domestic asset protection trust jurisdiction selection

Arizona, Maryland, Nevada, and New Hampshire

APRIL SESSION

ambar.org/AssetProtection

April 14, 2015 Panelists:

Michael GordonGourdon, Fournaris, & Mammarella

Michael GordonGordon Fournaris & Mammarella PA

Fred FrankeLaw Offce of Frederick R. Franke Jr.

LLC

Philip RupprechtAike Schenk Hawkins & Ricciardi

Todd MayoPerspecta Trust

Kristen SimmonsOshins & Associates LLC

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American Bar AssociationSection of Real Property, Trust and Estate Law

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The materials contained herein represent the opinions of the authors and editors and should notbe construed to be the action of the American Bar Association, Section of Real Property, Trustand Estate Law for Continuing Legal Education unless adopted pursuant to the bylaws of the

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There’s No Place Like Home Domestic Self-Settled Asset Protection Trusts and Inter Vivos QTIP Trusts:

Why Do Them and Where To Go When You Do?

Arizona

April 14, 2015

Philip R. Rupprecht Aiken Schenk Hawkins & Ricciardi P.C.

2390 E. Camelback Road #400 Phoenix, AZ 85006

602-248-8203 [email protected]

The drafters of the Arizona Trust Code—A.R.S §§ 14-10001 to -11102—sought to materially deviate from both the Uniform Trust Code and the Restatement (Third) of Trusts. In particular, the ATC drafters wished to enhance the spendthrift provisions, especially with respect to special needs trusts. The Arizona drafters felt that the UTC and the Restatement unreasonably favored creditors over beneficiaries. The ATC significantly enhances the statutory spendthrift provisions in favor of beneficiaries. ATC § 14-10504 is a significant expansion of Arizona law. ATC § 14-10504 provides in paragraph A:

Except as provided in subsection B of this section, whether or not a trust contains a spendthrift provision, a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, even if either:

1. The discretion is express in the form of a standard of distribution.

2. The trustee has not complied with the applicable standard of distribution or has abused the discretion regarding distributions. Subsection B of § 14-10504 states:

1 There’s No Place Like Home

To the extent a trustee has not complied with the applicable standard of distribution or has abused the discretion regarding distributions:

1. Except as provided in § 14-10503, a distribution may be ordered by the court to satisfy a judgment or court order against the beneficiary for support or maintenance of the beneficiary’s child.

2. The court shall direct the trustee to pay to the child an amount as is equitable under the circumstances but not more than the amount the trustee would have been required to distribute to or for the benefit of the beneficiary had the trustee complied with the standard or not abused the discretion.

The ATC offers quasi-spendthrift protection even when a spendthrift clause, per se, is absent. A creditor may not compel a distribution to a discretionary beneficiary even if the trustee’s discretion is expressed in the form of a standard for distribution or the trustee has not complied with the standard or can be shown to have abused the trustee’s discretion concerning distributions. § 14-10504(A)(2).

ATC § 14-10504(D) extends the statutory exemption of life insurance

proceeds and cash values available to life insurance payable to a trust for the benefit of the insured’s spouse, child, parent, brother, sister or other dependent family member. A.R.S. § 20-1131(D).

Under § 14-10504(E) a beneficiary can also be a trustee, of the sole trustee,

and still enjoy the protection of the spendthrift clause: A creditor of a beneficiary, whether or not the beneficiary is also a trustee or co-trustee, may not reach the beneficiary’s beneficial interest or otherwise compel a distribution if either the trustee’s discretion to make distributions for the trustee’s own benefit is purely discretionary or is limited by an ascertainable standard, including a standard relating to the beneficiary’s health, education, support or maintenance or similar language within the meaning of § 2041(b)(1)(a) of the Internal Revenue Code.

A creditor’s claims against the settlor of a trust allows the settlor’s creditors access to the assets of the trust to the extent of the settlor’s interest in the portion of the trust attributable to the settlor’s own contribution. Arizona is not a domestic


asset protection trust jurisdiction and, therefore, does not provide any self-settled spendthrift trust protection for Arizona settlors. 14-10505(A)(1). In furtherance of this concept, a person holding a power of withdrawal from a trust is treated as the settlor of that trust and no spendthrift protection is afforded that power holder. However, some protection from the claims of creditors was included in ATC § 14-10505(B)(2) for the beneficiaries of irrevocable Crummey trusts who held withdrawal rights pursuant to the provisions of the trust which have lapsed. At least with respect to the “five or five” amount, the beneficiary who has not exercised that withdrawal right will not be treated as the settlor (and thus treated as having contributed that property back to the trust as a settlor) for purposes of § 14-10505(A)(1). Section 14-10505 provides that following the death of a settlor, the property of a trust that was revocable at the time of the settlor’s death is subject to the claims of the settlor’s creditors, costs of administration of the settlor’s estate, the expenses of the settlor’s funeral and disposal of settlor’s remains and the statutory allowances owed by law to the settlor’s spouse and children to the extent that the settlor’s probate estate is insufficient to satisfy these claims subject, however, to the settlor’s right to designate the source from which liabilities will be paid,

While the ATC largely left alone the rights of creditors to reach the settlor’s

assets in trust, it made some estate planning options more interesting. Of course there are many reasons to create trusts--estate tax reduction, asset management in the event of disability, and probate avoidance for instance. For families of wealth, however a spendthrift can add considerable value both for the settlors and for the beneficiaries. The ability to put an inheritance out of the reach of future creditors and unknown or mendacious spouses is a significant plus. The ATC makes this protection beneficiary friendly.

The ability and flexibility in protecting assets left for children and their issue

has been greatly enhanced. § 14-10501(B).

“…a Trustee has no liability to any creditor of a beneficiary for any distributions made to or for the benefit of the beneficiary to the extent a beneficiary’s interest is protected by a spendthrift provision or is a discretionary trust interest referred to in § 14-10504.”

Spendthrift protection can be created with the mere reference in the trust that the beneficiary’s interest is held subject to a spendthrift trust, or words of similar import. § 14-10502(B). In general, spendthrift provisions in a trust agreement serve to prevent a beneficiary from assigning his or her trust interest, or accelerating his or her receipt of the trust interest. It also serves to prevent a


creditor of the beneficiary from attaching or garnishing the beneficiary’s interest in the trust. § 14-10502(C). One very significant change in the new spendthrift provisions is that elimination of the exception to spendthrift protection with respect to claims of spousal maintenance. § 14-10503. Parents and grandparents can now be assured that the funds held in trust for the benefit of their children and grandchildren cannot be attached by their descendant’s divorcing spouses. Child support payments continue to be an exception to the protection provided by a spendthrift provision, this exception no longer exists relative to a special needs trust. § 14-10503(B). Unlike the UTC, the ATC presumes that spendthrift provisions are a “material” reason for the trust. The originally promulgated UTC presumes that spendthrift provisions were not automatically deemed a material purpose for a trust. The ATC reverses that presumption. § 14-10105(B)(5). The ATC carves out special treatment for special needs trusts. Under the ATC, whether or not the trust contains a spendthrift provision, a creditor or assignee of a beneficiary cannot reach or compel distributions to or for the benefit of the beneficiary of a special needs trust. § 14-10505(A)(2)(c). The ATC removed uncertainty about the creditor consequences of certain common estate planning techniques. For instance, § 14-10505(A)(2)(a) protects from the reach of creditors the discretionary distributions from an intentionally defective grantor trust (“IDGT”) to reimburse the settlor for income tax generated by the trust that is taxable to the grantor. Prior the ATC’s effective date, Arizona law was unclear whether a creditor of an IDGT settlor which included provisions that allow the trustee to make discretionary distributions from the trust to the grantor in order to pay the grantor’s income tax liability can attach those discretionary distributions. Under the ATC. those discretionary distributions either paid directly to the settlor or paid directly to the taxing authority are not attachable by the settlor’s creditors. One further improvement relates to inter vivos QTIP trusts where settlor is a remainder beneficiary. Even though the settlor contributed the original assets to the trust, the general rule allowing a settlor’s creditor to reach assets contributed to the trust by the settlor does not apply. § 14-10505(E) provides as follows:

For the purposes of this section, amounts contributed to an inter vivos marital trust that is treated as qualified terminable interest property under § 2523(f) of the internal revenue code or to an inter vivos marital trust that is treated as a general power of appointment trust


under § 2523(e) of the internal revenue code and over which the beneficiary holds a limited power of appointment or a general power of appointment exercisable in favor of the holder’s estate, or both, are not deemed to have been contributed by the settlor even if the settlor is a beneficiary of the trust following the death of the beneficiary’s spouse.

This overview of the ATC is brief, in large part, because of the excellent and publicly available work done by others, closer to its passage, highlighting its changes and benefits. Les Raatz, writing in the January 2009 Arizona Attorney penned a succinct and helpful overview entitled “The Arizona Trust Code.” It is available on line at: http://www.myazbar.org/AZAttorney/PDF_Articles/0109trustcode.pdf A comprehensive look at the changes and the planning options and issues, authored by three trust counsel at Marshall & Ilsley Trust Company N.A. is available on line at: http://www.gustlaw.com/pdf/Arizona_Trust_Code_Dec08.pdf Between these two sources, one with the broad brushstrokes and the other exhaustive, the nuances of the ATC are thoroughly explored and explained.


http://www.myazbar.org/AZAttorney/PDF_Articles/0109trustcode.pdf

http://www.gustlaw.com/pdf/Arizona_Trust_Code_Dec08.pdf

ABA Section of Real Property, Trust & Estate Law Domestic Asset Protection Trust Planning: Jurisdiction Selection Series, eCLE

SELF-SETTLED ASSET PROTECTION TRUSTS FOR MARRIED COUPLES IN MARYLAND

By Fred Franke and David Sessions∗

Even though Maryland does not have a general domestic asset protection trust statute, it allows married couples to engage in asset protection through a tenants by the entirety immunity trust and/or an irrevocable inter vivos QTIP trust. The creditor protection afforded to these two trusts is provided by statute. This paper explains the statutory requirements that must be satisfied in order to claim the safe harbor and the creditors who may defeat that protection.

TENANTS BY THE ENITRETY IMMUNITY TRUST

Maryland, like several other states1, permits a married couple to create trusts that enjoy

creditor protection similar to that of a tenancy by the entirety.2 So long as the couple held the

property as tenants by the entirety before transferring it to a trustee, remains married while the

trustee holds the property and are both beneficiaries of the trust, the property will enjoy the same

immunity from the spouses' separate creditors as though the couple held the property free of trust

as tenants by the entirety.3 Thus, the statute allows a couple to take advantage of the asset

protection qualities of a tenancy by the entirety while also being able to hold their assets in

revocable trusts.

Unlike a true tenancy by the entirety, however, the statute does not require the deceased

spouse's share of the property to pass automatically to the surviving spouse.4 The statute

∗ Fred Franke is the founding principal of and David Sessions is an associate with the Law Office of Frederick R. Franke, Jr. LLC of Annapolis, Maryland. For more information see www.fredfranke.com. Copyright 2015, Law Office of Frederick R. Franke, Jr. LLC. 1 Virginia, see VA. CODE ANN. § 55-20.2; Tennessee, see TENN. CODE ANN. § 35-15-510; Missouri, see MO. CODE ANN. § 456.950; Wyoming, see WYO. STAT. ANN. § 4-10-402. 2 MD. CODE ANN. EST. & TRUSTS § 14.5-511. 3 Id. 4 This is based on the literal reading of the statute and Maryland case law.

abrogates the surviving spouse's inheritance rights because while in trust, the couple does not

hold the property in an entirety tenancy as defined by the historical and technical requirements of

the term.5 As a result, a couple is able to protect the trust property from their separate creditors

during their lifetimes and direct the trust assets under the provisions of the revocable trust upon

the first death to avoid the claims of the surviving spouse's separate creditors.

Like other domestic asset protection devices, Maryland's tenants by the entirety trust has

its shortcomings, pitfalls, and accompanying ambiguous law. Nevertheless, Maryland may have

created a new type of domestic asset protection trust—one with powerful and expansive asset

protection possibilities.

A. Historical Developments of the Tenancy by the Entirety

Blackstone penned the classic definition of a tenancy by the entirety in his 18th century

commentary when he wrote: "if an estate in fee be given to a man and his wife, they are neither

properly joint-tenants, nor tenants in common: for the husband and wife are considered one

person in law, they cannot take the estate by moiteties, but both are seized of the entirety, per

tout et non per my; the consequences of which is, that neither the husband nor the wife can

dispose of the any part without the assent of the other, but the whole must remain to the

survivor."6 When Blackstone wrote his commentaries, the common law allowed the husband to

rule the tenancy.7 He, and he alone, had sweeping powers over an entirety property.8 During the

marriage, he could occupy the property and consume, manage, control and dispose of the

5 MD. CODE ANN. EST. & TRUSTS §14.5-511(g). 6 WILLIAM BLACKSTONE, COMMENTARIES ON THE LAWS OF ENGLAND 182 (9th ed. 1783), quoted in Peter M. Carrozzo, Tenancies in Antiquity: A Transformation of Concurrent Ownership for Modern Relationships, 85 MARQ. L. REV. 423, 437 (Winter 2001). 7 See Oval A. Phipps, Tenancy by Entireties, 25 TEMP. L. Q. 24, 24 (1951). 8 Id. at 25.

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income.9 He alone could use the property as the basis for obtaining credit and he represented the

property in litigation.10 The wife's interests in the property, in contrast, were subject to the

husband's decisions.11

By the 1850s, male dominance of the entirety tenancy started to diminish in America as

various states enacted Married Women's Property Acts.12 These acts sought to bring the property

rights of both spouses into parity.13 In response to these legislative changes, courts dealt with the

common law of tenancy by the entirety in three ways.14 First, a handful of jurisdictions abolished

the tenancy altogether.15 Second, most jurisdictions reinterpreted the tenancy to mean that the

spouses property rights were equal.16 Lastly, a few jurisdictions denied that the new acts had any

impact on the old common law form of the tenancy.17 Eventually, however, these states fell into

line with the majority of states that reinterpreted the tenancy to reflect the equal property rights

of married women.18

As time progressed, the states that reworked the common law form of the tenancy

became either a full bar jurisdiction or a modified bar jurisdiction.19 The states that became full

bar jurisdictions prohibited one spouse from controlling or alienating the tenancy property by

unilateral action.20 Thus, these states require both spouses to act together in order to alienate or

encumber an entirety property.21 In contrast, states that became modified bar jurisdictions gave

each spouse separate and distinct rights to control or alienate specific attributes of an entirety

9 Id. 10 Id. 11 Id. 12 Fred Franke, Asset Protection and Tenancy by the Entirety, 34 ACTEC J. 210, 211 (2009). 13 Id. 14 See Id. 15 Phipps, supra note 7, at 28. 16 Franke, supra note 12. 17 Id. 18 Id. 19 Id. at 212. 20 Id. 21 Id.

3

property.22 As a result, these states grant a spouse's separate creditors limited rights to attach

entirety property despite the other spouse's ownership interests in the property.23

Maryland is a full bar jurisdiction. Therefore, in order to alienate or encumber entirety

property, whether the property is real estate, tangible personal property, or intangible personal

property, both spouses must act unanimously.24 This means that a spouse's separate judgment

creditors cannot destroy the tenancy to recover a claim.25 Except in the case of absolute divorce,

a couple can only terminate a tenancy by the entirety through joint action of both individuals and

a conveyance to a third person or entity.26

The asset protection benefit of Maryland's tenancy by the entirety is evidenced in case

law. In Watterson v. Edgerly, 40 Md. App. 230 (1979), a creditor filed a judgment lien against

the husband. The wife was not involved in the original debt or the judgment lien. After the

judgment lien was filed, the husband transferred his interest in the real property, which was held

as tenants by the entirety, to his wife. Sixty-one days after the transfer, the wife died, whereupon

the property was placed in a testamentary trust for the benefit of the husband. The Maryland

Court of Special Appeals upheld the conveyance when the creditor claimed the transfer was

fraudulent. The court said "[w]hen, as here, a husband and wife hold title as tenants by the

entirety, the judgment creditor of the husband or of the wife has no lien against the property held

as entireties, and has no standing to complain of a conveyance which prevents the property from

falling into [the creditor's] grasp."27

This holding was not an aberration. In Spitz v. Williams, 69 Md. App. 694 (1987), the

22 Id. 23 Id. 24 Id. at 225. 25 Beall v. Beall, 291 Md. 224, 234 (1981) (citations omitted); see also Carroll v. Manor Care, 237 B.R. 872, 874 (D. Md. 1999) (stating that "property held by the entireties is watertight as to claims against one spouse only"). 26 Beall, 291 Md. at 234. 27 Watterson v. Edgerly, 40 Md. App. 230, 238 (1979).

