By the middle of this century, as Americans pass along their accumulated wealth from one generation to the next and to charity, the projections are that the largest intergenerational wealth transfer ever in the United States - in excess of $41 trillion - will have taken place. Such projections have caused state legislatures to revamp their trust and banking laws to capture as much of the business that will be generated by this wealth transfer as possible. New Hampshire has been particularly responsive to this opportunity. Out-or-staters who establish trusts here pay no interest and dividends tax, and with no New Hampshire estate or inheritance tax imposed on the estates of in-staters, New Hampshire is particularly suited to become a magnet for trust business of the very wealthy.
New Hampshire's latest update of its banking and trust laws is the Trust Modernization and Competitiveness Act signed by Governor Lynch on June 20th. The new law has propelled New Hampshire into the national spotlight as a venue for wealthy families to establish and maintain their trusts. The Manchester Union Leader quoted the Governor as saying that he hoped the legislation would "make New Hampshire first in the country in the new national market for trust services and the good, high-paying jobs in that industry".
The Trust Modernization and Competitiveness Act is the culmination of efforts begun in 1998 to modernize New Hampshire's trust laws. These efforts were undertaken with important support of the New Hampshire Probate Court judges under the leadership of Judge John Maher and of Michael DeLucia, New Hampshire's Director of Charitable Trusts. The first step was adopting the Prudent Investor Act, which set forth modern standards for prudent investing by trustees. Then, in 2003, New Hampshire abolished its ancient common law "rule against perpetuities". This paved the way for so-called "dynasty trusts" in New Hampshire. The dynasty trust legislation was followed by the adoption of New Hampshire's first ever Trust Code in 2004. Now, in 2006, we have the Trust Modernization and Competitiveness Act.
There are three components to the 2006 legislation. First are amendments to New Hampshire's banking laws which authorize the establishment of a new category of trust company called "family fiduciary services companies". Each of these new non-depository trust companies will provide services limited to members of one broadly defined "family". The law is designed to attract so-called "family offices" which have long operated elsewhere, providing private trust services to wealthiest of the wealthy families in this country. Though they will be regulated by the Bank Commissioner, family fiduciary services companies will be able to provide the high level of privacy and confidentiality demanded by their customers.
The second component of the new legislation consists of amendments to New Hampshire's Uniform Trust Code that arguably make it the most modern trust code in the country. Third is the adoption of the Uniform Principal and Income Act, already in effect in most of the rest of the country. With this new Act, trustees of private, family trusts have better ability to invest trust portfolios on a total return basis. Total return investing can facilitate more predictable distributions to current trust beneficiaries while maintaining the real value of trust principal for future generations to enjoy.
Bankers, trust lawyers, accountants and others in the financial services sector may reap the benefits of increased business from wealthy out-of-staters, but does this legislation benefit the New Hampshire business community generally? The answer for many in the business community is a definite "yes".
- Business owners wanting to sell their businesses and preserve the proceeds for future generations can preserve their wealth in perpetuity by establishing their own dynasty trusts here in New Hampshire rather than being forced to a foreign jurisdiction. The same opportunity exists for those wanting to retain their business interests to pass along to future generations.
- New Hampshire families who reap significant proceeds from the sales of their businesses may find that establishing their own family offices is ideal. Indeed, family offices are not new to New Hampshire. Large trusts, such as one established years ago by owners of the old Manchester mills, are still run by a family office managing assets in the many millions and serving scores and scores of beneficiaries.
- Family offices established here will be able to maintain a high level of privacy and confidentiality, and the creator, or "settlor", of a trust can now require that a trustee not disclose information such as the size of the trust and who its future beneficiaries are. This is important for settlors who, for example, do not want younger generations to have this information until a particular time in the future.
- A settlor may designate special fiduciaries to serve specific roles with respect to family wealth. One kind of special fiduciary is a "trust advisor". A trust advisor may have special expertise, for example, to operate a business held in the trust or to invest securities in a particular manner desired by the settlor. Another kind of special fiduciary is a "trust protector". A trust protector may have special knowledge about the trust beneficiaries and will be authorized to make distribution decisions based on the protector's special knowledge.
- Some may find a so-called "purpose" trust a useful new technique because the new legislation has removed the former twenty-one year limitation on the life of these trusts. A purpose trust is a trust that exists for a stated purpose but which does not have any ascertainable beneficiaries. For example, a purpose trust can now hold a family compound or lodge for the future enjoyment in perpetuity by the settlor's descendants. The trust can be constructed so as to not give any descendant enough rights so that an interest in the property would be includible in his or her estate for federal estate tax or generation skipping tax purposes. The transfer of the property into the trust itself would not escape estate or gift tax, but a properly constructed purpose trust can prevent the imposition of future taxes in the descendants' estates.
Many New Hampshire trusts and estates lawyers participated actively in crafting the new legislation and are well informed about it. Those business owners who believe the new legislation may facilitate their own business and estate planning goals are encouraged to consult with their advisors about New Hampshire's new trust legislation.
Mary Susan Leahy is an attorney in the trusts and estates group at the law firm of Mclane, Graf, Raulerson &Amp; Middleton. She advises on personal estate and tax planning issues, business succession and family generational planning, often in cases involving complex real estate holdings. Susan can be reached directly at (603) 334-6926 or at [email protected] The McLane Law Firm is the largest full-service law firm in the State of New Hampshire, with offices in Concord, Manchester and Portsmouth.