been serving clients for over 130 years. We are a leading trust provider in New Hampshire with extensive experience with New Hampshire trust law. We work directly with families and with independent investment advisors.

Thanda– We hope that you found our discussion valuable. If you would like to learn more about New Hampshire trusts, please visit fiduciary-trust.com/nh-trusts, or contact me, Thanda Brassard, at tbrassard@fiduciary-trust.com or give me a call at (603) 695-4322. Thank you

 

 

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