4

very same issue raised by Watterson came before the Court of Special Appeals again. The

appellant sought to determine if a husband could convey his entirety property interest to his wife,

so as to shield the property from the husband's judgment creditors.28 The court succinctly replied,

"[o]ur answer remains the same; yes."29

Based on the holdings of these two cases, it follows that Maryland would also protect

transfers of entirety property like the one found in Sawada v. Endo, 561 P.2d 1291 (Haw. 1977).

In Sawada, a judgment was rendered against a husband for an automobile tort. After the

judgment was issued, the husband and wife conveyed their entirety property to their children.

The Supreme Court of Hawaii ruled that the creditors could not avoid the conveyance because

the creditors had no attachable interest in the property due to the entirety tenancy.30

As these cases illustrate, the asset protection power of a tenancy by the entirety is robust.

It permits a couple to transfer the entirety property in the face of a spouse's judgment creditors.

The couple can transfer the entirety property to the non-debtor spouse or to a third party, and

courts will respect the transfer. Furthermore, the property is protected even when the non-debtor

spouse, after receiving the tenancy property in fee simple from the debtor-spouse, leaves the

property in trust for the benefit of the debtor-spouse.

B. Tenancy by the Entirety Trust: Joint Lifetime of Settlors

The statute granting tenancy by the entirety immunity to trusts is found in Maryland

Estates and Trusts Article § 14.5-511. It states that the property of a husband and wife "that was

held . . . as tenants by the entirety and subsequently conveyed to the trustee or trustees of one or

more trusts" enjoys the "same immunity" from the couple's separate creditors as would have

28 Spitz v. Williams, 69 Md. App. 694, 694 (1987). 29 Id. 30 Sawada v. Endo, 561 P.2d 1291, 1295-97 (Haw. 1977).

5

existed had the husband and wife continued to hold the property as tenants by the entirety.31 In

order to secure this creditor immunity, however, four elements must be met:

1. The husband and wife must remain married after the property is transfer to trust;32 2. The property must be held in trust by the trustee or trustees;33 3. Both the husband and wife must be beneficiaries of the trust or trusts;34 and 4. The trust instrument, deed, or other instrument of conveyance states that the transfer of property took place pursuant to the statute.35

The statute has several other notable provisions as well. First, the statute permits the

proceeds obtained from the trust principal to enjoy the same entirety-like immunity so long as

the trustee holds the proceeds.36 Second, the statute stipulates that after a couple has made a

conveyance pursuant to the statute, "the property transferred [is] no longer . . . held by the

husband and wife as tenants by the entirety."37 Thus, the statute states that the trust property only

enjoys creditor immunity and that it is not subject to survivorship rights as is typical in a true

tenancy by the entirety. Lastly, the statute states that it "may not be construed to affect existing

state law with respect to tenancy by the entirety."38 This last provision seems to further

strengthen the notion that the creditor immunity granted to trust property under the statute is a

concept separate and apart from the common law construction of a tenancy by the entirety.

31 MD. CODE ANN. EST. & TRUSTS § 14.5-511(b). 32 Id. § 14.5-511(b)(1). 33 Id. § 14.5-511(b)(2). 34 Id. § 14.5-511(b)(3). 35 Id. § 14.5-511(b)(4). 36 Id. § 14.5-511(b), (b)(2) and (b)(4). 37 Id. § 14.5-511(g). 38 Id. § 14.5-511(h).

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i. Limitations of Creditor Immunity: Federal Bankruptcy Law

Under federal bankruptcy law, all property owned by a debtor is pulled into the

bankruptcy estate39 unless it falls under an exemption pursuant to 11 U.S.C. § 522(b).40 The

Maryland General Assembly opted out of the federal exemptions and requires debtors to use

Maryland's exemptions.41 When Maryland adopted the entirety trust statute, the General

Assembly modified the state bankruptcy exemptions so that property held in an entirety trust is

exempt from bankruptcy proceedings.42 It is important to remember, however, that this

exemption only applies when one spouse files for bankruptcy individually, not when spouses

declare bankruptcy jointly.43

Despite Maryland's exemptions, the trust res may still be included in the bankruptcy

estate under other provisions of the federal bankruptcy code. Under 11 U.S.C. § 548(a)(1), a

trustee may avoid any transfer of an interest in property made by the debtor so long as the

transfer occurred within two years of the date of the filing of a bankruptcy petition.44 Of course,

transfers avoided by the bankruptcy trustee under this section are done either because the debtor

wanted to "hinder, delay or defraud" a creditor45 or the debtor received less than fair market

value for the property and became insolvent or unable to meet his or her obligations after the

transfer.46 Thus, if an individual transfers property held individually to his or her spouse in order

to create an entirety tenancy, and the couple then transfers the property to an entirety trust, and

39 11 U.S.C. § 541 (2012). 40 Id. § 522(b)(1). 41 MD. CODE ANN. CTS. & JUD. PROC. § 11-504(g). 42 Id. § 11-504(b)(8) and (9). 43 Id.; but see Bunker v. Peyton, 312 F.3d 145, 152 (4th Cir. 2002) where both husband and wife filed separate bankruptcy petitions which were then consolidated into one proceeding. Because they did not have joint debts, the entirety property was exempt from the proceeding even though the husband and wife owed individual debts to the same creditor. 44 11 U.S.C. § 548(a)(1). In addition, a non-fraudulent transfer may be set aside as a "preference" if the transfer occurred on or within 90 days of the filing of the petition. 11 U.S.C. § 547(b). 45 11 U.S.C. § 548(a)(1)(A). 46 11 U.S.C. § 548(a)(1)(B)(i) and (ii)(I).

7

the transfer leaves the individual insolvent, the transfer may be avoided and brought into the

individual's bankruptcy estate if it falls within the two-year window. Furthermore, when property

is brought back into a bankruptcy estate, it does not come back as a tenant by the entirety

interest; rather, it comes back as tenant in common interest and therefore attachable by the

individual creditors of the spouses.47

Section 548(e)(1) of the federal bankruptcy code is similar. The provision allows a

bankruptcy trustee to avoid a transfer of debtor property to a self-settled trust or similar device

within 10 years of filing for bankruptcy.48 It is unclear if a tenants by the entirety trust is self-

settled.49 However, it is highly probable that an entirety trust would be classified as a "similar

device." The term is certainly broad and meant to pull a variety of asset protection vehicles into

the statute's control.50

To avoid transfers under these two provisions, a bankruptcy trustee typically must

establish that the debtor acted with actual intent to defraud.51 "Because the element is often

difficult to prove with direct evidence, courts will look to circumstantial badges of fraud to

determine fraudulent intent."52 When using an entirety trust, fraudulent intent may be easier to

detect if an individual takes steps to protect an individually held asset because the individual

must make two transfers to protect the asset—one to the spouse to create the entirety tenancy and

47 Dana Yankowitz, I Could Have Exempted it Anyway: Can a Trustee Avoid a Debtor's Pre-petition Transfer of Exempt Property?, 23 EMORY BANKR. DEV. J. 217 (2006); see also Fred Franke, Asset Protection and Tenancy by the Entirety, 34 ACTEC J. 209, 214 n. 29 (2009). 48 11 U.S.C. § 548(e)(1). 49 Compare Sec. Pac. Bank of Wash. v. Chang, 80 F.3d 1412, 1417 (1996) and In re Markmueller, 51 F.3d 755, 776 n. 3 (8th Cir. 1995) with Bolton Roofing Co. v. Hedrick, 701 S.W.2d 183 (Mo. App. 1985). 50 In re Mortensen, 2011 WL 5025249, *6-7 (May 26, 2011)(citing 5 COLLIER ON BANKRUPTCY ¶ 548.10[1](citing H.R. Rep. No. 109-31. 109th Cong., 1st Sess. 449 (2005)(statement of Rep. Cannon))). 51 In re Mortensen, 2011 WL 5025249, *7 (May 26, 2011)(citing 5 COLLIER ON BANKRUPTCY ¶ 548.10[3][d]). 52 In re Mortensen, 2011 WL 5025252, *2 (July 8, 2011)(citing Acequia, Inc. v. Clinton, 34 F.3d 800, 806 (9th Cir. 1994)).

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one to the entirety trust.53 However, if the couple already owns the asset as tenants by the

entirety and then transfers the asset to an entirety trust, actual intent to defraud may be much

more difficult for the bankruptcy trustee to establish.

ii. Limitations of Creditor Immunity: Federal Tax Liens

In Drye v. United States,54 a unanimous U.S. Supreme Court held that federal tax liens

may attach to an inheritance regardless of a disclaimer filed by the heir. The Drye analysis

became the basis for United States v. Craft,55 where the Court breached an entirety interest to

satisfy a federal tax lien levied against only one of the spouses. Because the Maryland entirety

trust enjoys the same immunity as a true tenancy by the entirety, it is likely that the corpus will

be subject to federal tax liens as well.

Drye resolved the question of whether disclaiming an inheritance under state law

prevents federal tax liens from attaching to the disclaimed interest. In Drye, an insolvent heir

validly disclaimed his inheritance under Arkansas state law.56 The U.S. Government argued that,

because a lien is imposed on any and all "property" or "rights to property" belonging to the

taxpayer to satisfy tax debts owed, it was entitled to a lien on the heir's inheritance, disclaimer

notwithstanding.57 The United States Supreme Court agreed with the IRS and held that the tax

lien could attach. The Court found that the heir had a "valuable, transferable, legally protected"

property right to the inheritance at the time of his mother's death.58 Rather than personally take

the interest, the heir chose to channel his interest to close family members through the act of

53 See MD. CODE ANN. EST. & TRUSTS § 14.5-511(b). 54 528 U.S. 49 (1999). 55 535 U.S. 274 (2002). 56 See Drye, 535 U.S. at 52. 57 Id. at 54. 58 Id. at 60.

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disclaiming. In determining whether a federal taxpayer's state-law rights constitute "property" or

"rights to property," the Court found that "the important consideration is the breadth of the

control the taxpayer could exercise over the property."59 "Drye had the unqualified right to

receive the entire value of his mother's estate . . . or channel that value to his daughter. The

control rein he held under state law rendered the inheritance "property" or "rights to property"

belonging to him within the meaning of [the IRC], and hence subject to the federal tax liens."60

Craft held that tenants by the entirety property is subject to a federal tax lien filed against

only one spouse. Craft may be seen as an extension of Drye but, unlike Drye, it was a split

decision with Justices Stevens, Scalia and Thomas dissenting. According to Justice O'Connor's

opinion, whether the lien attaches to one spouse's interest in an entirety tenancy is ultimately a

question of federal law. In analyzing this question, the Court followed the Drye approach: it

looked first to state law to determine what rights a taxpayer had in the specific property the

government sought; then it decided whether the taxpayer's rights qualified as property or rights

to property under federal law.61 Justice O'Connor concluded that the rights of the debtor-taxpayer

in the tenants by entirety property comprised of a sufficient number of presently existing "sticks"

in the "bundle" to give rise to an attachable interest.62 Among others, these rights included rights

of possession, of income, and of sale proceeds if the non-debtor spouse agreed to the sale.63

Blackstone's legal fiction, ingrained by state law, that neither tenant had an interest separable

from the other did not control the scope of the federal tax lien: "[I]f neither of them had a

property interest in the entireties property, who did? This result not only seems absurd, but

59 Id. at 61 (citations omitted). 60 Id.; it is important to note that this is not the Maryland rule for non-tax-lien creditors. MD. CODE ANN. EST. & TRUSTS § 9-202(f)(2)("creditors of the disclaimant have no interest in the property disclaimed"). 61 United States v. Craft, 535 U.S. 274, 278 (2002). 62 Id. at 285. 63 Id. at 285-83.

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would also allow spouses to shield their property from federal taxation by classifying it as

entireties property, facilitating abuse of the federal tax system."64

Whether the property in a Maryland tenants by the entirety trust is subject to a federal tax

lien has not yet been decided. Under the Drye analysis, a tax lien would probably attach to

property held in an entirety trust because the beneficiaries had a modicum of control over the

property when it was transferred to the trust. Additionally, under Justice O'Connor's decision in

Craft, a tax lien would attach to entirety trust property because the beneficiaries could have

rights to possession, income and sale proceeds.

C. Tenancy by the Entirety Trust: First Death

When using a tenants by the entirety immunity trust to engage in asset protection,

practitioners will be concerned about two scenarios: (1) when the first spouse to die has separate

creditors and (2) when the surviving spouse has separate creditors. According to Maryland

Estates and Trusts §14.5-511(c), upon the death of the first spouse to die, all property held in

trust, which was immune from the claims of a couple's separate creditors under the statute,

continues to have the same immunity from the claims of the decedent's separate creditors. Thus,

if the first spouse to die is the debtor-spouse, the statute itself protects the trust property from the

decedent's creditors.65 As a result, the trust document could send the decedent's share upon his or

her death to the surviving spouse or to a third party, whether outright or in a separate trust, and

the decedent's creditors would have no room to complain.66

The second scenario is more important for practitioners and much more ambiguous. What

happens to the trust corpus when the surviving spouse has creditors? The current version of the

64 Id. at 286. 65 MD. CODE ANN. EST. & TRUSTS § 14.5-511(c). 66 See Watterson v. Edgerly, 40 Md. App. 230, 238 (1979).

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statute fails to articulate the rights of the surviving spouse's creditors in respect to the trust

property, whether the share is attributable to the decedent or the surviving spouse.67 The previous

version of the statute subjected the decedent's share of the trust property to the creditors of the

surviving spouse "to the extent that the surviving spouse [remained] a beneficiary of the trust."68

This provision of the statute, however, was eliminated when the General Assembly adopted the

Maryland Trust Act. Because of the change, the surviving spouse's creditors are probably unable

to attach the share of the trust corpus attributable to the deceased spouse. Individuals seeking

asset protection under the entirety trust can be assured that at least the portion of the trust

attributable to the deceased spouse will be protected from the surviving spouse's creditors.69

What happens to the trust corpus attributable to the surviving spouse? Can it also be

protected from the individual creditors of the surviving spouse at the first death? The immunity

provided by the entirety trust statute arguably ends at the first death because the couple is no

longer married.70 Furthermore, if the surviving spouse is deemed to be a settlor of the trust71,

Maryland Estates and Trust § 14.5-508 states that "during the lifetime of the settlor, the property

67 THE NEW MARYLAND TRUST ACT, Maryland State Bar Association, Course 5134-14, p. 30 (September 11, 2014)(comments from John P. Edgar, reporter on of Maryland Trust Act: "§ 14.5-511 re-enacts most of existing § 14-113. However, the Senate Judicial Proceedings Committee deleted § 14-113(c)(2). This section provided that to the extent the surviving spouse remains a beneficiary of the trust, the property that was immune from the claims of the separate creditors of the decedent shall be subject to the claims of the separate creditors of the surviving spouse. This deletion could represent a significant change to current Maryland law by permitting spouse to retain immunity from creditors for property owned as tenants by the entirety, even after the death of the first spouse, if a transfer is made pursuant to this provisions. Presumably, § 14.5-511 is unaffected by new § 14.5-801(a)(1), providing that during the lifetime of the settlor, the property of a revocable trust is subject to the claims of the creditors of the settlor, but this is not clear."). 68 MD. CODE ANN. EST. & TRUSTS § 14-113(c)(2) (West 2014). This provision was removed from the statute when the Maryland General Assembly enacted the Maryland Trust Act. 69 See Id. § 14.5-508(a)(3)("If a trust has more than one settlor, the amount the creditor or assignee of a particular settlor may reach may not exceed the interest of the settlor in the portion of the trust attributable to the contribution of that settlor"). It is difficult to divide the entirety asset into shares attributable to each spouse. See Steve R. Johnson, Why Craft Isn't Scary, 37 REAL PROP. PROB. & TR. J. 439, 475 n. 223 (2002) (citing Steve R. Johnson, After Craft: Implementation Issues, 96 TAX NOTES 553, 564-68 (2002)). It may be prudent to create a disclaimer trust with a spendthrift provision for the decedent's share. The surviving spouse should not be granted a testamentary power of appointment over the principal. 70 MD. CODE ANN. EST. & TRUSTS § 14.5-511(b)(1). 71 Sec. Pac. Bank of Wash. v. Chang, 80 F.3d 1412, 1418 (1996) (debtor was the settlor even though the debtor contributed entirety property with his wife).

