The Hawaii legislature enacted two pieces of legislation this year that will
affect trusts and estates. The first was to permit a form of domestic asset
protection trust. The second was to reinstate a separate state death tax for
Domestic Asset Protection Trust Legislation
Until this year, eleven states permitted domestic asset protection trusts
pursuant to which the settlor would receive spendthrift protection from
creditors if certain requirements were met. The eleven states were Missouri,
Alaska, Delaware, Nevada, Rhode Island, Utah, South Dakota, Wyoming, Tennessee,
New Hampshire and Oklahoma (Oklahoma’s law is more restrictive than those in the
other states). Hawaii became the twelfth state this year.
The Hawaii legislature on April 27, 2010, adopted the Permitted Transfers in
Trust Act to permit domestic asset protection trusts to be created in Hawaii on
and after July 1, 2010.
Governor Lingle signed the bill into law on June 28, 2010. The purpose of the
Hawaiian act was to “build on proven domestic and international estate and
financial planning methodologies for the purpose of attracting foreign source
capital.” The act was designed to encourage high net worth individuals to
transfer a portion of their liquid net worth into Hawaii for asset and trust
management, thereby increasing tax revenues and positioning Hawaii to become a
world-class financial management jurisdiction.
The Hawaii Act allows an individual to set up a self-settled spendthrift
trust that is protected from most claims of the settlor’s creditors. The trust
must be an irrevocable trust. The assets in the trust are not subject to the
claims of the settlor’s creditors in Hawaiian courts. The settlor is permitted
to retain certain rights without jeopardizing the spendthrift protection. These
- The power to veto a distribution from the trust;
- A limited testamentary power of appointment;
- A mandatory right to income;
- The receipt of a fixed annuity or unitrust amount not exceeding five
- The right to or receipt of discretionary distributions of principal;
- The right to remove a trustee or advisor and appoint a new trustee or
- The ability to act as investment advisor to the trust:
- The right to or actual receipt of distributions to pay income tax due on
income of the trust; and
- The trustee’s authority to pay all or part of the settlor’s debts at the
time of settlor’s death.
As under most domestic asset protection trust statutes, creditors can reach
the property in the asset protection trust if the transfer was a fraudulent
transfer. Several types of claims are exempt from the provisions protecting the
trust assets. These include child support; obligations stemming from alimony or
spousal support; personal injury claims arising on or before the date of the
transfer; the claims of a lender who extends a secured or collateralized loan
based on the express or implied representation that the assets of the trust
would be available as security; and the claims of the State of Hawaii when a
settlor is unable to meet his or her tax liabilities.
Applicability of Hawaii Act
The settlor must use a Hawaiian individual or corporate trustee. The trust
must contain a spendthrift provision and incorporate the laws of Hawaii. A
Hawaiian corporate trustee must have its principal place of business in Hawaii.
Rule Against Perpetuities
The Hawaii Act specifically excludes domestic asset protection trusts from
the Hawaii rule against perpetuities.
The Hawaiian asset protection trust provisions, while similar to those in
many of the other asset protection states, have some unique provisions. Only
cash, marketable securities, life insurance contracts, and non-private annuities
may be placed in a Hawaiian trust. The act specifically permits the appointment
of trust protectors (also referred to as advisors). The trust protector may have
the power to: (i) remove and appoint permitted trustees, advisors or protectors;
(ii) direct, approve, or disapprove distributions from the trust; and (iii) act
as investment advisor to the trust.
A transfer is only valid to the extent that the amount of the property
transferred is equal to or less than 25 percent of the transferor’s net worth.
The settlor must provide an affidavit stipulating to this requirement as well as
stipulating that the transfer is not one in fraud of creditors. Hawaii levies a
one time, one percent excise tax on the fair market value of all property
transferred into the trust. The limitation on the amount of property that can be
transferred to a Hawaiian domestic asset protection trust and the imposition of
the one percent excise tax will likely make the Hawaiian trusts less attractive
than the trusts permitted in the other domestic asset protection trust states,
except for Oklahoma.
Hawaii Enacts Separate State Estate Tax
The Hawaii Legislature, on April 30, 2010, overrode Governor Lingle’s veto of
HB 2866 to impose a Hawaii estate tax on residents and also on the Hawaiian
assets of nonresidents based on the federal state death tax credit as it existed
in 2000. A $3.5 million exemption applies (except for nonresident non-U.S.
citizens for whom a $60,000 exemption applies). The legislation applies to
estates of decedents dying on or after May 1, 2010.
One interesting aspect about the legislation was that initially many thought
that the legislation imposed a tax only on nonresident, non-U.S. citizens with
property in Hawaii. However, upon closer reading, it became apparent that the
new law causes the tax to be owed both by residents of Hawaii and by
nonresidents of Hawaii (both US citizens and non-US citizens) who own property
McGuireWoods Fiduciary Advisory Services
Services advises financial institutions and other clients about planning,
tax, and fiduciary matters. This includes advising executors and trustees in
managing risks, avoiding litigation, and handling litigation when it does arise.
McGuireWoods Private Wealth Services
Services is ranked by Chambers and Partners, the international rating
service for attorneys, as one of two top-band private wealth services practice
groups in the country, with professionals in several U.S. cities and in London,
dedicated to estate planning and the analysis of related tax and fiduciary