New Hampshire’s Modern Plan For Trust Management

Mary Susan Leahy
Of Counsel, Trusts & Estates Department
May 1, 2007

The Trust Modernization Act signed by Governor Lynch this past summer, together with the earlier adoption of the Uniform Prudent Investor Act and the abolition of the Rule Against Perpetuities, make New Hampshire one of the most favorable states in the country in which to establish trusts. In addition to the changes to New Hampshire’s trust laws, the Trust Modernization Act also changes the laws governing trust companies in numerous ways and authorizes a new kind of private trust company called a “family fiduciary services company”.

One purpose of these changes is to attract some of America’s wealthiest families to New Hampshire to establish trusts and create their own family fiduciary services companies. Indeed, though the ink is barely dry on the Trust Modernization Act, some out of staters are already beginning to look closely at New Hampshire as a home for managing their accumulated wealth.

In addition to attracting out of state investors to New Hampshire, the Trust Modernization Act makes a number of important changes to trust law that will enhance the ability of bankers, trust officers and private trustees to administer existing New Hampshire trusts.

One change is the authorization of a new kind of trust that is particularly suitable for families who wish to perpetuate the use of family camps and second home compounds for future generations without the burden of federal estate tax liability as use of the property transfers through multiple generations.

Another change is a new power for trustees called “the power to adjust”. The power to adjust will be a useful new tool for bankers, trust officers and private trustees who manage trusts which were designed to pay interest and dividend income to current beneficiaries and reserve trust principal for distribution to future generations. These “income only” trusts are probably the most common form of trust instrument in existence today.

The investment environment has changed since many of these trusts were created. Interest and dividend income is now a considerably smaller portion of investment gain compared with principal appreciation generated by diversified trust portfolios than historically has been the case. This means that current beneficiaries, who usually are nearest and dearest to a trust grantor’s heart, in many cases are receiving relatively smaller benefits from trusts than many grantors ever contemplated.

The power to adjust gives trustees and portfolio managers the opportunity to structure trust portfolios prudently and to allocate assets between stocks and bonds in a way designed to maximize the total return of the portfolio rather than feeling constrained to overweight bonds to maximize distributions for current beneficiaries. The power to adjust gives a trustee who is prudently investing a portfolio, the power to select a rate of return, say four percent of the fair market value of a portfolio, and distribute that amount to a current beneficiary, even though some of that distribution will represent principal appreciation and will not be strictly limited to interest and dividend income.