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of a revocable trust is subject to the claims of the creditors of the settlor."72 The surviving

spouse's share of the trust property under this statutory provision would, therefore, be subject to

the claims of his or her separate creditors upon the first death.

The surviving spouse, however, may still be able to avoid the impact of § 14.5-508 by

sending the principal attributable to the surviving spouse to a new irrevocable spendthrift trust

for his or her benefit. Because it's a spendthrift trust, the creditors of the surviving spouse would

not be able to reach the trust corpus.73 The weakness of this theory is that the new spendthrift

trust may be classified as self-settled,74 and a spendthrift clause is generally invalid as to a self-

settled trust.75 Despite these limitations, two legal theories may validate the spendthrift clause of

the new trust. The first is based in the policy rationale underpinning the spendthrift clause and

the other is found in Maryland statutory law.

i. Validity of a Spendthrift Clause in a Self-Settled Trust

A spendthrift clause in a self-settled trust is invalid because the settlor-beneficiary should

not be able to place property that otherwise would be available to his or her creditors beyond

72 Id. § 14.5-508(a)(1). 73 See C.I.T. Corporation v. Flint, 333 Pa. 350 (1939) and Murphy v. C.I.T. Corporation, 347 Pa. 591 (1943). These two decisions involve the same set of facts. A husband and wife transferred tenants by the entirety property to trust even though the husband was the subject of a judgment. The wife died and the judgment creditors of the husband claimed the transfer was fraudulent. The court upheld the transfer because it was tenants by the entirety property and the husband's creditor's had no claim on the property. In the second case, the husband's creditors sought to claim the life estate given to the husband in the trust property. The court ruled that the spendthrift clause was invalid because the trust was self-settled. The trust allowed the survivor to "revoke this trust either in part or in its entirety, or from time to time to alter or amend the same in any manner that to them shall seem fit or proper." 347 Pa. at 593. 74 Sec. Pac. Bank of Wash. v. Chang, 80 F.3d at 1418; see also In re Markmueller, 51 F.3d 755 (8th Cir. 1995). It is possible to get around this issue by having the trust provisions send the principal to a new trust for the benefit of a third party upon the death of the first spouse. As soon as the first spouse dies, the surviving spouse has no interest in the property and the creditors of the surviving spouse have nothing to attach. In addition, a spendthrift clause would then protect the corpus from the creditors of the third party. This type of asset protection planning would work well if the surviving spouse is willing to part with the property. However, most clients are not inclined to do so. 75 The exception to this is domestic asset protection statutes.

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their reach while still being able to keep the property for his or her own needs.76 This policy

rational is not applicable to a tenancy by the entirety trust, or any subsequent trust used to hold

the corpus, because the principal was not available to the spouse's separate creditors before the

property was transferred to trust.77 In order for the entirety trust to exist, the couple must hold the

property as tenants by the entirety prior to transferring property to trust, and entirety ownership

precludes a spouse's separate creditors from attaching the property.78 Respecting the spendthrift

clause in the new trust, therefore, does not violate public policy.79 It does not prevent the

surviving spouse's separate creditors from accessing assets that were available to them prior to

the funding of the entirety trust.80

This analysis is supported by dicta in Watterson v. Edgerly.81 In that case, the court

respected the debtor husband's transfer of entirety property to his wife. It was chance that the

wife died after the transfer, causing the property to be placed in a testamentary trust for the

benefit of the husband. The court noted that their holding placed "the creditor . . . in no worse

position than if the wife were still living with the property in her name or she had survived the

husband."82 Thus, if a court deems a subsequent trust to be self-settled by the surviving spouse,

the court may still respect a spendthrift clause against the surviving spouse's separate creditors

because those creditors could not reach the assets before they were transferred to trust.

76 David B. Young, The Pro Tanto Invalidity of Protective Trusts: Partial Self-Settlement and Beneficiary Control, 78 MARQ. L. REV. 807, 842 n. 209 (1995); RESTATEMENT (SECOND) OF TRUSTS § 156; Duvall v. McGee, 375 Md. 476, 484 (2003)(citing Smith v. Towers, 69 Md. 77, 88-90 (1888)). 77 Young, 78 MARQ. L. REV. at 843-49. 78 Compare MD. CODE ANN. EST. & TRUSTS § 14.5-511(b)(requiring the transferred property to be tenants by the entirety) with Sec. Pac. Bank of Wash. v. Chang, 80 F.3d 1412, 1418 (1996) (stating that even though the trust corpus was held as tenants by the entirety before being transfer to trust, the transfer terminated the entirety interest; in addition the debt was incurred after the entirety interest was severed). 79 Young, 78 MARQ. L. REV. at 847. 80 See Watterson v. Edgerly, 40 Md. App. 230, 238 (1978). 81 Watterson, 40 Md. App. at 238. 82 Id.

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ii. Preventing Self-Settled Status

It may also be possible for a spendthrift clause of an entirety trust to be valid under the

theory that the common law treated a tenancy by the entirety as a separate entity from the

individual constituents of the couple.83 Thus, the couple, as settlors, is a separate entity from the

beneficiaries. This legal theory, however, may be overly formalistic since the individuals of the

tenancy by the entirety are the same individuals who settled the trust.84

Self-settled status, however, can be avoided through the trust provisions. According to

Maryland Estates and Trusts § 14.5-103(t)(1), a settlor is defined as a person that creates or

contributes property to a trust. The next clause of the statute qualifies this rule. Paragraph (2)

states that a settlor includes a person who contributes property to a trust, but only to the extent

that the trust or property cannot be revoked or withdrawn by another person.85

Two bankruptcy cases illustrate the power of this definition. In In re Reuter, a husband

had judgment creditors and filed for bankruptcy. The bankruptcy trustee tried to pull assets held

by his wife's revocable trust into the bankruptcy estate because the husband was a beneficiary of

the trust and contributed assets to it. Under the bankruptcy trustee's theory, the spendthrift clause

was invalid because the husband's contributions to the wife's trust made him a settlor. The court,

in interpreting Missouri's definition of settlor, which parallels Maryland's, disagreed because the

debtor's wife had the "sole power to revoke or withdraw the portion of the trust property

contributed by the debtor."86 Thus, the husband was not a "settlor as to the term defined by

83 Bolton Roofing Co. v. Hedrick, 701 S.W.2d 183 (Mo. Ct. App. 1985). 84 Sec. Pac. Bank of Wash. v. Chang, 80 F.3d 1412, 1418 (9th Cir. 1996) (even though the property was transferred to trust as tenants by entirety, the entirety interest was severed upon transfer and it was a self-settled trust); compare In re Markmueller, 51 F.3d 775 (8th Cir. 1995) (rejecting holding in Bolton Roofing) and Bolton Roofing Co. v. Hedrick, 701 S.W.2d 183 (Mo. Ct. App. 1985)(stating that funding a trust with tenants by entirety property does not create a self-settled trust). 85 MD. EST. & TRUSTS § 14.5-103(t)(2). 86 In re Reuter, 499 B.R. 655, 672 (W.D. Mo. 2013).

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Missouri law."87

A bankruptcy case from Florida, In re Quaid, is similar.88 The husband and wife in Quaid

held a bank account as tenants by the entirety. Before the husband filed for bankruptcy, the

couple transferred the entirety account to a trust settled by the wife. The wife had sole authority

to manage, control and withdraw trust assets. The bankruptcy trustee sought to invalidate the

trust spendthrift provision under the theory that because the husband was a beneficiary of the

trust and contributed property to it, the husband was a settlor. The court disagreed and concluded

that the debtor-husband was not a settlor under Florida law because his wife had the "sole power

to revoke or withdraw any trust assets, including the amounts contributed by the debtor. Thus,

his beneficial interest was protected from his creditors by the spendthrift provision."89

Because Maryland's definition of settlor is similar to that of Missouri90 and Florida91, a

practitioner is able to draft the entirety trust in a manner as to exclude the debtor-spouse from the

definition of settlor. In order to do so, the trust provisions must grant only the non-debtor spouse

the ability to revoke the trust or withdraw assets contributed by the couple. Thus, if the debtor-

spouse is the survivor, the spendthrift clause will be valid against claims of his or her creditors

because the surviving spouse is not a settlor of the trust under the law.92

ii. Beneficiary Control of Corpus

87 Id. 88 In re Quaid, 2011 WL 5572605 (Nov. 16, 2011). 89 In re Reuter, 499 B.R. at 675 (citing In re Quaid, 2011 WL 5572605 *2-3 (Nov. 16, 2011)). 90 MO. ANN. STAT. § 456.1-103(23)("settlor means a person . . . who creates or contributes property to a trust. If more than one person creates or contributes property to a trust, each person is a settlor of the portion of the trust property attributable to that person's contribution except to the extent another person has the power to revoke or withdraw that portion pursuant to the terms of the trust."). 91 FLA. STAT. ANN. § 736.0103(18)("Settlor means a person . . who creates or contributes property to a trust. If more than one person creates or contributes property to a trust, each person is a settlor of the portion of the trust property attributable to that person's contribution except to the extent another person has the power to revoke or withdraw that portion."). 92 In re Reuter, 499 B.R. at 675; In re Quaid, 2011 WL 5572605, *2-3 (Nov. 16, 2011).

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If the spendthrift clause is respected, a practitioner should also worry about the degree of

control the surviving spouse can exert over the trust property because too much control may

cause the spendthrift clause to be invalidated as well. A beneficiary can control trust corpus in

two ways: (1) the beneficiary can be given a withdrawal power and (2) the beneficiary can serve

as his or her own trustee.

A court may invalidate a spendthrift provision in a trust when the terms of the trust allow

the surviving spouse to demand distributions.93 Courts do this because "the beneficiary has the

legal right to receive trust assets by . . . purely unilateral action."94 As a result, the beneficiary's

"interest [in the corpus] is indistinguishable from outright ownership."95 Under these

circumstances the spendthrift clause has no effect and the separate creditors of the surviving

spouse can reach the trust assets.96 To avoid this issue, a practitioner should not provide the

surviving spouse with a demand right or ability to terminate the trust.

A court may also invalidate a spendthrift provision when the surviving spouse serves as

his or her own trustee.97 Because the surviving spouse, as trustee, has the power to make

distributions some courts take the position that it too is indistinguishable from outright

ownership.98 The new Maryland Trust Act, however, solves this problem. Under § 14.5-510, a

creditor is prohibited from attaching, exercising, reaching or otherwise compelling a "distribution

of the beneficial interest of a beneficiary that is a trustee or the sole trustee of the trust."99

Even though Maryland has no case interpreting this statute yet, a bankruptcy case from

California enforced a similar statute from North Carolina. In In re Trawick, the debtors, a

93 See MD. CODE ANN. EST. & TRUSTS §14.5-502(e). 94 David B. Young, The Pro Tanto Invalidity of Protective Trusts: Partial Self-Settlement and Beneficiary Control, 78 MARQ. L. REV. 807, 853 (1995). 95 Id. 96 See In Re McCoy, 274 B.R. 751 (N.D. Ill. 2002). 97 Young, 78 MARQ. L. REV. at 855-57. 98 Id. 99 MD. CODE ANN. EST. & TRUSTS § 14.5-510(a).

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husband and wife, filed for Chapter 7 bankruptcy in California.100 The wife's parents had

established a revocable trust governed by the laws of North Carolina. When her parents died, the

wife became the trustee of the trust for her and her brothers' benefit. It was a discretionary trust,

and therefore, the wife had all duties and powers to make distributions. The bankruptcy trustee

sought to bring the trust assets into the bankruptcy estate because the beneficiary had the ability

to "exert dominion and control over the trust."101 The court rejected the trustee's argument

holding the spendthrift clause valid because the statute allows beneficiaries to serve as their own

trustees.102

D. Conclusion

A tenants by the entirety trust allows a couple to protect assets from their individual

creditors during their lifetimes. With the exception of the federal bankruptcy clawback rules and

federal tax liens, the entirety immunity provided by the statute will protect real, tangible, or

intangible property so long as the couple satisfies the requirements of the statute. If the debtor-

spouse dies first, the property will be protected from the deceased spouse's creditors by virtue of

the statute. If the debtor-spouse is the survivor, it is probable that the principal will continue to

be protected from the surviving spouse's creditors if the corpus is sent to a new irrevocable

spendthrift trust so long as the surviving spouse is not deemed to be the settlor. By so doing, the

surviving spouse can enjoy the use of the property while also being able to escape the claims of

his or her own creditors. Even though Maryland has not adopted a domestic asset protection

100 497 B.R. 572 (C.D. Cal. 2013). 101 Id. at 579. 102 Id. at 580 n. 1; MD. CODE ANN. EST. & TRUSTS § 14.5-510 does not allow a creditor to compel the "distribution of the beneficial interest of a beneficiary" who is acting as their own trustee or sole trustee, so long as the beneficiary "is not a settlor of the trust."

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statute like Alaska or Delaware, the tenants by the entirety trust may provide asset protection

capabilities similar in scope to these asset protection vehicles.

IRREVOCABLE INTER VIVOS QTIP TRUSTS

Another asset protection trust available to married couples in Maryland is the inter vivos

QTIP trust.103 The settlor creates and funds an irrevocable trust for the benefit his or her spouse,

and under the terms of the trust, the donee-spouse retains a qualifying income interest in the

property as defined in IRC § 2523.104 The result of this transfer is that the settlor looses control

of the property; however, by relinquishing control of the property, it is no longer subject to the

creditors of the settlor. Moreover, while the donee-spouse is benefiting from the income of the

property, the creditors of the donee-spouse are unable to attach the assets of the QTIP trust due to

a spendthrift clause.105 The trust is not, of course, self-settled by the donee-spouse. In addition,

Maryland's statute permits the settlor to be the remainder beneficiary after the death of the

donee-spouse and the settlor's creditors are still precluded from attaching the property under the

spendthrift clause.106 A couple could decide to create irrevocable QTIP trusts for each other (the

husband funding an inter vivos QTIP trust for the wife and the wife funding an inter vivos QTIP

trust for the husband), and by so doing, protect all of their assets. Even though the irrevocable

inter vivos QTIP trust can be expansive in its protection, it contains several disadvantages which

practitioners and clients must consider before effectuating the transaction. By navigating the

pitfalls successfully, however, a couple can secure solid creditor protection for all of their assets

during their lifetimes, enjoy sophisticated tax benefits, and pass more of their wealth to future

103 MD. CODE ANN. EST. & TRUSTS § 14.5-1003. 104 See id. 105 Id. 106 Id.

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generations.

A. Establishing Creditor Protection: Maryland Trust Act § 14.5-1003

Estates and Trusts § 14.5-1003 of the Maryland Code provides asset protection for an

irrevocable inter vivos QTIP trust when the settlor becomes the remainderman of the trust after

the death of the donee-spouse. The statute states that the settlor of an irrevocable inter vivos

QTIP trust is not considered the settlor of the trust if the following elements are met:

(1) the trust was created for the benefit of the settlor's spouse; (2) the principal of the trust is qualified terminable interest property under section 2523(f) of the Internal Revenue Code; and (3) the settlor's interest in the trust income and principal comes after the settlor's spouse's interest in the trust has terminated.

