2006 Fall, Pg. 6. The Policy and Provisions of the Trust Modernization and Competitiveness Act of 2006.

AuthorBy Attorneys Michelle M. Arruda and William F. J. Ardinger

New Hampshire Bar Journal

2006.

2006 Fall, Pg. 6.

The Policy and Provisions of the Trust Modernization and Competitiveness Act of 2006

New Hampshire Bar Journal Fall 2006, Volume 47, No. 3Taxes, Trusts, Judicial Review, and more. . .The Policy and Provisions of the Trust Modernization and Competitiveness Act of 2006By Attorneys Michelle M. Arruda and William F. J. ArdingerI. Introduction

On June 20, 2006, Governor Lynch signed into law the "Trust Modernization and Competitiveness Act of 2006."(fn1) According to the act, the purpose of the TMCA is "to establish New Hampshire as the best and most attractive legal environment in the nation for trusts and trust services."(fn2) In signing the bill, Governor Lynch hoped "to make New Hampshire first in the country in the new national market for trust services and the good, high-paying jobs in that industry."(fn3)

Think trust law is boring and arcane? Well, think again! The Wall Street Journal reported on TMCA's enactment just two days after the Governor signed the bill, stating that the "latest entrant in the trust wars is New Hampshire, whose governor signed into law this week a bill that seeks to surpass most other states in innovative trust features."(fn4)

This article examines this important legislative initiative which makes significant changes to New Hampshire's statutes in two areas: (1) those governing trust companies, which are regulated by the Banking Department.; and (2) those governing the establishment and administration of trusts.

First, we summarize the principal policy considerations that led to enactment of the TMCA. Second, we identify and discuss some of the important provisions of the TMCA. We conclude with some thoughts about what will be required if New Hampshire intends to maintain a leading position in this area.

  1. Policy Context for Enactment of TMCA

    Given the topic of this article - laws regulating trust companies and trusts, not necessarily the most scintillating of legal issues - one might question why any reader other than the authors (who love this stuff) would continue to read further. In this section, we try to entice the reader with a focus not on the technical provisions of the bill, but rather on the important policy reasons that led to very broad support by our state's policy-makers, most of whom are not lawyers.

    For these legislative sponsors, the TMCA is about jobs for New Hampshire citizens. The hope is that by affording the best legal "infrastructure" for trusts and trust services, New Hampshire can attract trust companies and other businesses that offer trust administration and wealth management services, and that, in turn, these businesses will provide good jobs to our citizens.

    1. Why Now?

      Why has this initiative occurred at this time (and not 20 years ago)? In 1999, the Boston College Center on Wealth and Philanthropy (then the Social Welfare Research Institute) published a study that projected a wealth transfer of $41 trillion by the year 2055 as Americans pass their accumulated assets from one generation to the next.(fn5) The authors of the study have characterized this transfer as "the largest intergenerational transfer of wealth in the history of the United States."(fn6) As indicated below, this unprecedented transfer of wealth, coupled with a booming personal trust business across the nation, has helped to create a new "national fiduciary services market" for trust services.

    2. How Does Wealth Get Transferred?

      Such an historic wealth transfer will have many repercussions for our society and our legal system.(fn7) Wealth is transferred by many common mechanisms, including wills, testamentary and lifetime trusts, gifts, and other sales and assignments. Moreover, wealth increasingly is being transferred to charitable organizations, charitable trusts, private foundations, and similar charitable entities. These wealth transfer mechanisms and charitable entities are governed by and subject to various systems of oversight and regulation. For example, wills must comply with state statutory requirements and are typically subject to oversight by probate courts.(fn8) The governing laws and regulations are sometimes arcane and complex and often fail to attract the attention necessary to ensure that they reflect and respond to economic and social changes.

