Co-written by: Erin Stearns
Published in the NH Bar News, January 16, 2009 (http://www.nhbar.org/publications/display-news-issue.asp?id=4907)
The Qualified Dispositions in Trust Act, RSA Chapter 564-D, was enacted during the last legislative session and applies to trusts created after January 1, 2009. This legislation reverses the common law principle that a creditor can reach the assets of an individual’s self-settled trust. Rather, under this law, a person may transfer assets into a trust of which that person (the "grantor") is a beneficiary and have the trust assets avoid his or her future creditors.
This legislation has broad application since the grantor may, but does not need to be, a New Hampshire resident. Similarly, the beneficiaries may, but do not need to be, New Hampshire residents. However, the trustee must be a New Hampshire-based individual or institution with trust management powers.
There are a number of trust provisions for lawyers and clients to consider which provide the grantor with some measure of control, benefit and flexibility. First, at the trustee’s discretion, the grantor may receive distributions of income and principal from an asset protection trust. Second, the grantor may veto distributions of trust property to others. Third, the grantor may have a "limited power of appointment" to direct how assets are to be distributed upon the grantor’s death. Fourth, the grantor may retain the right to remove and replace the trustee so long as the replacement trustee is not related or subordinate to the grantor. Fifth, the grantor may also name a board of "trust advisors" to direct trust distributions who may, but do not need to be New Hampshire-based. Sixth, the income tax attributes of the trust may be reported by the grantor, allowing the trust assets to grow without the burden of paying any income tax (the trust would be an "intentionally defective grantor trust"). Certain provisions may give rise to gift and estate tax consequences, discussion of which is beyond the scope of this article, but which should be carefully considered.
There are also several drafting requirements to be mindful of. First, the grantor cannot be the trustee. Second, the asset protection trust instrument must state that New Hampshire law will govern its validity, construction and administration, and that the trust is irrevocable. Third, the trust must contain a spendthrift provision which does not allow beneficiaries to assign or pledge trust property to creditors.
Clients and lawyers should beware that four types of creditors may still reach property held by asset protection trusts: (1) creditors whose claim arises before the date of the qualified disposition of property to the trust; (2) creditors whose claim arises after the date of the qualified disposition of property to the trust, but who file a lawsuit within four years of the transfer; (3) spouses and former spouses as of the date of the qualified disposition and children of the grantor who are entitled to receive payments of alimony and/or support; and (4) persons who suffer death, personal injury or property damage on or before the date of the qualified disposition if the Grantor is determined (at any time) to have caused the damage.
Asset protection trusts offer creditor protection to all grantors, whether New Hampshire residents or out-of-state residents. Asset protection trusts also offer potential significant state income tax advantages to out-of-state residents. New Hampshire imposes a tax on interest and dividends, but does not impose a capital gains tax. Interest and dividends which are accumulated in the trust for the ultimate distribution to out-of-state beneficiaries are not subject to New Hampshire tax. For example, an out-of-state business owner may transfer a business ownership interest into a New Hampshire asset protection trust. The trust could then sell the ownership interest and invest the proceeds in interest bearing or dividend paying securities and not pay any New Hampshire tax.
The adoption of a domestic asset protection law furthers New Hampshire’s reputation as a highly favorable place to create trusts.
Erin Stearns is an attorney in the Trust and Estate Department at McLane, Graf, Raulerson & Middleton, P.A. She can be reached at [email protected] or 603-628-1325.
William V. A. Zorn is a director at McLane, Graf, Raulerson & Middleton, P.A. and Chair of the Trust and Estate Department. He can be reached at [email protected][email protected] or 603-628-1340.
The McLane Law Firm is the largest full-service law firm in the State of New Hampshire, with offices in Concord, Manchester and Portsmouth, as well as Woburn, Massachusetts.