As defined in I.R.C. § 2523, "qualified terminable interest property" is property held in

trust in which the donee-spouse has a "qualifying income interest" for his or her lifetime.107 A

"qualifying income interest" means that the donee-spouse is entitled to all income from the

property,108 or, in lieu of an income interest, the trust provides the donee spouse with a "usufruct

interest" in the trust property.109 Moreover, the trust property, if subject to a power of

appointment, can only be appointed to the donee-spouse at his or her death.110 To be a QTIP for

tax purposes, the donor-spouse must make an election on his or her gift tax return.111 Therefore,

the election for QTIP treatment is likewise a requirement for the trust to fall within the safe

107 I.R.C. § 2523(f)(2)(B)-(f)(3)(stating that the rules under I.R.C. § 2056(b)(7)(B) apply to the gift tax provisions as well). 108 Id. § 2056(b)(7)(B)(ii)(I)(stating that the income must be paid at least annually). 109 Id. 110 Id. § 2056(b)(7)(B)(ii)(II)(stating that the section does "not apply to a power exercisable only at or after the death of the surviving spouse"). 111 Id.

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harbor of the Maryland statute.112

Once the inter vivos QTIP trust is settled, the statute continues to protect the trust res

from the settlor's own creditors, when the settlor becomes a beneficiary of the trust after the

death of the donee-spouse.113 Because the settlor is not deemed to be the "settlor" when the trust

meets the statutory requirements, the trust cannot be classified as self-settled when the settlor

steps into the shoes of the donee-spouse. As a result, the spendthrift clause is valid and creditors

are unable to attach the property. The statute reiterates this theory by stating that once the settlor

becomes a beneficiary after the death of the settlor's spouse, a "creditor . . . may not attach, reach

or otherwise compel a distribution of any principal or income of the trust.114

In using the inter vivos QTIP trust to secure asset protection for clients, it is important to

remember that transfers to a QTIP trust are subject to federal bankruptcy law and Maryland's

fraudulent transfer legislation. The Maryland General Assembly mandates that the trust "may not

be construed to affect any state law with respect to a fraudulent transfer by an individual to a

trustee."115 Transfers to a QTIP trust are likely subject to 11 U.S.C. § 548(a)(1)116 and (e)(1)117

as well.

B. Income and Wealth Transfer Tax Benefits

In addition to asset protection, the inter vivos QTIP trust provides several tax advantages

to a couple if they create separate QTIP trusts for each other. Gans, Blattmachr and Zeydel's

112 This is a potential trap because with the high federal estate tax threshold, securing the marital deduction may no longer be useful. 113 MD. CODE ANN. EST. & TRUSTS § 14.5-1003(a) and (a)(2)(iii). 114 Id. § 14.5-1003(b)(1). 115 Id. § 14.5-1003(c). 116 11 U.S.C. § 548(a)(1) permits a bankruptcy trustee to avoid a transfer of property if the transfer was made within two years of the debtor's filing for bankruptcy. 117 11 U.S.C. § 548(e)(1) permits a bankruptcy trustee to avoid a transfer of property if the transfer was made within 10 years of filing for bankruptcy and the transfer was made pursuant to a domestic asset protection statute or similar device. It seems that the QTIP trust would qualify as a similar device.

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article, Supercharged Credit Shelter TrustSM, addresses these advantages.118 Because this course

focuses on asset protection, the income and wealth transfer tax implications of the inter vivos

QTIP trust exceed the scope of this discussion.

C. Disadvantages of an Irrevocable Inter Vivos QTIP Trust

Despite the powerful asset protection and beneficial income and estate tax maneuvers

provided by the inter vivos QTIP trust, engaging in the transaction has its pitfalls. A majority of

the potential issues, however, are connected with the tax consequences of the transaction and not

with the asset protection provided by the Maryland statute. The issues discussed in this section

address potential problems with the QTIP trust and ways in which settlors may disqualify

themselves from the benefits of the safe harbor.

i. Divorce of the Settlor and Beneficiary-Spouse

In order to qualify under the Maryland QTIP provision, the trust must be irrevocable.

Therefore, once the transaction has been executed, the settlors are unable to unwind it. If the

settlor and the beneficiary-spouse divorce, the beneficiary-spouse will enjoy the benefits of the

settlor's assets for the remainder of his or her lifetime. Thus, the inter vivos QTIP trust should not

be used if divorce is a possibility in the clients' future. The settlor, however, may be able to

mitigate the effects of the divorce by writing specific provisions into the trust that become

effective upon divorce. For example, the trust provisions could limit the beneficiary-spouse's

access to the principal so that "after divorce, only income distributions [are] mandated."119

118 Mitchell M. Gans, Jonathan G. Blattmachr, Diana S. C. Zeydel, Supercharged Credit Shelter Trust, 21 PROB. & PROP. 52 (July/August 2007). 119 Richard R. Gans & Barry A. Nelson, New §736.0505(3) Assures Tax/Asset Protection of Inter Vivos QTIP Trusts, 84 FLA. B. J., 50, 52(Dec. 2010).

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ii. Citizenship of the Settlor and Beneficiary-Spouse

Non-U.S. citizens may not engage in asset protection through an inter vivos QTIP trust.

The Maryland statute provides asset protection to the remainder interest only if the trust corpus

can be treated as "qualified terminable interest property" under I.R.C. § 2523(f).120 Only U.S.

citizens may make a QTIP election.121 Thus, without satisfying the requirements for the QTIP

election, the trust fails to qualify for the asset protection provided by the statute.

iii. Jurisdiction

Not all states allow citizens to engage in asset protection via an inter vivos QTIP trust.122

Thus, the practitioner should ensure that only Maryland law, or the law of another jurisdiction

that allows asset protection for inter vivos QTIP trusts, governs in the trust document. If the law

governing the trust switches to a jurisdiction without a statute, the trust corpus will likely be

attachable by the settlor's creditors when the remainder interest invests in the settlor upon the

death of the donee-spouse. The mobility of clients, therefore, can thwart the transaction. This

pitfall can be carefully controlled through the provisions of the trust document.

iv. Reciprocal Trust Doctrine

In creating inter vivos QTIP trusts for each other, a couple may run into the reciprocal

trust doctrine, which was adopted by the Supreme Court of the United States in United States v.

120 MD. CODE ANN. § 14.5-1003. 121 I.R.C. § 2056(b)(7). 122 Jurisdictions providing asset protection to the remainder interest of an inter vivos QTIP trusts include: Arizona, Delaware, Florida, Kentucky, Maryland, Michigan, North Carolina, Oregon, South Carolina, Texas, Virginia and Wyoming. Barry Nelson & Richard Franklin, Inter Vivos QTIP Trusts Could Have Unanticipated Income Tax Results to Donor Post-Divorce, STEVE LEIMBERG'S ESTATE PLANNING NEWSLETTER, Sept. 15, 2014.

23

Estate of Grace, 395 U.S. 316 (1969). In the case, a husband created a trust for the benefit of his

wife.123 The trust provisions gave the wife an income interest and a power of appointment in

favor of the couple's descendants and the husband.124 Fifteen days after the husband created the

trust, the wife created a second trust, giving the husband an income interest and a power of

appointment in favor of the wife and the couple's descendants.125 When the wife died, her estate

claimed that the trust created by the husband was not includable in her gross estates under a

previous version of I.R.C. §2036 because another party created the trust for her.126 When the

husband died a few years later, his estate used the same argument to exclude the trust created by

his wife from his gross estate.127 The IRS disagreed with the couple's approach and argued that

form should not trump substance, that the transaction left the couple in a substantially similar

economic circumstance, and that the transaction should be disregarded in order to make the

estate tax fair.128 The Supreme Court agreed with the IRS and found that the trust assets were

includable in couple's respective estates.

It is important to remember that Estate of Grace uses the reciprocal trust doctrine to

determine whether the trust assets were subject to the federal estate tax. It would seem, therefore,

that the doctrine has little or no application to creditor rights under the Maryland Estate and Trust

statute. However, the statutory creditor protection only attaches when a trust qualifies for the

QTIP election.129 It is possible that if the IRS denies the QTIP election because of the reciprocal

trust doctrine, the trusts would not qualify for the asset protection under the statute.

Gans, Blattmachr and Zeydel believe that the reciprocal trust doctrine is inapplicable to

123 Estate of Grace, 395 U.S. 316, 319 (1969). 124 Id. 125 Id. 126 Id. at 320. 127 Id. 128 Id. at 322. 129 MD. CODE ANN. EST. & TRUSTS § 14.5-1003(2)(ii).

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the inter vivos QTIP trust.130 But, they also warn estate planners to err on the side of caution and

avoid the implication of the doctrine.131 Some drafting suggestions used to avoid the doctrine

include: appointing different trustees, allowing a considerable amount of time to pass between

the creation of the two trusts, making sure the dispositive provisions of the two trusts are

different, and using powers of appointment to modify the settlor's and beneficiary's powers under

the trust terms.132

D. Conclusion

The inter vivos QTIP trust can provide significant protection to a couple's assets. The

trust also has its short comings. Clients lose total control of the property, which can be

problematic should the couple divorce. The plan only works if state law protects the settlor's

remainder interest, which could be lost if clients move to a new state. Transfers to QTIP trusts

can be avoided under bankruptcy law and may be subject to the reciprocal trust doctrine. If

clients are willing to assume these risks, however, they can enjoy sophisticated tax benefits and

powerful asset protection.

130 Mitchell M. Gans, Jonathan G. Blattmachr, Diana S. C. Zeydel, Supercharged Credit Shelter Trust, 21 PROB. & PROP. 52, 56-59 (July/August 2007). 131 Id. at 57-58; see also Richard R. Gans & Barry A. Nelson, New §736.0505(3) Assures Tax/Asset Protection of Inter Vivos QTIP Trusts, 84 FLA. B. J., 50, 52 (Dec. 2010). 132 Gans, et al., 21 PROB. & PROPER. at 57-58; see also Gans & Nelson, 84 FLA. B. J., at 52.

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1 Law Offices of Oshins & Associates, LLC

ABA – Real Property, Trust and Estate Law Section

Domestic Asset Protection Trust Planning: Jurisdiction Selection

There’s No Place Like Home – Domestic Self-Settled Asset Protection Trusts and Inter Vivos QTIP

Trusts: Why Do Them and Where to Go

April 14, 2015

NEVADA

Presented by: Kristen E. Simmons, EPLS, AEP®

Oshins & Associates, LLC 1645 Village Center Circle, Suite 170

Las Vegas, Nevada 89134 (702) 341-6000, ext. 7

[email protected]

I. The Basics – Creating a Self-Settled Nevada Asset Protection Trust

Chapter 166 of the Nevada Revised Statutes (the Spendthrift Trust Act of Nevada (herein the “Nevada Act”)) was introduced into law in October 1999, placing Nevada into the Domestic Asset Protection Trust ring with only a handful of other states. In the fifteen plus years since its enactment, as other states have adopted versions of a self-settled spendthrift trust statute, the Nevada Act has been refined to keep Nevada among the elite jurisdictions in which to establish an asset protection trust. A. Requirements for Creation

(1) The trust must be irrevocable, must not require that any part of the income or principal of the trust be distributed to the settlor, and must not be funded with an intent to hinder, delay or defraud known creditors (NRS 166.040).

(2) The trust must appoint at least one Nevada trustee who has the power to maintain records and prepare income tax returns for the trust. The Nevada trustee must be one of the following: (i) a natural person who resides or has his or her domicile in Nevada, (ii) a trust company that is organized under federal law, Nevada law or another state’s law and maintains an office in Nevada for the transaction of business, or (iii) a bank that is organized under federal law, Nevada law or another state’s law, that maintains an office in Nevada for the transaction of business and that possesses and exercises trust powers (NRS 166.015(2)).

(3) The trust must contain a spendthrift clause that places a restraint on the voluntary and

involuntary transfer of the interest of the beneficiary (NRS 166.020).

B. Powers of Settlor The Nevada Act permits the settlor to retain significant powers over the trust and its assets, while still qualifying as a spendthrift trust. The primary power that the settlor may not retain is the power to make distributions to himself or herself without the consent of another person. The


Nevada Act specifies explicitly some of the powers that the settlor may retain without disqualifying the trust as a spendthrift trust. Specifically, the Nevada Act allows the settlor to retain the following controls or powers: (1) The settlor may be a co-trustee of the spendthrift trust, so long as the role as co-trustee does

not enable the settlor to make distributions to himself or herself without the consent of another person (NRS 166.040(3)). Clients are often concerned with granting another individual investment control over their assets. This statute expressly permits the settlor to be an investment trustee of the trust and maintain the investment control, so long as the role of the investment trustee is restricted so that the settlor may not make distributions to himself or herself without the consent of another person.

(2) The settlor is permitted to remove and replace the trustees, direct trust investments and exercise other management powers over the trust assets (NRS 166.040(3)).

(3) The settlor may have the power to prevent a distribution from the trust (NRS 166.040(2)(a)).

In designing a Nevada Asset Protection Trust, this is generally referred to as a “veto power,” by which the settlor may have advance notice of a proposed distribution by the distribution Trustee, and may veto the proposed distribution before it is made to the intended beneficiary. This power is used when utilizing an incomplete gift Nevada Asset Protection Trust (discussed below).

(4) The settlor may retain a lifetime or testamentary special power of appointment (NRS 166.040(2)(b)). A special power of appointment is one that may be exercised in favor of anyone but the settlor, the settlor’s estate, the settlor’s creditors or the creditors of the settlor’s estate. The Nevada Act specifically permits the settlor to retain a testamentary and lifetime special power of appointment over the trust assets. This power of appointment is crucial in designing the trust as an incomplete gift for federal transfer tax purposes.

(5) The settlor may use real or personal property owned by the trust (NRS 166.040(2)(h)). The

Nevada Act permits the settlor, in his or her capacity as a beneficiary of the trust, to continue to use property contributed to the trust with or without payment of rent (so that trust property may be retained within the protection of the trust and not distributed to the beneficiaries).

In addition to explicitly outlining broad powers that the settlor of a Nevada Asset Protection Trust may retain, the Nevada Act further qualifies certain trusts, traditionally used for estate and income tax planning, as spendthrift trusts. Specifically, the Nevada Act permits Qualified Personal Residence Trusts (QPRTs), Grantor Retained Annuity Trusts (GRATs) and Charitable Remainder Trusts (CRTs) to be characterized as spendthrift trusts during the period that the settlor retains an interest (through personal use or a retained annuity/unitrust), thereby protecting the settlor’s retained interests therein.

C. Creditor Exposure and Statute of Limitations

NRS 166.170 outlines limitations on actions brought with respect to transfers of property to a spendthrift trust. (1) Who is a Creditor? Under Nevada law, a person is a creditor if the person has a claim. A

claim is defined generally as a right to payment (NRS 112.150).


(2) Future Creditors - A person that becomes a creditor of the transferor after the transfer is made to a spendthrift trust may not bring an action with respect to the transfer of the property to the spendthrift trust unless the action is commenced within two years after the transfer is made (NRS 166.170(b)).

(3) Current Creditors

a. If at the time a transfer is made to a spendthrift trust the transferor has a current creditor, that current creditor’s action with respect to the transfer would be barred unless it is commenced within two years from the date of the transfer or six months from when the current creditor discovers or reasonably should have discovered the transfer, whichever is later (NRS 166.170(1)(a)).

b. The Nevada Act permits the “tolling” of the limitations period as a public policy matter, so that a creditor who has no reasonable expectation of discovering a transfer to a spendthrift trust has an extended period of time to bring an action.

c. The tolling period in Nevada is among the shortest in the states that permit Domestic

Asset Protection Trusts. The majority of DAPT jurisdictions permit a one-year tolling of the statute of limitations period for current creditors.

(4) Statutory Exception Creditors? NO! Of the Domestic Asset Protection Trust states, nearly all allow certain exception creditors to pierce through the spendthrift trust. These exception creditors include child support, divorcing spouses, alimony, and in some instances (such as Delaware) preexisting tort creditors. Nevada does not have any statutory exception creditors. It and Utah are the only Domestic Asset Protection Trust states that do not statutorily create these “super-creditors.”

