NH trust laws undergo yet another alteration
Is competition among states a ‘race to the bottom’?
Civil law foundations “open the door to wealthy families from other countries,” said NH Trust Council’s Todd Mayo.
In the recently concluded legislative session, lawmakers took another step toward ensuring New Hampshire remains a premier jurisdiction for establishing and administering trusts. But not without raising concerns among bankers, regulators and lawmakers that, in vying for a share of as much as $40 trillion of wealth projected to be transferred by the middle of the century, the state may find itself in what some call “a race to the bottom.”
Senate Bill 225 was the latest of nearly a dozen refinements to the trust laws undertaken since the Uniform Trust Code was adopted in 2004 and the Trust Modernization and Competitiveness Act was enacted in 2006 with the express purpose of fostering “the best and most attractive legal environment in the nation for trusts and trust services,” which in turn promised significant increases in professional employment.
Since then, the number of chartered trust companies in the state has risen from 22 — 18 public trust companies and four trust departments of banks — to 33, including 27 public trust companies, two trust departments and four family trusts.
Of the 27 chartered public trust companies, 20 maintain their operations centers outside the state. The total assets under administration, excluding those of family trusts which the Bank Department does not disclose, has grown from $242.6 billion to $469.6 billion, a number that includes managed, non-managed and custodial assets, as of March 31 this year.
Since trust companies chartered in New Hampshire need not maintain a presence in the state, growth of employment cannot be measured with precision.
In 2005, economist Richard Gsottschneider of RKG Associates Inc., projected that creating a favorable legal environment for trust companies would spawn between 855 and 4,000 jobs, paying between $63.7 million and $298.2 million in annual wages by 2010 — projections undermined by the recession.
But although any employment has fallen short of expectations, the trust business has generated economic activity in the form of additional demand for legal, accounting and financial services.
Just as significant, New Hampshire is counted among a handful of states — Delaware, Nevada, South Dakota, Alaska and Tennessee — aggressively vying for shares of as much as $40 trillion of wealth projected to be transferred by the middle of the century. Although a Las Vegas lawyer told The New York Times, “New Hampshire is a little bit of a wannabe,” Todd Mayo, president of the NH Trust Council, said the state is “a strong and growing competitor with a growing reputation.”
‘Civil law foundations’
The council, an industry group, was founded in 2010 by Perspecta Trust, a multifamily trust begun by Paul Montrone and Paul Meister, chair and vice chair, respectively, of the former Fisher-Scientific International Inc., of Hampton.
Seeking “to improve the statutory, regulatory and judicial landscape for trusts and trust companies“ in the state, the council has regularly authored and supported legislation aimed at keeping in pace or gaining an edge with other states.
As attorney Bill Ardinger, one of the original architects of the initiative, told the House Commerce and Consumer Affairs Committee earlier this year, the effort has enjoyed consistent support from both sides of the aisle.
SB 225, sponsored by Sen. Lou D’Allesandro, D-Manchester, carried the Senate by a voice vote after a cursory hearing in the Senate Commerce Committee. But the bill, which ran to 89 pages, got closer scrutiny in the House committee, where it was amended by a subcommittee, which split 15-6 in favor of the amended bill. It then passed the House on a roll call vote, 219-137. The Senate concurred with the House amendment and the bill was signed into law by the governor.
With the bill, New Hampshire will become the first state to authorize so-called “civil law foundations” — legal vehicles akin to trusts for managing family wealth that are commonplace in continental Europe.
Mayo said that such foundations, as a familiar alternative to trusts, “open the door to wealthy families from other countries.”
Under the measure, foundations, which may serve either charitable or non-charitable purposes, will be treated as trusts for tax purposes by the federal and state government and will be generally exempt from tax in New Hampshire. Directors of foundations need not be U.S. citizens or residents of New Hampshire. Likewise, a foundation may domesticate in New Hampshire and be treated as a New Hampshire foundation without transferring its assets to the state. Foundations will register with and report to the Secretary of State and fall under the jurisdiction of the probate court.
The bill also added “unregulated” or “exempt” family trust companies to the regulated and lightly regulated forms of family trusts.
Authorized in 2010, family trusts are private entities serving only members of a consanguineous family — people descended from the same ancestor. There are three family trusts registered in New Hampshire, Perspecta among them.
‘Big hole’ in NH law
Banking Commissioner Jerry Little questioned the proposal, cautioning that if an unregulated family trust were to suffer financial failure or engage in fraudulent conduct it would reflect badly on the state.
If problems arise, a remedy would rest with the trust itself, as the Banking Dept. does not have authority, said Commissioner Jerry Little.
