New Hampshire Enacts Trust Modernization and Competitiveness Act

Both houses of New Hampshire’s legislature have passed Senate Bill 394, entitled the Trust Modernization and Competitiveness Act, and Governor Lynch signed the bill into law on June 20, 2006. Although ambitious in spirit (the act purports “to establish New Hampshire as the best and most attractive legal environment in the nation for trusts and trust services,…”), most of the changes are targeted toward the attraction of a trust services cottage industry, and will not significantly affect the typical trust established and administered in New Hampshire.

Closely-Held Trust Companies

The chief purpose of the Trust Modernization and Competitiveness Act (hereafter the “Trust Modernization Act”) is to enable the formation of closely-held, non-depository trust companies, and a subset of such trust companies referred to as family fiduciary services companies. The Trust Modernization Act revises various sections of the state’s banking laws to enable small groups of private investors to form trust companies empowered to carry on most of the same activities as more traditional banks or trust companies, but without the power to accept deposits. In general, the banking laws are liberalized with respect to their application to trust companies to make them more favorable to closely-held entities. For example, while the initial capital requirement is increased from $250,000 to $500,000, the existing banking laws are amended to allow trust companies to be operated as limited liability companies without compliance with the requirements of the Federal Deposit Insurance Corporation, and with the liability of LLC members limited to the extent of their personal investment in the LLC.

Family-organized trust companies that do not transact business with the general public (meaning they do not offer trust business services to more than 15 non-family members) may apply to the New Hampshire Banking Commissioner for family fiduciary services company status, which entitles such companies to operate with even greater freedom than non-depository trust companies. For example, once approved by the Banking Commissioner, family fiduciary services companies may operate without many of the corporate governance formalities required of banks and other trust companies.

Uniform Principal and Income Act

Incorporated into the Trust Modernization Act is the enactment of the Uniform Principal and Income Act (“UPIA”). New Hampshire previously adopted the UPIA and repealed it after having it on the books for less than a year. Apparently the proponents of the Trust Modernization Act believe that the investment and trust accounting latitude granted to trustees by the UPIA are important components of attracting trust administration business to New Hampshire.

Because trust receipts can take many forms other than simple interest, dividends and capital gains recognized upon sale of securities, trustees often face complex choices with respect to the allocation of a particular receipt to trust income or trust principal. The trustee’s allocation determines which trust beneficiary will be entitled to the receipt (a present income beneficiary or a future beneficiary entitled to principal remaining upon trust termination). Since the income and remainder beneficiaries are in competition with one another, the trustee faces possible criticism from one group or the other with respect to each allocation. The UPIA relieves this pressure on trustees by establishing detailed ground rules for the allocation of various types of receipts and by clothing trustees with discretion to make adjustments between income and principal to the extent the trustee determines such adjustments are necessary to maintain parity between income and remainder beneficiaries.

The UPIA also permits trustees to convert certain types of income interests to “unitrust” interests, which require the income beneficiary to be paid a fixed percentage of trust asset values rather than the actual trust accounting income. This also relieves pressure on the trustee with respect to the allocation of receipts to income for trust accounting purposes and also frees the trustee to invest trust assets on a total return basis. The Trust Modernization Act does not incorporate the unitrust portion of the UPIA because New Hampshire already permits unitrust conversion under RSA 564-A:3-c, which was enacted in 2002.

Uniform Trust Code Revisions

In what has become an annual event, the Uniform Trust Code is again revised by the Trust Modernization Act. In addition to some minor technical revisions, two significant additions are worthy of note.

The new term “directed trust” is added to the UTC. A directed trust is defined as one in which the trust beneficiaries are empowered to direct the trustee’s actions. In addition, a new Article 12 is added to the UTC, which creates quasi-fiduciaries knows as “trust protectors” and “trust advisors.” Trust protectors and advisors will have the authority to amend the trust, to remove and replace trustees, and to approve trustee actions. Each of these new trust models has the obvious advantage of allowing the trustee to be absolved of responsibility for actions either directed by the beneficiaries in a directed trust or approved by a trust protector or trust advisor in trusts that incorporate the latter. While these changes should have the effect of making it more attractive for trustees to serve in New Hampshire, their utility in the typical estate planning context remains to be seen. Directed trusts amount to little more than an outright conveyance, and the use of trust protectors and advisors is likely to add undesirable complexity for most estate planning clients.

The primary purpose of this newsletter is to provide current information on business and legal developments. However, it may be deemed advertising or a solicitation under applicable law or ethical guidelines.