(5) Bankruptcy. Although Nevada does not have any statutory exception creditors, every self-settled spendthrift trust is subject to a ten-year statute of limitations period in Bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added new language to Section 548 of the Bankruptcy Code, which governs fraudulent transfers and obligations, as follows:

“(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition if-

(A) Such transfer was made to a self-settled trust or similar device; (B) Such transfer was by the debtor; (C) The debtor is a beneficiary of such trust or similar device; and (D) The debtor made such transfer with actual intent to hinder, delay, or defraud

any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”

(6) Other Considerations

a. Nevada Advantage: Limiting the Exposure of Tolling. Not only does Nevada have one of the shorter tolling periods, the Nevada Act also permits a transferor to make a public record of a transfer to put potential current creditors on notice (thereby effectively eliminating the tolling period if the public record is made at the time of the transfer). See NRS 166.170(2) below:


“A person shall be deemed to have discovered a transfer at the time a public record is made of the transfer, including, without limitation, the conveyance of real property that is recorded in the office of the county recorder of the county in which the property is located or the filing of a financing statement pursuant to chapter 104 of NRS.”

b. Burden of Proof. A creditor wishing to bring an action with respect to the transfer of property to a spendthrift trust bears the burden of proving by clear and convincing evidence that the transfer was a fraudulent transfer or that the transfer violated a legal obligation owed to the creditor bringing the action under a contract or court order that was enforceable by the creditor at the time of the transfer. Absent clear and convincing evidence, the property transferred would not be subject to the claims of the creditor, even if the transfer was made within the statutory period noted above (NRS 166.170(3)).

c. Permitted Transfers for Convenience. The Nevada Act permits the trustee of the Nevada Asset Protection Trust to distribute property from the trust to a settlor or beneficiary for the purpose of obtaining a loan secured by a mortgage or deed of trust. So long as the property distributed is reconveyed to the trust, there is no “new” transfer when the property is reconveyed and the transfer from the trust is disregarded as though the property was owned by the Nevada Asset Protection Trust from its original date of contribution (NRS 166.170 (4)).

d. Protection of Advisors and Trustees. In addition to protecting transfers to a

spendthrift trust (subject to the limitations and burden of proof noted above), the Nevada Act also protects the advisors of a settlor or trustee of a spendthrift trust and the trustee of a spendthrift trust from liability associated with the transfer of property to a spendthrift trust unless the person who would otherwise bring the action regarding the transfer, by clear and convincing evidence, can prove that the advisor or trustee acted knowingly and in bad faith in violation of the laws of Nevada and that the action of the advisor or trustee directly caused damages to the person asserting the claim (NRS 166.170(5) and 166.170(6)).

e. Coordination with Decanting Laws. Nevada law permits the Trustee of a trust to

decant an existing trust into another trust (NRS 163.556). The Nevada Act provides that if a spendthrift trust is decanted into a second spendthrift trust, the statute of limitations period during which a creditor could bring an action against the original spendthrift trust is not lengthened. Rather, when the assets of the original spendthrift trust are distributed to the second spendthrift trust through the decanting action of the Trustee, the assets transferred to the second spendthrift trust are deemed to have been transferred to that trust on the same date they were initially transferred by the settlor to the original spendthrift trust (NRS 166.170(9)).

f. Change of Situs. Generally, if the situs of an existing trust is transferred to Nevada

from another Domestic Asset Protection Trust state or from a foreign jurisdiction that permits self-settled spendthrift trusts, then for purposes of determining the statute of limitations period applicable in Nevada, the date that the property was initially transferred to the trust in the other state or foreign jurisdiction will be the deemed date of transfer in Nevada. See NRS 166.180(2):


“2. For purposes of NRS 166.170, if the domicile of an existing trust is transferred from another state or from a foreign jurisdiction to this State and the laws of the other state or jurisdiction are similar to the provisions of this chapter, the transfer shall be deemed to have occurred:

(a) On the date on which the settlor of the trust transferred assets into the trust if the applicable law of the trust has at all times been substantially similar to the provisions of this chapter; or (b) On the earliest date on which the applicable laws of the trust were substantially similar to the provisions of this chapter.”

D. The Nevada Advantage

In outlining the basics above, it is important to note that there are many benefits to establishing a Domestic Asset Protection Trust under Nevada law. To reiterate these benefits, the following are the most commonly noted Nevada advantages: (1) No Exception Creditors. Nevada does not have any statutory exception creditors that can

pierce a spendthrift trust. As an illustration, assume a physician is looking to establish a self-settled spendthrift trust and is unaware of any malpractice claims, but has treated hundreds of patients in his or her practice. That physician may choose to utilize a Nevada Asset Protection Trust over a similar Delaware trust, since preexisting tort creditors (including malpractice creditors that are unknown to the physician at the time of the transfer but who the physician treated prior to the transfer) are exception creditors in Delaware.

(2) No Affidavit of Solvency Required. Many states, such as Alaska, Utah and Ohio, require that each time a transfer is made by the settlor to a self-settled spendthrift trust, the settlor must execute an Affidavit of Solvency that states that the settlor is solvent and not intending to delay, defraud or hinder a known creditor by making the transfer. Although this may be a “best practices” approach in any jurisdiction (so that the attorney is not advising the settlor to make a fraudulent transfer), having a statutory requirement that an Affidavit of Solvency be signed each time a transfer is made sets up the settlor of the trust for failure. Neglecting what some settlor’s may consider a menial and cumbersome task in a state that requires the Affidavit could void the protection afforded by that state’s spendthrift trust statute. Nevada does not require that the settlor execute an Affidavit of Solvency when making transfers to the trust.

(3) Short Statute of Limitations Period. As noted above, Nevada has one of the shortest statute

of limitations periods during which a creditor may bring a claim against a transfer to a Nevada Asset Protection Trust. A majority of the Domestic Asset Protection Trust states have four-year statute of limitations periods, with a one-year tolling period for current creditors. Nevada, however, has a two-year statute of limitations period and a six-month tolling period (which can be avoided by providing public notice of a transfer) for current creditors.

(4) No State Income Tax. Nevada does not impose a state income tax on residents or on trusts

administered in Nevada. This consideration becomes important in the discussion of Nevada Incomplete Gift Non-Grantor Trusts (NINGs) below.


II. Considerations for Non-Residents of Nevada Only fifteen states currently permit a self-settled spendthrift trust. Clients in other states want to know – will the Nevada Asset Protection Trust work to protect the non-resident settlor’s assets. There are several considerations for non-Nevada residents. (1) Conflict of Laws Issues

a. Generally, the Full Faith and Credit Clause of the U.S. Constitution will require states to recognize the laws of another state, unless those laws are against a strong public policy of the home state.

b. Some proponents argue that the increasing number of states recognizing some form of self-settled trusts weakens the public policy arguments of other states.

c. Limited Case Law

i. There have been only two primary cases addressing whether a Domestic Asset Protection Trust will be upheld if established by a non-resident of the Domestic Asset Protection Trust state. Neither case gives clear authority of the rule of law.

ii. In re Huber, a Bankruptcy Court case, included assets of an Alaska self-settled spendthrift trust established by a Washington state resident in the bankrupt settlor’s bankruptcy estate. In the dicta, the court stated that it believed it was against Washington state’s public policy for a Washington resident to establish a self-settled trust. Because of this harmful dicta, this case is often cited by nay-sayers that Domestic Asset Protection Trusts do not work. However, the transfers made in the Huber case were within the ten-year claw-back period outlined in Section 548(e) of the Bankruptcy Code. Further, the transfers made in the Huber case were found to be clear fraudulent transfers, with the intent to defraud a known creditor.

iii. The lower court in Dahl v. Dahl upheld what appeared to be a Nevada Asset Protection Trust in a Utah divorce case, finding that the divorcing wife was not entitled to assets transferred by husband to the Nevada trust. However, the Utah Supreme Court recently reversed the decision, finding that the trust in question, although called “The Dahl Family Irrevocable Trust” was in fact a revocable trust. This is because the settlor reserved a power to alter or amend any of the terms of the trust. Therefore, this case is no longer relevant to determining the choice of law issues that would apply for a non-resident establishing a Domestic Asset Protection Trust.

(2) Funding Considerations for Non-Residents

a. The first step a non-resident can take in bolstering the argument that Nevada law should apply to a Nevada Asset Protection Trust is to carefully choose the assets to be contributed to the trust.

b. Nevada assets would be ideal for contribution. Forming a Nevada limited liability company or Nevada limited partnership to hold the underlying assets, and then contributing the LLC or LP interest to the trust results in a Nevada trust holding Nevada personal property (as LLC and LP interests are deemed personal property).


c. The least favorable asset to contribute to a Nevada Asset Protection Trust, or any Domestic Asset Protection Trust, for that matter, is real property located in a jurisdiction that is not a Domestic Asset Protection Trust state.

(3) Hybrid Nevada Asset Protection Trust a. The conservative approach is for a non-resident to use a Hybrid Nevada Asset Protection

Trust.

b. A Hybrid Nevada Asset Protection Trust is one that does not include the non-resident settlor as a beneficiary. Instead, it includes the non-resident settlor’s family and gives a Trust Protector the ability to add the non-resident settlor at some point in the future (when the choice of law issue is clearer or when there is no longer as strong a concern about asset protection).

c. Because the settlor is not a beneficiary of the Hybrid Nevada Asset Protection Trust, it is important that it is treated as a rainy day fund and that the settlor retains sufficient assets to maintain the settlor’s lifestyle.

d. A more thorough discussion of the Hybrid Nevada Asset Protection Trust is outlined in the design portion of the outline below.

III. Designing and Integrating a Nevada Asset Protection Trust into a Client’s Overall Plan A Nevada Asset Protection Trust can take many forms. Depending on the intended use of the trust, it may be structured as a grantor trust for income tax purposes or a complex trust for income tax purposes; it may be used solely as an asset protection tool or may also be used for estate tax savings; it may include the settlor as a beneficiary or it may leave open the ability for the settlor to become a beneficiary in the future. This section will outline the different design considerations when incorporating a Nevada Asset Protection Trust into a client’s overall plan.

A. Incomplete Gift Nevada Asset Protection Trust

(1) When a Nevada Asset Protection Trust is intended for asset protection only, and not for estate tax savings, the self-settled spendthrift trust is structured so that transfers are incomplete gifts for transfer tax purposes. An Incomplete Gift Nevada Asset Protection Trust will be included in the settlor’s estate, and therefore, should be drafted to coordinate with the settlor’s overall estate plan.

(2) Drafting Considerations. In order to ensure that transfers to the trust are not completed gifts, the settlor of the trust often retains the following powers over the trust property:

a. The settlor may retain the power to veto distributions proposed by the distribution

trustee. A power to veto a distribution is a power to affect the beneficial enjoyment of the property. The veto power causes not only estate inclusion of the trust assets in the settlor’s federal estate tax proceeding, but it also prevents a completed gift by the settlor to the Nevada Asset Protection Trust. Further, the veto power also protects the settlor from an unintended completed gift in the event the distribution trustee decides to make a distribution to a beneficiary other than the settlor (since the settlor can override the distribution trustee’s decision).


b. The settlor may retain a lifetime and a testamentary limited (special) power of appointment. As noted above, the special power of appointment must be limited so that the settlor may not appoint trust property to the settlor, the settlor’s estate, the settlor’s creditors or the creditors of the settlor’s estate. The lifetime and testamentary powers of appointment give the settlor the power to change the interests of the beneficiaries of the Nevada Asset Protection Trust, thereby making transfers to the trust incomplete gifts (See Treasury Regulation 25.2511-2)).

c. In order to mitigate estate taxes at the settlor’s death, it may be desirable to include marital deduction provisions within the Incomplete Gift Nevada Asset Protection Trust, since it will be included in the settlor’s estate. Adding a marital deduction formula will protect against an unintended estate tax of the assets in the Nevada Asset Protection Trust at the settlor’s death.

(3) Benefits a. There are no gift tax ramifications in funding the Incomplete Gift Nevada Asset

Protection Trust, so there is no need for an appraisal of hard-to-value assets contributed to the trust and there is no ceiling on the amount that can fund the trust.

b. There is more flexibility with an Incomplete Gift Nevada Asset Protection Trust, because of the settlor’s retained veto power and powers of appointment. Both of these powers give the settlor flexibility to modify the ultimate beneficiaries of the trust and make modifications to the Nevada Asset Protection Trust without amending it.

B. Completed Gift Nevada Asset Protection Trust

Can an Asset Protection Trust be used for estate tax planning purposes? With guidance from Private Letter Ruling 200944002, it appears the answer may be yes, depending on the jurisdiction selected. (1) Completing a Gift to a Nevada Asset Protection Trust

a. A settlor may make a transfer to a Nevada Asset Protection Trust that is structured as a completed gift. The Nevada Asset Protection Trust must be drafted carefully to ensure that the gift is complete.

b. The settlor must not retain dominion and control over the property (Treas. Reg. Section 25.2511-2).

i. In a completed gift Nevada Asset Protection Trust, the settlor would not be permitted to retain a power to veto distributions made by the Trustee of the trust. The retained veto power would be a power to affect the beneficial enjoyment of the property.

ii. Further, the settlor may not retain a lifetime or testamentary special (limited) power of appointment over the trust property. Treas. Reg. 25.2511-2 addresses that a retained power of appointment, even if it is a limited power, can cause a transfer to be characterized as an incomplete gift.


iii. The settlor may retain the power to remove and replace the Trustees of the trust and still make a completed gift transfer to the Nevada Asset Protection Trust.

iv. If a creditor may pierce the trust to satisfy a judgment against the settlor, the settlor will be treated as retaining dominion and control over the trust assets and the gift may not be complete (see Revenue Ruling 76-103).

v. Nevada Advantage: No exception creditors. By utilizing a Nevada Asset Protection Trust rather than a trust in a Domestic Asset Protection Trust jurisdiction that permits exception creditors, the client is in a better position to argue that a transfer is a completed gift. The IRS may find that a transfer to a spendthrift trust in another Domestic Asset Protection jurisdiction that has exception creditors is not a completed gift, since under the law of the state in which the trust is established, certain creditors may access the trust assets to satisfy a debt against the settlor.

(2) Private Letter Ruling (PLR) 200944002

a. The IRS issued Private Letter Ruling (PLR) 200944002 in 2009, which analyzed a self-settled Alaskan Asset Protection Trust to determine whether the assets would be included in the Alaskan settlor’s estate for estate tax purposes.

b. The transfers made by the settlor to the trust reviewed by the PLR were completed

gifts, and the settlor did not retain any powers of appointment or veto powers over the assets.

c. The settlor of the Alaskan Asset Protection Trust was included as a beneficiary of the trust.

d. The IRS ruled in the PLR that the spendthrift trust would not be included in the

settlor’s estate for estate tax purposes.

e. The ruling included a caveat excepting from its ruling the possibility of an understanding or pre-existing arrangement between the settlor and the trustee of the spendthrift trust that may otherwise cause inclusion of the trust assets under IRC § 2036.

f. It should be noted that PLRs are binding only as to the requesting taxpayer and do

not establish precedent upon which other taxpayers may rely.

(3) Application of PLR 200944002 to Nevada Asset Protection Trust a. Although the PLR addressed an Alaskan resident establishing an Alaskan trust, since

Alaska and Nevada have similar laws (notably, Nevada law may be superior to Alaska law because of the shorter statute of limitations period, lack of exception creditors and no requirement of an Affidavit of Solvency for each transfer made), it can be inferred from the PLR that the result would be the same for a Nevada resident establishing a Nevada trust.


b. In 2011, the Nevada legislature updated the Nevada Act to negate any implied agreements between the settlor of a spendthrift trust and a trustee of the trust. Specifically, NRS 166.045 provides as follows:

“NRS 166.045 Powers of settlor. The settlor of a spendthrift trust has only those powers and rights that are conferred to the settlor by the trust instrument. An agreement or understanding, express or implied, between the settlor and the trustee that attempts to grant or permit the retention of greater rights or authority than is stated in the trust instrument is void.”

c. The addition of this language should bolster the use of a Nevada Asset Protection Trust as an estate tax savings tool for the right client.

