New Hampshire Bar Journal
2011 Winter, Pg. 34.
Migrating Trusts to New Hampshire: The "Why" and the "How"
New Hampshire Bar JournalVolume 51, No. 2Winter 2011Migrating Trusts to New Hampshire: The "Why" and the "How"By Joseph F. McDonald, IIIA. INTRODUCTION: WHAT THE GRANITE STATE HAS TO OFFER TO TRUST SITUS-SEEKERS
Moving to New Hampshire has for decades had great appeal for many retirees. This state offers year-round recreation, no state income, sales and estate taxes, and favorable creditor protection laws. these attributes and the intangibles that confer "quality of life" have all played a part in the substantial migration of clients to New Hampshire from other states, particularly our more urban neighbors to the south.
Recent changes to our laws have created other reasons to look at what New Hampshire can provide. The legislature has modernized our trust and trust company laws in several important steps during the last 12 years. New Hampshire's progressive "designer" version of the Uniform Trust Code ("UTC", and sometimes referred to herein as the "Model Act" or "Model UTC") and other trust laws create strong relocation incentives for irrevocable trusts now being administered in less trust-friendly states.(fn1) The seminal trust and trust company law changes came four years ago with the enactment of the "Trust Modernization and Competitiveness Act of 2006" ("TMCA") .(fn2) The preamble to TMCA states as its purpose "to establish New Hampshire as the best and most attractive legal environment in the nation for trusts and trust services."(fn3) When he signed the bill, Governor Lynch expressed the hope that it would lay the foundation for New Hampshire to be "... first in the country in the new national market for trust services and the good, high-paying jobs in that industry."(fn4) Two days after the Governor signed TMCA into law, the Wall StreetJournal took notice: "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." (fn5)
Subsequent reforms and technical corrections made since 2006 have built further on TMCA's strong foundation. TMCA will be sterile, and its policy goals will be unrealized, unless as practicing members of our trusts and estates bar we make it our business to thoroughly understand the opportunities TMCA creates and thereby make ourselves available as valued planning partners with our colleagues in other states. This article is intended to help us do that so that more among us can become competent local counsel and zealous advocates for New Hampshire as a premier trust destination jurisdiction. in addition to continuing in our traditional roles of advising clients who have moved here from other states and want their trusts to move with them, we as New Hampshire attorneys will have new opportunities to advise and assist non-New Hampshire families and their local counsel concerning whether and how to relocate their trusts here. And as part of this pre-migration planning, attorneys may take steps to insulate many of the relocated "legacy trusts" from the taxing jurisdiction of their original state's revenue authorities on certain types of income.
This article discusses those circumstances in which it may be possible for New Hampshire lawyers to help move a foreign irrevocable trust here, and what should be done to assist in accomplishing any given set of trust migration objectives while avoiding the many potential pitfalls in doing so. (fn6) The primary focus will be on moving from the eight most proximate states in the northeast from which trust migration to New Hampshire is perhaps most likely - the five other New England states and New York, New Jersey and Pennsylvania. The analytical framework described herein for determining what must be done in those states will generally apply if you are dealing with a trust located in another state. For convenience, a trust's current non-New Hampshire jurisdiction will occasionally be referred to as the "original trust state."
A word of caution at the outset: there is tremendous ferment in the various state legislatures as the inter-jurisdictional competition for trust situs continues unabated (indeed, even accelerates).(fn7) The trust laws in all of the states are evolving, some faster than others.(fn8 )Therefore, this article has a limited shelf life as an accurate resource to practitioners.
B. THE SIGNIFICANCE OF A TRUST'S SITUS AND GOvERNING LAW
1."Migration" In Context: The Term Can Have Different Meanings Depending on Particular Migration Objectives. Successfully migrating a trust to New Hampshire can be accomplished by different means depending on any given migration objective or set of objectives. sometimes a mere change in situs will suffice.(fn9) in other instances more may be needed. The method chosen to migrate the trust will have a bearing on whether the trust will escape continuing income tax jurisdiction of the original trust state and which of New Hampshire's trust law benefits can be made available to the trust.