In response, the option of registering as a “family office” with the Securities and Exchange Commission was added to the bill. A proposal from Democrats on the House committee would have required family trust companies to operate as regulated entities successfully for 18 months before applying to operate as unregulated entities, but it failed on a party-line vote.
Nevertheless, Little insisted that the record shows that the Banking Department would have no authority to examine or regulate exempt family trust companies, and if problems did arise, the remedy would rest with the trust itself.
He indicated that he sought to forestall the sort of finger-pointing and recrimination that arose following the 2009 collapse of Meredith-based Financial Resources Mortgage Inc., which left investors more than $20 million out of pocket.
Mayo of the Trust Council said that, while many families prefer a regulated trust, not offering the unregulated option was “a big hole in New Hampshire law.” Glenn Perlow of the Trust Council, and a former banking commissioner, told the House Commerce Committee that five states offer unregulated family trusts and “more are coming.”
In addition, Commissioner Little and Tom Fahey, representing the NH Bankers Association, challenged a proposal to reduce the minimum capital required of family trusts from $250,000 to $50,000.
Fahey explained that family trusts are required to bear the costs in the event of failure. But family trusts are not required to contribute to the Banking Department’s liquidation fund, leaving the capital of a failed trust the sole resource to defray liquidation costs.
Conceding that the costs are difficult to calculate, he said that with insufficient capital the Banking Department, a self-funded agency, could be at risk. Ultimately, the House amended the bill to reduce the minimum capital requirement by $50,000, to $200,000.
In written testimony, Fahey told the committee that his organization’s membership “does not believe the state needs to see another entity entrusted with large amounts of capital fall through the regulatory cracks. We’ve been there,” adding that “the results are not good and the after-effects are long-lasting.”
In particular, he noted that, since membership may reach to the fifth degree of lineal kinship and ninth degree of collateral kinship, a family trust could serve a large number of beneficiaries.
The bankers also took exception to measures they said would hinder creditors from pursuing claims against fraudulent transfers of assets by halving the statute of limitations for challenging fraudulent transfers and raising the standard of proof of fraud from “a preponderance of the evidence” to “clear and convincing evidence” to favor the defendant.
Fahey told the committee that the changes could “directly affect banking and the flow of capital in our state.”
Although “meant to attract the assets of a small number of wealthy individuals who will likely never live here,” he claimed, “the entire business community will feel the brunt of this new standard.”
The provisions, together with another restricting the access of divorced spouses and dependent children to trust assets, were struck from the bill by the House.
Ed Butler, D-Harts Location, who has served in the House since 2006 and closely followed the evolution of the trust laws, was one of three of the nine Democrats on the Commerce Committee to support the bill.
He said that the amendments addressed the most significant concerns raised by the original bill, but noted that both unregulated family trust companies and civil law foundations are “untested.”
“We have come very far in the past 10 years,” Butler said, adding that New Hampshire ranks among the handful of states considered most “welcoming” to trust companies. But he said “we need to slow down the process. We needn’t do it every two years to stay on top of the pile.”
Butler echoed the minority report on the bill written by Rep. Kermit Williams, D-Wilton, who voted against the bill.
Referring to the stream of legislation, he wrote that “each one was touted as the ultimate solution to make our trust industry succeed and boost the state’s economy. Then a year or two later, another set of wholesale changes is requested.”
His report recommended the state conduct “an independent study of the effects of all the previous changes on the state’s economy and reputation before we change the trust laws again. While we are in favor of businesses succeeding, we don’t believe that the RSAs should be churned over and over by a small influential group hunting for a winning strategy for themselves.”
But, speaking against the bill on the House floor, Williams was more direct. “No other part of our laws have been chewed and churned so much,” he said, referring to the repeated rewrites of the trust laws. “It seems that these trust lawyers are forever looking for some magic formula that will make them a boatload of money.”
He went on to question the benefit to the state, since there is nothing to require trust companies to either conduct their operations or place their funds in New Hampshire. He also called for a moratorium on further changes to the law until the impact could be assessed, citing “unpredictable consequences.”
For his part, Mayo indicated that the Trust Council will continue to monitor initiatives taken by other states as well as litigation bearing on the operation of trust companies and, when appropriate, offer legislation to ensure New Hampshire keeps pace with the most progressive jurisdictions in the country.
He acknowledged that competition among states resulting in a race to the bottom “is always a valid concern” while emphasizing that “maintaining the integrity of the trust sector is a priority of the council.”
At the same time, he said, the council will continue to “float ideas that will be tested by the membership and the Legislature and rejected or accepted according to whether they make sense, are rational and appropriate.”