(4) IRC 2036 and 2038 – Specific Considerations for Non-Residents a. Even if the Domestic Asset Protection Trust is structured as a completed gift and

follows the guidelines set out in PLR 200944002, there are some additional issues to consider whether the trust will be outside of a settlor’s estate for estate tax purposes.

b. Revenue Ruling 76-103 stands for the proposition that if a creditor can pierce a trust to satisfy claims against the settlor’s estate, the trust is includible in the settlor’s estate for estate tax purposes.

i. Based on this ruling, Nevada is likely the most favorable state in which to establish a Completed Gift Asset Protection Trust, if the goal is exclusion for estate tax purposes. This is because Nevada has no exception creditors.

ii. Nevada law would seem to clearly apply to a Nevada resident establishing a Completed Gift Nevada Asset Protection Trust, thereby ensuring that after the statute of limitations period, the trust assets would not be included in the settlor’s estate for estate tax purposes.

iii. As discussed above, the law is unclear as it applies to non-Nevada residents establishing a Nevada Asset Protection Trust. However, use of a Hybrid Nevada Asset Protection Trust (discussed in more detail below) may place the non-resident settlor in the best position possible if the non-resident wishes to use the Completed Gift Asset Protection Trust strategy.

c. Further, 2036(a) provides that if a decedent made a transfer and retained a right to the

income or enjoyment of the property, the decedent made a transfer with a retained interest, causing inclusion of the property in the decedent’s estate.

i. PLR 200944002 indicates that since the settlor of the self-settled spendthrift trust did not have an implied understanding with the Trustee that the settlor would receive property contributed to the trust back, the fact that the settlor was a beneficiary of the trust did not constitute a retained right to the income or enjoyment of the property.

ii. Conservative Approach: Instead of including the settlor as a beneficiary at the time of creation of the Completed Gift Nevada Asset Protection Trust, it


would be more conservative to use the Hybrid Nevada Asset Protection Trust (see discussion below). If the settlor is never added as a beneficiary of the Hybrid Completed Gift Nevada Asset Protection Trust, then upon the settlor’s death, there is a greater argument that the decedent settlor did not retain a right to the income or enjoyment of the property.

C. Hybrid Nevada Asset Protection Trust

(1) A Hybrid Nevada Asset Protection Trust is one that does not include the settlor as a beneficiary initially.

(2) The Hybrid Nevada Asset Protection Trust may include the settlor’s spouse, descendants and potentially more remote family members (such as parents or siblings) as initial beneficiaries of the trust.

(3) In funding the Hybrid Nevada Asset Protection Trust, it is important that it is treated as a true “rainy day” fund since the settlor is not included as a beneficiary. So long as the settlor is not sued and has maintained sufficient assets outside the Hybrid Nevada Asset Protection Trust, the trust will be maintained for the benefit of the settlor’s other beneficiaries.

(4) The Hybrid Nevada Asset Protection Trust appoints a Trust Protector, acting in a non-fiduciary capacity. The primary role of the Trust Protector is to add or remove beneficiaries from the trust.

(5) If the settlor’s circumstances change in the future, the Trust Protector may add the settlor as a beneficiary of all or of a portion of the Hybrid Nevada Asset Protection Trust.

(6) When is the Hybrid Nevada Asset Protection Trust used?

a. Incomplete Gift Nevada Asset Protection Trusts are most commonly drafted as Hybrid Nevada Asset Protection Trusts if the settlor is a non-resident of Nevada or another Domestic Asset Protection Trust state. The Hybrid version in this context places the settlor in a better position if a creditor raises a choice of law issue, presuming that the settlor never needs to be added as a beneficiary of the trust.

b. For residents and non-residents, if a Nevada Asset Protection Trust is to be a completed gift, the most conservative approach is to use a Hybrid Nevada Asset Protection Trust. If the settlor never has to be added as a beneficiary, the result is a third-party established trust for the settlor’s family, over which the settlor does not retain any right to the income or enjoyment from the property.

c. Nevada Incomplete Gift Non-Grantor Trusts (NINGs), discussed in more detail

below, should be drafted as Hybrid Nevada Asset Protection Trusts, where possible. Utilizing a Hybrid version of the trust bolsters the creditor protection. This has an added benefit in the NING because if a creditor can attach the assets of the trust, it will be deemed a grantor trust for income tax purposes (negating the state income tax savings). Further, if the settlor later moves to a state that has more favorable creditor and state income tax rules, a Trust Protector may be permitted to add the settlor as a beneficiary of the trust.


D. Nevada Incomplete Gift Non-Grantor Trusts (NINGs) (1) A Nevada Incomplete Gift Non-Grantor Trust (NING) is a trust that is structured to be its

own independent taxpayer for state and federal tax purposes, but that does not characterize transfers made by the settlor to the trust as completed gifts for transfer tax purposes.

(2) The ideal client for a NING Trust is a resident of a state with a high income tax rate.

(3) Each taxing state has different rules regarding trusts that would be subject to state income taxation.

(4) For example, in order to be protected from California state income tax, the income earned by the NING cannot be California source income and the fiduciaries of the NING would have to be non-residents of California.

(5) Because Nevada has arguably the most favorable self-settled spendthrift trust laws, Nevada is one of the leading jurisdictions for these types of trusts.

(6) The design considerations in drafting a NING are complex, and often will vary depending on the state in which the settlor resides. As such, an analysis of the provisions to be included (or omitted) is beyond the scope of this outline.

Introduction to New Hampshire Trust Laws

Todd D. Mayo

Principal and General Counsel

Perspecta Trust LLC

One Liberty Lane East

Hampton, NH 03842

[email protected]

+1 603 929 2671

© 2014 Todd D. Mayo. All rights reserved. These materials are excerpted from Todd D. Mayo, New Hampshire Trust

Laws: Statutes and Commentary (Perspecta Trust LLC, 2014). Nothing contained in this materials is to be considered as

the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own

legal counsel. These materials are intended educational and informational purposes only.

New Hampshire Trust Laws Statutes and Commentary

Todd D. Mayo

® ® ®

© 2014 Todd D. Mayo.

All rights reserved. Published by Perspecta Trust LLC, One Liberty Lane East, Hampton, New Hampshire 03842 USA.

Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book is intended for educational and informational purposes only.

ISBN-13 978-0692285602 ISBN-10 0692285601

2 Introduction

New Hampshire’s trust laws promote creative and effective trust design. The laws themselves have been crafted with three themes in mind. First, the preservation of settlor intent. New Hampshire has a long tradition of preserving settlor intent, and that tradition infuses the statutes. The courts have described settlor intent as “sovereign”116 and “paramount,”117 and the statutes explicitly echo the primacy of settlor intent.118

Second, the promotion of certainty. The ongoing codification of the trust laws—incorporating new concepts inspired by new thinking and resolving issues identified in case law throughout the country—helps to create a framework that facilitates trust planning and administration. Uncertainty tends to frustrate planning and administration, and it sometimes leads to judicial resolution of issues. Certainty creates a more efficient environment in which to create and administer trusts.

Third, balance. By its nature, a trust involves multiple parties—the settlor, beneficiaries, trustees, trust advisors, trust protectors, and third parties. In its trust laws, New Hampshire has endeavored to balance fairly the interests of those parties. Those laws recognize the tensions that exist between and among the parties involved in a trust.

116 King v. Onthank, 152 N.H. 16 (2005) (“It is well settled that the testator's intent is the sovereign guide in the interpretation of a will, and, this intent being ascertained, the court must enforce it unless it is illegal or impossible to do so”). The courts uphold settlor intent to the same degree as testator intent. See Katz v. Katz, 104 N.H. 478 (1963). 117 In re Lowy, 156 N.H. 57 (2007). 118 See, e.g., RSA 564-B:1-112 and RSA 564-B:11-1101.

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A trust is an organizational framework for effecting an individual’s donative objectives. That organizational framework may operate for generations. New Hampshire’s trust laws, which continue to evolve, provide the structures and tools to craft that framework, designing it to meet a settlor’s and the beneficiaries’ specific circumstances.

This chapter is an introduction to those laws. The aim here is to provide some road maps for navigating through those statutes when seeking to construct a particular feature of a trust or address a specific issue affecting a trust. Those maps lead to the specific statutes. While the commentary here tends to be more holistic, the commentary following the specific statutes is more granular.

Statutory Framework

New Hampshire’s robust body of trust law is concentrated in three statutory chapters:

Uniform Trust Code (UTC). The UTC is the main body of law governing trusts. The UTC is codified in RSA 564-B. The UTC includes the Uniform Prudent Investor Act, which is found in article 9 of RSA 564-B. Chapter 3 focuses on the UTC.

Uniform Principal and Income Act (UPIA). The UPIA is a comprehensive set of default rules governing the allocation of receipts and disbursements between income and principal. The UPIA is codified in RSA 564-C. Chapter 4 focuses on the UPIA.

Qualified Dispositions in Trust Act (QDTA). The QDTA recognizes self-settled spendthrift trusts. The QDTA is codified in RSA 564-D. Chapter 5 focuses on the QDTA.

In addition to those statutes, an assortment of other statutes affect trusts, their administration, and ancillary planning issues:

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Charitable trusts. In addition to the UTC’s provisions applicable to charitable trusts, the statutes generally applicable to charitable organizations also affect charitable trusts. Those statutes are found in RSA 7. Chapter 6 focuses on those statutes.

Miscellaneous provisions. An assortment of other statutes affects inter vivos and testamentary trusts. Those statutes include what remains of the Uniform Trustees Powers Act. Some statutes governing wills and estates—such as the statute codifying the enforceability of no-contest provisions—are, at a minimum noteworthy, and, in some cases, relevant in trust design and administration. Chapter 7 collects those statutes.

Trust-related tax laws. New Hampshire does not impose a general income tax or a capital gains tax, but does impose an interest and dividends (I&D) tax. Trusts are not subject to the I&D tax. Chapter 8 focuses on those I&D tax statutes.

Trust court. In 2014, New Hampshire established a specialty court that focuses on complex trust disputes. Chapter 9 contains materials concerning the trust court.

Default and Mandatory Rules

The UTC is a set of a default and mandatory rules.119 The UPIA is a set of default rules.120 To the extent that a rule is not mandatory, a settlor may modify or waive it.121 The settlor generally can modify or eliminate any of the trustee’s duties, except the trustee’s duty to act in good faith and in accordance with the terms and purposes of

119 RSA 564-B:1-105. 120 RSA 564-C:1-103(a)(1) (“in allocating receipts and disbursements between income and principal … a fiduciary … shall administer a trust … in accordance with the terms of the trust … even if there is a different provision in this chapter”). 121 RSA 564-B:1-105(b).

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the trust and the interests of the beneficiaries.122 Similarly, the trustee and beneficiaries may modify or waive a default rule, unless the modification or waiver violates a material purpose of the trust.123

Under the UTC, there are 17 mandatory rules.124 Those 17 rules can be grouped into six categories:

Trust creation and purpose. Two of those rules involve a trust’s creation and purposes:

The requirements for creating a trust.125

The requirement that a trust and the terms of that trust be for the benefit of its beneficiaries as their interests are defined under the terms of the trust, and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve.126

Duty to act in good faith. Two of those rules involve the duty to act in good faith:

The trustee’s duty to act in good faith and in accordance with the terms of the trust, the purposes of the trust, and the interests of the beneficiaries.127

If, under the terms of the trust, a trust advisor or trust protector is a fiduciary, the duty of the trust advisor or trust protector to act in good faith and in accordance with the terms of the trust, the purposes of the trust, and the interests of the beneficiaries.128

122 RSA 564-B:1-105(b)(2). 123 See, e.g., RSA 564-B:1-111. 124 RSA 564-B:1-105(b). 125 RSA 564-B:1-105(b)(1). 126 RSA 564-B:1-105(b)(3). 127 RSA 564-B:1-105(b)(2). 128 RSA 564-B:1-105(b)(15).


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Charitable trusts. Two of those powers involve charitable trusts:

To the extent that the trust is a charitable trust, the requirement that a trust advisor or trust protector is a fiduciary.129

To the extent that a trust is a charitable trust, the limitations on the trustee’s power to decant and the limitations on the trustee’s power of modification.130

Protection of the interests of a beneficiary, trustee, trust advisor, or trust protector. Four of those rules safeguard a person’s interests:

An interested person’s rights to seek a court’s determination of whether a trust’s nonjudicial dispute resolution procedures are reasonable.131

The extent to which a no-contest provision is unenforceable or inapplicable.132

The effect of an exculpatory term.133

The limitation periods for commencing a judicial proceeding.134

Third-party rights. Two of those rules involve creditor and other third-party rights:

A spendthrift provision’s effect and the rights of certain creditors and assignees to reach a trust under article 5.135

129 RSA 564-B:1-105(b)(16). 130 RSA 564-B:1-105(b)(17). 131 RSA 564-B:1-105(b)(13). 132 RSA 564-B:1-105(b)(14). 133 RSA 564-B:1-105(b)(8). 134 RSA 564-B:1-105(b)(10). 135 RSA 564-B:1-105(b)(5).

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The rights of a third party (i.e., a “person other than a trustee or beneficiary”).136

Court’s powers. Six of those rules involve the court’s powers:

The court’s power to modify or terminate a trust.137

The court’s power to require, dispense with, or modify or terminate a bond.138

The court’s power to adjust a trustee’s compensation.139

The court’s power to take action and exercise jurisdiction as may be necessary in the interests of justice.140

The subject-matter jurisdiction of the court and venue for commencing a proceeding.141

The license to modify or waive such broad swaths of the rules governing trusts fosters creative trust design tailored to specific circumstances. That license should be used thoughtfully and carefully. The careless or inattentive modification or waiver of one or more rules can have unwelcome results, including the frustration of the settlor’s intent.

Settlor Intent

New Hampshire has a long tradition of respecting settlor intent, and that tradition infuses the state’s statutory regime. In the Burtman case, which was decided in 1952, Chief Justice Francis W. Johnston wrote, “probably no jurisdiction has stood more

136 RSA 564-B:1-105(b)(9). 137 RSA 564-B:1-105(b)(4). 138 RSA 564-B:1-105(b)(6). 139 RSA 564-B:1-105(b)(7). 140 RSA 564-B:1-105(b)(11). 141 RSA 564-B:1-105(b)(12).


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steadfastly for giving effect to the intention of the testator rather than to arbitrary rules of law than New Hampshire.”142 Although the Burtman case involved the construction of a will, New Hampshire’s courts take the same approach for settlor intent as they do for testator intent.143 In Indian Head National Bank case, which was decided in 1963, the New Hampshire Supreme Court stated that “it is well established in this jurisdiction that our courts have shown a signal regard for the intention of a settlor of a trust.”144

The New Hampshire courts “give effect to the settlor’s intent unless that intent is contrary to statute or public policy.”145 This attitude is deeply imbedded in the state’s jurisprudence. In 1926, the New Hampshire Supreme Court stated that “it is believed that in no other jurisdiction is there greater liberality shown in seeking the intention of the testator in this, as in other particulars.”146 When common law applies, the court is reticent to create public policy exceptions that would defeat the settlor’s intent.147 When an unambiguous statute governs the matter, the court will not create a public policy exception.148

New Hampshire views settlor intent as paramount. In the Lowy case, which was decided in 2007, the state supreme court stated that, “when we construe a trust, the intention of a settlor is paramount.”149 In 2013, the court echoed that statement in the 142 Burtman v. Butman, 97 N.H. 254, 258 (1952) (upholding the validity of a no-contest provision based upon the provision’s express terms, repudiating any public policy exception for the beneficiary’s good faith or probable cause in contesting the will). 143 Katz v. Katz, 104 N.H. 478, 481-482 (1963). 144 Indian Head National Bank v. Rawls, 105 N.H. 142, 144 (1963). See also In re Wolcott, 95 N.H. 23, 26-27 (1948) and Katz v. Katz, 104 N.H. 478, 481-482 (1963). 145 Bartlett v. Dumaine, 128 N.H. 497, 504 (1986). See also In re Lathrop Estate, 100 N.H. 393, 394 (1956). 146 Clark v. Campbell, 82 N.H. 281, 285(1926) (determining that a trust was unenforceable because it did not have ascertainable beneficiaries). 147 See, e.g., Burtman v. Butman, 97 N.H. 254 (1952). 148 See, e.g., Scheffel v. Krueger, 146 N.H. 669 (2001). 149 In re Lowy, 156 N.H. 57, 61 (2007).

