New State Law Developments on Domestic Asset Protection Trusts and State Death Taxes

July 14, 2011

Hawaii Enacts Favorable Changes to Domestic Asset Protection Trust Legislation and Connecticut, Ohio, and Maine Revise or Eliminate Their State Death Taxes

Hawaii Enacts Changes to Domestic Asset Protection Trust Statute

Twelve states currently have statutes that permit domestic asset protection trusts pursuant to which the settlor will receive spendthrift protection from creditors if certain requirements are met. The twelve states are Missouri, Alaska, Delaware, Nevada, Rhode Island, Utah, South Dakota, Wyoming, Tennessee, New Hampshire, Oklahoma (Oklahoma’s law is more restrictive than those in other states), and Hawaii. Hawaii was the last state to adopt domestic asset protection trust legislation when, on April 27, 2010, the Hawaii legislature adopted the Permitted Transfers in Trust Act. This Act became effective July 1, 2010. As originally enacted in 2010, Hawaii’s domestic asset protection trust statute contained certain unique provisions which made it less attractive to individuals interested in domestic asset protection trusts. Only cash, marketable securities, life insurance contracts, and non-private annuities could be placed in Hawaiian domestic asset protection trusts. This prevented the funding of a Hawaiian domestic asset protection trusts with real estate, closely held stock, limited partnership interests, and limited liability company interests. A transfer was only valid to the extent that the amount of the property transferred was equal to or less than 25% in value of the settlor’s net worth. Hawaii also levied a one-time, 1% excise tax on the fair market value of all property transferred into the trust.

On June 23, 2011, Governor Neil Abercrombie signed into law H.B. 1447 which amended the Permitted Transfers in Trust Act. The primary intent of this legislation was to eliminate the 1% excise tax at the time of transfer, to eliminate the restrictions on the type of property that could be transferred into a Hawaiian domestic asset protection trust, and to eliminate the requirement that a Hawaiian domestic asset protection trust could only be funded with up to 25% of the settlor’s net worth. These changes were effective July 1, 2011 and bring the provisions of the Hawaii statute into line with those of the other states that permit domestic asset protection trusts. As a result, the Hawaii law no longer presents the same handicaps as it did previously.

Changes in State Death Taxes

Three states have recently revised or eliminated their state death taxes. First, as part of its budget bill in 2011, Connecticut lowered its threshold for its state estate tax from $3.5 million to $2 million retroactive to January 1, 2011.

Second, on June 20, 2011, Maine’s Governor signed Public Law Chapter 380 into law. This will increase the current $1 million estate tax exemption to $2 million in 2013 and beyond. The rates of tax in Maine will also change, effective January 1, 2013, to 0% for Maine estates up to $2 million, 8% for Maine estates between $2 million and $5 million, 10% for Maine estates between $5 million and $8 million, and 12% for Maine estates in excess of $8 million.

Third, in Ohio on June 30, 2011, Governor Kasich signed H.B. 153, the biennial budget bill, which contains a repeal of the Ohio state estate tax effective January 1, 2013.

As states address budgetary challenges, there will undoubtedly be additional changes with respect to the inheritance and estate taxes currently imposed by about one-half of the states upon a person’s death. Some states, as Ohio did, might repeal their state death taxes. Other states, as Illinois did in January, may reinstate their state death taxes.

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