    3. Trust Law Gets Modernized

      For centuries, trusts have been used by property owners to accomplish their wealth management and transfer goals. A "trust" may be defined as "a fiduciary relationship with respect to property, arising from a manifestation of intention to create that relationship and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons, at least one of whom is not the sole trustee."(fn9) A "settlor" or "grantor" of a trust is the person who creates the trust; a "trustee" is the person who holds legal title to the trust property; and the "beneficiary" is the person who is to benefit from the trust.(fn10)

      While the original source of trust law was the common law, there has been much recent work to codify basic trust law rules in statutes. In 2000, the National Conference of Commissioners on Uniform State Laws ("NCCUSL") completed a comprehensive codification of the law of trusts, known as the model Uniform Trust Code. As stated by the project:

      The primary stimulus to the Commissioners' drafting of the Uniform Trust Code is the greater use of trusts in recent years, both in family estate planning and in commercial transactions, both in the United States and internationally. This greater use of the trust, and consequent rise in the number of day-to-day questions involving trusts, has led to a recognition that the trust law in many states is thin. It has also led to a recognition that the existing Uniform Acts relating to trusts, while numerous, are fragmentary. The Uniform Trust Code will provide states with precise, comprehensive, and easily accessible guidance on trust law questions.(fn11)

      But the model Uniform Trust Code did not merely codify long-standing trust rules; it also codified several "innovative provisions."(fn12)

      The model Uniform Trust Code drafters are not alone in seeking to promulgate new and innovative trust law. Very recently, several states have entered a vigorous competition for a piece of "the booming personal-trust business."(fn13) This competition should be viewed as a direct consequence of the projected historic transfer of personal wealth and the development of a "national fiduciary services market" where wealthy individuals interested in passing assets to their heirs and charities are more and more careful to select the most favorable state trust laws.

      New Hampshire has not sat idly by while this trust law business transformation unfolds. In 2002, the New Hampshire legislature granted trustees the authority to convert a trust into a "unitrust," thereby enabling trustees to invest trust assets for "total return," to the benefit of both the income and remainder beneficiaries of the trust.(fn14) In 2003, the Legislature provided settlors with express power to override the "rule against perpetuities," thereby allowing so-called "dynasty" or perpetual trusts.(fn15) In 2004, the Legislature adopted New Hampshire's version of the Uniform Trust Code (the "UTC").(fn16) The next year, this reform continued with the enactment of significant improvements and technical corrections to the UTC.(fn17) Collectively, this legislation placed New Hampshire among the top states with progressive trust laws, but the enactment of the TMCA, in the opinion of some commentators, puts New Hampshire's trust law in first place.(fn18)

    4. The Role of "Trust Companies"

      Perhaps the most important aspect of establishing a trust is the selection of a trustee. A settlor must have the highest faith that the trustee will carry out all her instructions and serve the purposes of the trust and its beneficiaries.

      Traditionally, settlors have selected trusted family members, friends, or lawyers to serve as trustees. Another option has been a corporate trustee, or a "trust company." These corporate trust institutions provide services both to the institutional market (e.g., employee benefit plan administration, traditional corporate trust administration, custodial activities, investment advisory and stock transfer agency services) and to the personal trust market (e.g., acting as fiduciary of personal trusts and related services such as investment management and professional administration of trust affairs). Most people are familiar with the provisions of such fiduciary services by trust departments of commercial banks. Increasingly, however, fiduciary services are provided by nondepository trust companies (i.e., financial institutions that do not accept deposits).

      Corporate trust institutions are subject to regulation, typically by federal or state banking authorities. Most states prohibit the conduct of a "trust business" except pursuant to a license or charter issued by state banking regulators. Traditionally, this regulation occurred within the framework of statutes governing banks. Recently, states have been enacting separate regulatory regimes for nondepository trust companies.(fn19)

      Why might a person select a corporate trustee over an individual trustee, such as a family member or a lawyer? First, many trusts will exist for several generations, well beyond the life expectancy of a single individual. Therefore, a corporate trustee...

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