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Tamposi case.150 The state has incorporated this paradigm into its statutes.

New Hampshire’s strong deference toward settlor intent pervades its statutes.

Rejection of the Benefit-of-the-Beneficiaries Rule

In 2008, New Hampshire rejected the benefit-of-the-beneficiaries rule. In that year, New Hampshire amended portions of the UTC to foreclose any argument that the “benefit-of-the-beneficiaries rule” applied within the state. This emerging rule allows a court to modify or disregard the terms of a trust if the court determines that those terms are not in the beneficiaries’ interest as determined by the court, even if those terms unambiguously express the settlor’s intent. A scholarly debate has focused on this rule.151

Although it garnered little publicity, the rule had a cameo appearance in the Tamposi case. The probate court mentioned the rule when discussing the trust’s investments. Judge Gary Cassavechia wrote:

The court notes that in a recent article Professor Langbein himself suggests that in certain circumstances maintaining a family business may be an appropriate reason for nondiversification of trust assets and may not violate the “benefit-of-the-beneficiaries” rule. Langbein, Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments, 90 BU Law Review 375, 394 (2010).

The suggestion that the benefit-of-the-beneficiaries rule might have a toe-hold in New Hampshire flew in the face of the state’s long-standing tradition of protecting settlor intent.

150 Shelton v. Tamposi, 164 N.H. 490 (2013). 151 See, e.g., Jeffrey A. Cooper, Shades of Gray: Applying the Benefit-of-Beneficiaries Rule to Trust Investment Directives, 90 B.U. L. Rev. 2383 (2010); and John H. Langbein, Burn the Rembrandt?: Trust Law’s Limits on the Settlor’s Power to Direct Trust Investments, 90 B.U. L. Rev. 375 (2010).


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As amended, the UTC provides that, “for the purposes of determining the benefit of the beneficiaries, the settlor’s intent as expressed in the terms of the trust shall be paramount.”152 This statutory directive echoes the New Hampshire Supreme Court’s statement of this legal principle in In Re Lowy:

When we construe a trust, the intention of a settlor is paramount, and we determine that intent, whenever possible, from the express terms of the trust itself. … Moreover, we reject any construction of trust language that would defeat the clear and expressed intention of a settlor.153

As amended, the UTC’s mandatory rules state that “the requirement that a trust and its terms be for the benefit of its beneficiaries as their interests are defined under the terms of the trust.”154 The UTC also expressly provides that “a trust and its terms must be for the benefit of its beneficiaries, as their interests are defined under the terms of the trust.”155

Settlor Intent as Primary Consideration

As amended in 2014, the UTC further emphasizes the supremacy of settlor intent. In applying and construing the UTC, a court must give primary consideration to the preservation of the settlor’s intent as expressed in the terms of the trust.156 A court must give secondary consideration to three objectives: (1) the protection of the interests of the beneficiaries consistent with the settlor’s intent as expressed in the terms of the trust; (2) the promotion of certainty concerning the duties and liabilities of trustees, trust advisors, and trust protectors (including the division of those duties and liabilities

152 RSA 564-B:1-112. 153 In Re Lowy, 156 N.H. 57, 61 (internal citations omitted). 154 RSA 564-B:1-105(b)(3) (emphasis added). 155 RSA 564-B:4-404 (emphasis added). 156 RSA 564-B:11-1101.

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among trustees, trust advisors, and trust protectors); and (3) the promotion of the efficient administration of a trust. There is no priority among those three objectives.

Divided Trusteeship (Directed Trusts), Trust Advisors, and Trust Protectors

New Hampshire has a comprehensive set of laws governing divided trusteeship. Subject only to the mandatory rules found in RSA 564-B:1-105(b), a settlor may divide trustee powers in any manner.

The key statutory provisions are:

RSA 564-B:7-771 (Directed Trusts)

RSA 564-B:8-808 (Power to Direct)

RSA 564-B:8-813(k) (Duty to Inform)

RSA 564-B:12-1201 (Powers of Trust Advisors and Trust Protectors)

RSA 564-B:12-1202 (Trust Advisors and Trust Protectors as Fiduciaries)

RSA 564-B:12-1203 (Trust Advisors and Trust Protectors Subject to Court Jurisdiction)

RSA 564-B:12-1204 (No Duty to Review Actions of Trustee, Trust Advisor, or Trust Protector)

RSA 564-B:12-1205 (Fiduciary’s Liability for Action or Inaction of Trustee, Trust Advisor, or Trust Protector)

RSA 564-B:12-1206 (Limitation of Action Against a Trust Advisor or Trust Protector)


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Judicial Affirmation

In the Tamposi case decided in 2013, the New Hampshire Supreme Court affirmed the efficacy of divided trusteeship.157 The court respected the division of investment and distribution powers between a two classes of trustee, which, under the terms of the trust, were called “investment directors” and “trustees.”

In the 1990s, Samuel A. Tamposi Sr. created two trusts, which subsequently were combined. Upon Sam Sr.’s death, the trust divided into separate trusts for each of Sam Sr.’s six children. At the same time, Gerald Prunier became the trustee, and Sam Sr.’s sons Samuel A. Tamposi Jr. and Stephen Tamposi became the investment directors. Under the terms of the trust, the trustee had the power to make distributions, and the investment directors had the exclusive power to invest and manage the trust property.

Sam Sr.’s daughter Elizabeth (“Betty”) Tamposi sued the trustee and investment directors for breach of trust, alleging in part that the investment directors had improperly managed the trust property. In construing the trust, the probate court concluded that the trustee was an excluded fiduciary with respect to investment matters and the investment directors were excluded fiduciaries with respect to distributions.

The state supreme court upheld that construction of the trust agreement. In doing so, the court judicially blessed the divided trusteeship.

Trust Advisors or Trust Protectors

Under the New Hampshire statutes, the terms “trust advisor” and “trust protector” are synonymous.158 When creating a new trust, the settlor can define a trust advisor’s or trust protector’s role however he or she wishes. The settlor can define those powers in 157 Shelton v. Tamposi, 64 N.H. 490 (2013). 158 RSA 564-B:12-1201(a). See RSA 564-B:1-103(27) and (28).

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the trust instrument, the trustees and the beneficiaries can define those powers by agreement, or a court may define those powers.159

As originally enacted, the UTC impliedly recognized trust advisors under the statutes governing the power to direct.160 In 2006, New Hampshire amended its UTC, adding a set of statutes expressly recognizing—and governing—trust advisors and trust protectors.161 The 2006 amendment contained separate definitions of trust advisor and trust protector, but each definition contained a catch-all clause that allowed any power or duty to be granted to either a trust advisor or trust protector. The practical effect made trust advisors and trust protectors statutorily indistinguishable.

In 2008, New Hampshire amended its statutes, consolidating the definitions of trust advisor and trust protector.162 Under the amended statute, a trust advisor or trust protector is a person other than the trustee who has a power or duty with respect to the trust.163

Fiduciary Status

In the case of a noncharitable trust, by default, a trust advisor or trust protector is a fiduciary.164 The terms of the trust, however, may override that default rule and provide that a trust advisor or trust protector is a nonfiduciary. If a trust advisor or trust protector is fiduciary, then he or she must act in good faith, in accordance with the terms of the trust, and in the interests of the beneficiaries.165

159 Id. 160 See RSA 564-B:8-808. 161 Laws of 2006, ch. 320. In particular, see Laws of 2006, ch. 320, § 67. 162 Laws of 2008, ch. 374, § 18. 163 RSA 564-B:12-1201(a). 164 RSA 564-B:12-1202(a). 165 Id.


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In the case of a charitable trust, a trust advisor or trust protector is a fiduciary.166 In contrast to the default rule applicable to a noncharitable trust, a trust advisor’s or trust protector’s fiduciary status is mandatory in a charitable trust.167 The 2014 act clarified that mandatory rule. When the Trust Modernization Act added the statutes governing trust advisors and trust protectors, the act did not include an express mandatory rule. The 2014 act made the technical correction, and it expressly provides that the mandatory rule applies to any person who becomes a trust advisor or trust protector before, on, or after the 2014 act’s effective date.168

Excluded Fiduciary

A trust advisor or trust protector is an excluded fiduciary with respect to any power or duty granted exclusively to a trustee or other person.169 To the extent that a trust advisor or trust protector is an excluded fiduciary, the trust advisor or trust protector is not liable for any action or inaction by the person who has the duty or power.170 The trust advisor or trust protector also is not liable for any loss that results if the trust advisor or trust protector timely proposes an action, but the other person fails to authorize it.171

Investment Powers

As a default rule, a trustee must manage and invest the trust property in accordance with the prudent investor rule.172 A settlor,

166 RSA 564-B:12-1202(a). 167 RSA 564-B:1-105(b)(16). 168 Id. 169 RSA 564-B:12-1202(b). 170 RSA 564-B:12-1205. 171 Id. 172 RSA 564-B:9-901(a).

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however, can modify or eliminate the rule as it applies to a trust that the settlor creates.173

A settlor may wish to modify or eliminate the rule—in particular, the duty to diversify—so that the settlor can more effectively achieve his or her intent. For example, a settlor may wish to create a trust to hold a concentrated position in a family-owned business or hold as its principal asset a family compound. By waiving the duty to diversify, the settlor can eliminate the trustee’s duty to reassess periodically whether special circumstances continue to apply and thereby permit holding a non-diversified portfolio. This is welcome certainty for both the settlor and the trustee.

Although a settlor can modify or eliminate the prudent investor rule, the UTC’s mandatory rules continue to apply. For example, the settlor cannot modify the trustee’s duty to act in good faith and in accordance with the terms of the trust.174 The settlor also cannot modify the requirement that a trust must be for the benefit of the beneficiaries, the trust must be for a lawful purpose, and the trust’s purpose must be possible to achieve.175 Within that rubric, the settlor has broad latitude to define the prudent investor rule’s application to the trust, given the limits on the trustee’s liability for relying upon the terms of the trust. Moreover, New Hampshire has rejected the benefit-of-the-beneficiaries rule. The benefit-of-the-beneficiaries rule is a dubious corollary to the rule that a trust must be for the benefit of the beneficiaries. The benefit-of-the-beneficiaries rule elevates the beneficiaries’ perceived interests over the settlor’s intent and undermine the settlor’s modification or elimination of the prudent investor rule. Some commentators have

173 RSA 564-B:9-901(b). 174 RSA 564-B:9-901(b) and 564-B:1-105(b)(2). 175 RSA 564-B:9-901(b) and 564-B:1-105(b)(3).


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asserted that the benefit-of-the-beneficiaries rule restrains the settlor’s ability to modify or eliminate the prudent investor rule.176

With respect to the trustee’s management of the trust property, the trustee is not liable to a beneficiary so long as the trustee acts in reasonable reliance upon the terms of the trust or a court order.177 In deciding not to diversify, the trustee is not liable if the trustee acts in good faith reliance upon the terms of the trust, the trustee acts in good faith reliance upon a court order, or the trustee determines that the special circumstances preclude diversification.178

The trustee and the beneficiaries can agree to modify or eliminate the prudent investor rule’s application to the trust, so long as the modification or elimination of the rule would not violate a material purpose of the trust. Since it may be difficult to conclude with certainty that the rule’s application is not a material purpose of the trust, the trustee and beneficiaries may wish to seek judicial approval of any agreement. The agreement would be invalid if it violates a material purpose of the trust, and the trustee potentially would face significant liability for agreeing to a course of action that would violate a material purpose of the trust.

Duty to Inform and Quiet Trusts

A trustee generally has a duty to keep the beneficiaries informed about the trust and its administration. The key statutes are:

RSA 564-B:8-813 (Duty to Inform and Report)

RSA 564-B:1-108(d) (Principal Place of Administration)

RSA 564-B:8-802(g) (Duty of Loyalty)

RSA 564-B:1-105 (Default and Mandatory Rules) 176 See, e.g., John H. Langbein, Burn the Rembrandt?: Trust Law’s Limits on the Settlor’s Power to Direct Trust Investments, 90 B.U. L. Rev. 375 (2010). 177 RSA 564-B:9-901(b). 178 RSA 564-B:9-901(b) and 564-B:9-903.

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Default Rules

In New Hampshire, the duty to inform is a default rule, which the settlor may modify or eliminate. New Hampshire’s approach departs from traditional trust law. The duty to inform traditionally was a fundamental, unwaivable duty.

The UTC contains a set of default rules concerning the persons to whom the trustee must report, the nature of the notices and other information that the trustee must provide to those persons, and the circumstances under which the trustee must provide notices and other information.

For a revocable trust, the trustee’s duty generally runs only to the settlor.179 For an irrevocable trust, on the other hand, the trustee generally must keep certain beneficiaries reasonably informed about the trust and its administration, and the trustee must promptly provide to one of those beneficiaries any information that the beneficiary requests relating to the administration of the trust, unless it is unreasonable under the circumstances.180 The trustee also must provide to those beneficiaries:

Trustee’s reports181 Copy of the trust instrument182

In addition, a trustee generally must notify certain beneficiaries upon the occurrence of the certain events. Some of those events include:

Acceptance of trusteeship Death of the last surviving settlor183 Creation of an irrevocable trust184

179 RSA 564-B:8-813(a). See RSA 564-B:6-603(a). 180 RSA 564-B:8-813. 181 RSA 564-B:8-813(d). 182 RSA 564-B:8-813(c)(1). 183 RSA 564-B:8-813(c)(3). 184 RSA 564-B:8-813(c)(3).


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A formerly revocable trust becoming irrevocable185 In some cases, the sale or other transaction involving real

estate, privately-held business interests, or other assets that are hard to value or replace

Change of the trustee’s compensation186 In some cases, a trustee’s resignation or removal187 Change of principal place of administration188 Termination of the trust189

Modification and Waiver of the Duty to Inform

In New Hampshire, a settlor can modify or waive the trustee’s duty to inform.190 As originally enacted, the UTC included mandatory notice requirements. In 2006, however, New Hampshire amended its statutes, eliminating the mandatory notice requirements.191 Since that change, a settlor can modify or waive the duty to inform. At the extreme, a settlor can waive the duty to inform in its entirety, creating a so-called “quiet trust” or “silent trust,” under which the trustee does not have any duty to inform.

A settlor may wish to waive the trustee reporting requirements, because he or she does not want to create any sense of expectation on the part of the beneficiaries and, hence, any incentive for unproductive lives and activities. In certain cases where a settlor is concerned that an individual’s knowledge of a trust might create a disincentive, the settlor may prefer to create a purpose trust, under which a trust advisor or other person has the power to appoint trust property. Since the trust would not have any specific beneficiaries, 185 RSA 564-B:8-813(c)(3). 186 RSA 564-B:8-813(i). 187 RSA 564-B:8-813(d). 188 RSA 564-B:1-108(d). 189 RSA 564-B:8-813(d). 190 See RSA 564-B:1-105(b). 191 Laws of 2006, ch. 320, § 49.

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the settlor avoids the issues associated with the trustee’s duty to inform the beneficiaries.

The duty to inform can serve an important function in ensuring the proper administration of a trust. The modification or elimination of the duty to inform potentially affects a beneficiary’s ability to monitor the trustee’s conduct. When a settlor chooses to modify or eliminate the trustee’s duty to inform, the statutes do not resolve the resulting tension that arises with respect to ensuring that the trustee properly administers the trust and the beneficiaries’ interests are protected. Accordingly, the trust instrument should provide a mechanism for ensuring the proper administration of the trust.

