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 Hawaii.
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 include:
- 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 percent;
- The right to or receipt of discretionary distributions of principal;
- The right to remove a trustee or advisor and appoint a new trustee or advisor;
- 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 in Hawaii.
McGuireWoods Fiduciary Advisory Services
Fiduciary Advisory 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
Private Wealth 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 issues.