For example, in one case, it might be possible to get perpetual duration, no state income taxation, avoidance of accounting and beneficiary notice requirements, effective creditor and spendthrift protection, a more favorable total-return unitrust law or equitable adjustments regime, reduction in administrative costs, and a directed trustee structure with a fiduciary trust advisor that directs investments or distributions. in another case, however it might be impossible to get any one or more of these benefits.(fn10) These often thorny choice of law principles are discussed in more detail in Section B.4(b), infra.
CAVEAT: if an attempt is made to change both the situs and governing law from the original trust state to New Hampshire without approval of a modification by a court of competent jurisdiction in the home state, or preferably under the unambiguous authority of a statute allowing those changes without the expense and delay of court involvement, attorneys should be concerned about the ability of a dissident beneficiary, an aggrieved creditor, a revenue commissioner or another trust stakeholder to successfully petition the courts in the original trust state (or even the New Hampshire probate court) to disregard the attempted change of governing law. This could result in possible drastic consequences, perhaps long after the failed attempt, to all parties involved -- attorneys included -- who took action in reliance on the assumption that the change would be successful. Prudence dictates that when in doubt about any possible challenge to a change in governing law, the attorney should insist on a court-supervised modification or other decree in the original trust state even though it might be expensive and time-consuming. This is certainly a case where you would not rather beg for forgiveness than ask for permission.(fn11)
2. Original Trust State's Resident Trustee's Resignation or Removal, Appointment of a New Hampshire Resident Trustee, and Otherwise Satisfying State Choice of Law and Jurisdictional Requirements to Achieve Migration Objectives. in most cases, achieving the objectives of the migration, be they state income-tax refuge related or the application of one or more of the favorable New Hampshire trust laws, will at a minimum require two things. First, the trustee in the original state must resign or be removed. Second, one or more New Hampshire resident trustees must succeed to the trusteeship and conduct at least a portion of the administration of the trust in New Hampshire.
in many cases, the non-resident trustees will initiate or cooperate in the migration and be willing to voluntarily resign the trusteeship. Succession by a New Hampshire resident trustee will therefore often be easy, at least for non-court supervised inter vivos trusts, provided that the governing instrument or the default provisions of the original trust state's trust code(fn12) provides for the appointment and acceptance by a successor trustee.
If the trustee in the original trust state is not a voluntary participant, review the governing instrument to determine if it provides for the extrajudicial removal and replacement of the trustee. in the absence of such provisions, determine if the instrument confers powers of appointment that might be exercised by the beneficiaries to accomplish the transfer to a new New Hampshire trust with New Hampshire resident trustees without court intervention.
Frequently, however the governing instrument is silent on the issues of removal, resignation and replacement, or grants no powers of appointment. if that is the case, the beneficiaries must either obtain the trustee's agreement to resign(fn13) or convince the local probate court to remove the trustee. if the original trust state has adopted the Model UTC, Model Act §706, or the common law or a local statute in a non-UTC state, might provide the local court with a basis for removing the recalcitrant trustee.(fn14)
3. Change in Situs is Often Easy; Changing Governing Law Can Be Much More Difficult. Merely changing the trustee of the original trust from a resident of the original state to a resident New Hampshire individual or corporate trustee will in most cases change an inter vivos trust's principal place of administration, provided that: (i) the trust's governing instrument does not expressly prohibit the change (that would be unusual), and (ii) some or most of the important aspects of the administration of the trust are conducted in New Hampshire by the resident trustee (s). it will not, however necessarily mean that the move has also changed the trust's governing law on issues relating to the trust's validity and construction. A quick reference guide providing some general guidance on distinguishing between matters involving validity and construction, on the one hand, and administration, on the...