The New Hampshire legislature recently enacted the “Qualified Dispositions in Trust Act” (Senate Bill No. 465) to, among other things, permit domestic asset protection trusts to be created in New Hampshire on and after January 1, 2009. Once signed into law by Governor Lynch, the provisions of the new law will be found in New Hampshire Statute 564-D. The legislation also addresses trust protectors and decanting.
Domestic Asset Protection Trusts. In permitting the creation of asset protection trusts, the New Hampshire legislature joins nine other states (Alaska, Delaware, Missouri, Nevada, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming) which have enacted similar legislation permitting self-settled “spendthrift” trusts. The New Hampshire law is patterned after the Delaware statute, the “Qualified Dispositions in Trust Act”, Delaware Code §§ 3570 – 3576 (which was enacted in 1997). The major benefit of asset protection trusts is the settlor’s ability to shield assets placed in a qualified trust from creditors. Transfers made to the trust are irrevocable, but the transferor may retain significant benefits and control, including the receipt of trust income, control over dispositions, and control over investment decisions.
To qualify as an asset protection trust under New Hampshire law, the trust instrument must comply with several statutory provisions. First, the instrument must expressly incorporate New Hampshire law regarding the validity, construction, and administration of the trust. Second, the instrument must explicitly state that assets transferred to a New Hampshire trust cannot be further transferred, assigned, pledged, or mortgaged (whether voluntarily or involuntarily) by the grantor before the trustee distributes trust property to beneficiaries. Third, the instrument must provide that the trust is irrevocable.
The trust will not be deemed revocable (and thus loose its protective value) if the trust instrument provides that (1) the transferor retains a power to veto trust distributions, (2) the transferor retains a testamentary special power of appointment over trust assets, (3) the transferor receives trust income or has a right to retained trust income, (4) the transferor retains a right to income or principal from a charitable remainder unitrust or charitable remainder annuity trust, (5) the transferor receives annually either an annuity or unitrust interest not in excess of five percent, (6) the transferor receives trust principal through either the actions of the qualified trustee in his sole discretion or based on an ascertainable standard contained in the trust instrument, (7) the transferor retains the right to remove the trustee and appoint a new one, (8) the transferor uses real property held under a New Hampshire personal residence trust as a personal residence, (9) the transferor receives qualified annuity interest, or (10) the trustee uses trust assets to pay the transferor’s debts outstanding at the time of the transferor’s death including estate administration and tax expenses. Thus, the transferor, as in the other asset protection states, can retain significant benefits and control while gaining protection from creditors for trust assets.
To qualify under the New Hampshire statute, the trust must be administered by a qualified trustee. A qualified trustee can be any natural person, other than the transferor, who is a New Hampshire resident. The qualified trustee can also be a federally chartered bank or trust company having a place of business in New Hampshire that is authorized to do trust business there. Some or all of the trust property must be maintained by the trustee in New Hampshire. The trustee must maintain records in the state, prepare fiduciary income tax returns, or otherwise materially participate in administering the trust in the state. These requirements are basically identical to the requirements in the domestic asset protection trust states other than Missouri.
Although the transferor cannot be a qualified trustee of his or her own asset protection trust, the transferor can be a trust advisor. A trust advisor is granted his or her authority under the terms of the trust instrument and does not have to be a New Hampshire resident. As trust advisor, the transferor’s rights are limited to a veto power over trust distributions and the right to consent to the trustee’s investment decisions. The transferor’s rights as trust advisor are limited to only those powers that are stated in the trust instrument.
Creditors are generally restricted from reaching trust assets. With certain exceptions , no action of any kind, including enforcement of a judgment, may be brought to attach trust property. Creditors seeking to reach qualified trust property are limited to only those actions available through the New Hampshire Uniform Fraudulent Transfer Act. Thus, if a transfer to a New Hampshire domestic asset protection trust is found to be a fraudulent transfer, the assets can be reached.
A creditor’s claim is extinguished unless it is brought within the applicable limitations period. For claims arising before the date of a qualified distribution, the claim must be initiated within four years or, if later, within one year after the disposition was or could reasonably have been discovered by the creditor. If the claim arises at the same time or later than the disposition, the limitations period is four years. Similar to the Delaware law, a tacking rule provides that the amount of time that trust assets are held in a predecessor trust may be added to the time the assets are considered held as a qualified disposition trust. This tacking provision could be important in cases involving dispositions that are otherwise still within the applicable limitations period but were generated by previous dispositions from a qualified trust.
Even if a creditor is able to reach trust assets, a qualified disposition is avoided only to the extent necessary to satisfy the transferor’s debt plus costs. If part of the disposition is avoided, the qualified trustee has a first lien against the trust property providing the trustee has not acted in bad faith in accepting trust property. Notwithstanding other provisions of the law, there is a complete bar against actions brought by creditors against a qualified trustee or trust advisor. This bar extends to claims against persons who provide counseling, drafting, preparation, execution, or funding of the trust. The same limitations periods applicable for claims against trust assets apply to claims brought against the trustee, trust advisor, or other counselors.
As in the Delaware statute, two classes of creditors are exempted from the provisions protecting trust assets. Child support obligations and those stemming from alimony or spousal support are outside of the statute’s protections. Importantly, the statute defines “spouse” or “former spouse” as a person to whom the transferor was married at or before the time of the qualified distribution. Thus, dispositions in trust made before marriage are protected by the statute.
The second class of exempted creditors are those who suffered death, personal injury, or property damage on or before the date of the qualified disposition if the transferor’s act or omission was a cause of the death, injury, or damage.
Decanting. Senate Bill 465 will also amend the New Hampshire Uniform Trust Code by permitting trustees to decant a New Hampshire trust. The new provision, New Hampshire Statute 564-B:4-418, provides that unless expressly prohibited in the trust instrument, a trustee with the discretion to distribute trust property to or for the benefit of trust beneficiaries may exercise that discretion by transferring trust property to a second trust for the benefit of some or all of those beneficiaries. Beneficiaries of the second trust must all be beneficiaries of the first, and the second trust cannot reduce the current fixed income, annuity, or unitrust interest for any beneficiary of the first trust. New Hampshire will join Alaska, Delaware, Florida, New York, South Dakota, and Tennessee in having statutes that permit decanting.
Trust Protectors. Senate Bill 465 also clarifies New Hampshire law regarding trust advisors and trust protectors. Included in the bill is an amendment to New Hampshire Statute 564-B:12-1201 (Trust Advisors and Trust Protectors as Fiduciaries) which expressly defines trust advisors and protectors as fiduciaries with respect to powers granted to them by the trust instrument. Trust advisors and protectors are thus required to act in good faith and are liable to the beneficiaries for any losses stemming from a breach of duty. Alaska, Idaho, South Dakota, and Wyoming also have specific statutes addressing whether a trust protector is a fiduciary. Those states that have enacted Section 808 (d) of the Uniform Trust Code have also addressed this issue.
The developments in New Hampshire should be seen as part of a trend across the country by some states seeking to modify their laws to provide greater protection from creditors to the settlors of trusts as well as greater flexibility in trusts through specific rules governing trust protectors and the ability of trustees to decant. Kentucky and Ohio, for example, are considering domestic asset protection trust legislation. Often this type of legislation is being enacted or considered as a way to retain business or attract more business for corporate fiduciaries in the state.
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