The challenges posed by a quiet trust are illustrated by the Wilson case.192 In that case which involved a North Carolina trust, the beneficiaries alleged that the trustee had breached his fiduciary duties (he apparently had not made any distributions for 15 years and he may have invested in companies that he personally controlled), and they sought an accounting. Under the North Carolina UTC, a settlor could modify or eliminate the trustee’s duty to inform.193 The trustee argued that, since the trust agreement expressly abrogated the trustee’s duty to account to the beneficiaries, he did not have any obligation to provide an accounting. In 2010, however, a divided North Carolina appellate court held that the trustee’s duty to act in good faith (which cannot be waived under the terms of the trust) and the court’s jurisdiction over the trust effectively override the settlor’s ability to modify or eliminate a trustee’s duty to inform.194

Given the New Hampshire courts’ strong tradition of deferring to legislative prerogative and settlor intent, a similar result is unlikely in New Hampshire.195

192 Wilson v. Wilson, 690 S.E.2d 710 (N.C.App. 2010). 193 N.C. Gen. Stat. § 36C- 1-105. 194 Wilson v. Wilson, 690 S.E.2d 710 (N.C.App. 2010). 195 Scheffel v. Krueger, 146 N.H. 669 (2001).


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Perpetual Trusts

A settlor can create a perpetual trust, including a perpetual purpose trust. The key statutes are:

RSA 564-B:4-402A (Duration of Trusts)

RSA 564:24 (for trusts created on or after January 1, 2004, and before July 1, 2014)

RSA 564-B:4-409(1) (Purpose Trusts).

In 2004, New Hampshire repealed its rule against perpetuities.196 In the trust instrument, the settlor must provide that the trust is exempt from the rule against perpetuities.197 In addition, the trust instrument must contain magic language. Specifically, the trust instrument must provide that the trustee has the power to sell, mortgage, or lease trust property for any period of time beyond the time necessary for the beneficial interests to vest so that they are valid under the rule against perpetuities.198 In other words, the trust instrument must not impose an impermissible restraint on alienation. Accordingly, a settlor may create a perpetual noncharitable trust. The statute repealing the rule against perpetuities became effective on January 1, 2004.199

As originally enacted, RSA 564-B:4-409(1) limited the duration of a purpose trust to 21 years. The 2006 act eliminated that 21-year limit.200 Consequently, beginning on August 19, 2006, a settlor could create a perpetual purpose trust.

A trust that is exempt from the rule against perpetuities also is exempt from the rule against accumulations.201 The rule against

196 RSA 564:24. 197 RSA 564-B:4-402A. 198 RSA 564-B:4-402A(b). 199 RSA 564-B:4-402A(d). See also Laws of 2003, ch. 143, § 2. 200 Laws of 2006, ch. 320, § 53. 201 RSA 564-B:4-402A(c).

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accumulations generally limited the settlor’s ability to direct the trustee to accumulate income beyond the applicable perpetuities period. A common-law rule, the New Hampshire courts have not addressed whether it applies within the state.

Purpose Trusts

In New Hampshire, a settlor can create a purpose trust, which is a trust that is created for a valid, noncharitable purpose or a trust that does not have any definite or definitely ascertainable beneficiaries.202 The key statute is RSA 564-B:4-409.

A purpose trust can be created for any noncharitable purpose. For example, a settlor can create a purpose trust for purposes of maintaining a family compound or holding the interests in a privately-held business. The purpose must be “valid,” which likely means any purpose that is lawful, not contrary to public policy, and possible to achieve.203 A purpose trust can include charitable purposes or charitable beneficiaries; the operative statute does not preclude the inclusion of charitable purposes or charitable beneficiaries.

A purpose trust can have beneficiaries, or it can have no definite or definitely ascertainable beneficiaries. A definite or definitely ascertainable beneficiary generally would be a specific person designated under the terms of the trust or a person who is a member of an identifiable, finite class of persons. For example, the “settlor’s friends” typically would not be definitely ascertainable beneficiaries, because the class generally is too amorphous.

Without any definite beneficiaries, a purpose trust may enable a settlor to achieve more readily his or her goals. In some trusts, there is a tension between settlor intent and the beneficiaries’ interests (or

202 RSA 564-B:4-409(1). 203 See RSA 564-B:4-404.


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the beneficiaries’ perceptions of their interests). The purpose trust can minimize or eliminate that tension.

A well-drafted purpose trust will identify at least one purpose, even if broadly described. For example, the trust’s purpose may be to promote the values by which the settlor sought to live his or her life. Although a trust qualifies as a purpose trust if it does not have definite beneficiaries or any noncharitable purpose, the omission of any purpose limits the trust’s efficacy. The trustee generally must distribute the trust property to the settlor to the extent that the trust property exceeds the amount needed to achieve the trust’s intended purpose.204 Without some guidance concerning the trust’s purpose, the trustee may have a duty to distribute the trust property back to the settlor.

A trustee, trust advisor, or trust protector has the power to enforce a purpose trust.205 The terms of the trust also may appoint a person who has the power to enforce a purpose trust.206 If the terms of the trust do not appoint a person who can enforce a purpose trust, then the court may appoint a person who has the power to enforce a purpose trust.207 A well-drafted purpose trust will specify one or more persons who have the power to enforce the trust and will provide a process of appointing successors to those persons.

The trustee generally must disburse or expend the trust property for the trust’s purposes.208 A court can determine whether the trust property exceeds the amount required to achieve the trust’s purposes, which, in the statutory parlance, is called the trust property’s “intended use.” Unless the terms of the trust provide otherwise, the trustee must distribute the excess trust property to the settlor or, if the settlor is not living, the settlor’s successors in

204 RSA 564-B:4-409(3). 205 RSA 564-B:4-409(2). 206 Id. 207 Id. 208 RSA 564-B:4-409(3).

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interest. The statute does not define who are the settlor’s successors in interest.

Although a few other states allow for the creation of purpose trusts, New Hampshire is notable for allowing a purpose trust potentially to last in perpetuity. As originally enacted, RSA 564-B:4-409(1) limited the duration of a purpose trust to 21 years, but the 2006 act repealed that limitation effective August 19, 2006.209

Creditor Rights

The UTC and QDTA define a creditor’s ability to reach a beneficiary’s or settlor’s interest in a trust. The key statutes are:

RSA 564-B:5-501 (Non-Spendthrift Trusts)

RSA 564-B:1-103(17) (Definition of Spendthrift Provision)

RSA 564-B:5-502 (General Rule for Spendthrift Trusts)

RSA 564-B:5-503 (Exceptions to the General Rule)

RSA 564-B:5-504 (Discretionary Trusts)

RSA 564-B:8-814(b) (Beneficial Interest as Mere Expectancy)

RSA 564-B:5-505 (Claims Against the Settlor)

RSA 564-B:5-506 (Overdue Distributions)

RSA 564-B:5-508 (Disposition of Claims Against the Settlor)

RSA 564-B:5-509 (Disposition of Claims Against the Trust)

RSA 564-D (Self-Settled Spendthrift Trusts)

For a creditor seeking to reach a beneficiary’s interest in a trust, the following analytical framework applies:

209 Laws of 2006, ch. 320, § 53.


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Is the trust a self-settled spendthrift trust? That is, does the QDTA govern the trust? If so, the QDTA’s special rules apply.

Is the beneficiary’s interest subject to a spendthrift provision? If so, RSA 564-B:5-503 applies.

Is the creditor an exception creditor? Exception creditors are defined in RSA 564-B:5-503. If yes, then the creditor may be able to attach the distributions to the beneficiary, unless the trust is a discretionary trust. If the beneficiary’s interest subject to the trustee’s discretion, then the creditor also must run the gauntlet under RSA 564-B:5-504.

If the creditor is not an exception creditor, then the creditor cannot reach the beneficiary’s interest in the trust.

Is the beneficiary’s interest subject to the trustee’s discretion? If so, RSA 564-B:5-504 applies.

Is the creditor an exception creditor? Under RSA 564-B:5-504(c), a spouse or child is an exception creditor for certain debts. If yes, then the creditor may be able to attach the distributions to the beneficiary to the extent that the trustee has abused its discretion or failed to comply with a standard of distribution.

If the creditor is not an exception creditor, then the creditor cannot reach the beneficiary’s interest in the trust.

For a creditor seeking to reach a settlor’s interest in a trust, the following analytical framework applies:

Is the trust a self-settled spendthrift trust? That is, does the QDTA govern the trust? If so, the QDTA’s special rules apply.

For a trust other than a self-settled spendthrift trust, is the settlor living?

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If so, RSA 564-B:5-505 applies. The creditor can reach the trust property to the extent that the trustee can distribute it to the settlor.

If the settlor is dead, are the claims barred under RSA 564-B:5-508, RSA 556:3 (relating to the claim period applicable to decedent’s estates), or another limitation period? If not, RSA 564-B:5-505 applies, and the creditor can reach the trust property to the extent that the trustee can distribute it to the settlor.

The rules applicable to spendthrift trusts, discretionary trusts, and self-settled spendthrift trusts are discussed in more detail below.

Spendthrift Trusts

In the case of a spendthrift trust, a beneficiary’s creditor generally cannot reach a beneficiary’s interest or any distribution before the beneficiary actually receives it.210 There, however, are four categories of “exception creditors,” who potentially can reach a beneficiary’s interest. Those exceptions creditors are: (1) a beneficiary’s child for child support; (2) a beneficiary’s spouse or former spouse for “the most basic food, shelter and medical needs” as expressly provided in an alimony award; (3) an attorney or person who has been awarded a judgment against the beneficiary for services provided in protection of the beneficiary’s interest in the trust; and (4) the state or federal government.211

A spendthrift provision is a provision that restrains both voluntary and involuntary transfer of a beneficiary’s interest.212 A restraint on the voluntary or involuntary transfer of a beneficiary’s interest can be created merely with a statement that a beneficiary’s

210 RSA 564-B:5-502(c). 211 RSA 564-B:5-503(b). 212 RSA 564-B:5-502(a).


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interest is held in a spendthrift trust or similar language.213 A slightly more verbose statement may be advisable for drafting purposes, if only to alert the trustee, the beneficiaries, and the beneficiaries’ creditors to the import of a spendthrift provision.

To the extent a beneficiary’s interest is not subject to a spendthrift provision, the beneficiary’s creditor can reach the beneficiary’s interest.214 In the case of a discretionary trust, however, a beneficiary’s creditor generally cannot compel a trustee to make a distribution.215

Discretionary Trusts

A beneficiary’s creditor generally cannot compel the distribution, even if the discretion is subject to a standard of distribution or the trustee has abused its discretion.216 So long as the distribution is subject to the trustee’s discretion, it does not matter whether the trust contains a spendthrift provision.217

A beneficiary’s child, spouse, or former spouse cannot compel a distribution, except under limited circumstances. If the trustee has failed to comply with a standard of distribution, then a beneficiary’s child can obtain a distribution for purposes of paying child support.218 Similarly, if the trustee has failed to comply with a standard of distribution, then a beneficiary’s spouse or former spouse can obtain a distribution for alimony for his or her most basic food, shelter, and medical needs.219 The divorce decree must expressly state the amount of the alimony that is attributable to

213 RSA 564-B:5-502(b). 214 RSA 564-B:5-501. 215 RSA 564-B:5-504(b). 216 RSA 564-B:5-504(b). 217 Id. 218 RSA 564-B:5-504(c)(1). 219 RSA 564-B:5-504(c)(1) and (2).

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those most basic needs. In each case, the court can compel the distribution, but it only to the extent that it is equitable under the circumstances and does not exceed the amount that the trustee would have distributed if the trustee had complied with the standard.220

In a spendthrift trust, a judgment creditor or the state or federal government is an exception creditor.221 Although those persons are exception creditors for purposes of a spendthrift trust, they are not exception creditors for purposes of a discretionary trust.222 Thus, unlike a spouse or child, they cannot compel a distribution, even if the trustee’s discretion is subject to a standard of distribution or the trustee has abused its discretion.

Beneficial Interest as Mere Expectancy

In New Hampshire, a beneficiary’s interest in a trust is a mere expectancy if the trustee has discretion whether to make a distribution to the beneficiary and even if the discretion is subject to a standard of distribution. Specifically, the statute provides:

[I]f a distribution to or for the benefit of a beneficiary is subject to the exercise of the trustee’s discretion, whether or not the terms of a trust include a standard to guide the trustee in making distribution decisions, then the beneficiary’s interest is neither a property interest nor an enforceable right, but a mere expectancy.223

This statutory provision was added in 2008.

In 2011, the New Hampshire Supreme Court affirmed that a beneficiary’s interest in a trust is a mere expectancy, rejecting a former spouse’s claim that post-divorce distributions are marital 220 RSA 564-B:5-504(c)(2). 221 RSA 564-B:5-503(b). 222 See RSA 564-B:5-504. 223 RSA 564-B:8-814(b).


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property subject to division. In the Goodlander case, the court relied upon the statutory provision declaring a beneficial interest as a mere expectancy.224 The court also affirmed that the statute could be applied retroactively, because, in the case at hand, the beneficiary-spouse did not have a vested right or interest before the statute was amended in 2008 to add the “mere expectancy” language.

The court reversed the trial court’s alimony order, ruling that the trial court failed to conduct the requisite analysis of the former spouse’s reasonable needs before conducting an analysis of the former spouse’s “most basic needs” (which formed the basis for determining the portion of the former spouse’s alimony that potentially could be satisfied by distributions from the trust). The court also ruled that the trial court incorrectly conditioned the former spouse’s alimony on the beneficiary-spouse’s receipt of a distribution from the trust.

Disposition of Claims Against the Settlor

As amended in 2014, the UTC includes a process for disposing of claims against the settlor upon the settlor’s death. Under RSA 564-B:5-508, a trustee generally can start a one-year limitation period for certain claims against the settlor. For known claims, the trustee must provide notice to the claimant. For unknown claims, the trustee must publish notice. A creditor’s claim is barred unless the creditor commences a judicial proceeding within one year after the notice.

Disposition of Claims Against the Trust

As amended in 2014, the UTC includes a process for disposing of claims against an irrevocable trust upon the trust’s termination. The statute substantially parallels the process for disposing of claims against a settlor after the settlor’s death.

224 In the Matter of Goodlander, 161 N.H. 490 (2011).

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Under RSA 564-B:5-509, a trustee generally can start a one-year limitation period for certain claims against the trust. For known claims, the trustee must provide notice to the claimant. For unknown claims, the trustee must publish notice. A claim against the trust does not include any claim against a trustee, trust advisor, or trust protector for a breach of trust. A creditor’s claim is barred unless the creditor commences a judicial proceeding within one year after the notice.

Self-Settled Spendthrift Trusts

In 2009, New Hampshire began allowing settlors to create self-settled spendthrift trusts in New Hampshire.225 The key statutes are found in RSA 564-D, which creates an exception to the general rule found in RSA 564-B:5-505.

Sometimes called an asset protection trust, a self-settled spendthrift trust generally enables a settlor to create a trust and retain a beneficial or other interest in the trust, while insulating the trust property from the claims of the settlor’s creditors.

Judicial Modification

The UTC contains an array of tools for judicial modification of a trust. The key statutes are:

RSA 564-B:4-410 (Modification or Termination)

RSA 564-B:4-411 (Modification or Termination by Consent)

RSA 564-B:4-412 (Modification or Termination for Unanticipated Circumstances)

RSA 564-B:4-413 (Cy Pres)

225 New Hampshire’s Qualified Dispositions in Trust Act (which added RSA 564-D) generally was modeled on Delaware’s Qualified Dispositions in Trust Act.


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RSA 564-B:4-414 (Modification or Termination of an Uneconomic Trust)

RSA 564-B:4-415 (Reformation)

RSA 564-B:4-416 (Modification to Achieve Settlor’s Tax Objectives)

Decanting

In New Hampshire, a trustee generally has the power to decant. The key statute is RSA 564-B:4-418.

Administrative Power

The decanting power is an administrative power.226 The statute specifically provides that “a trustee’s power to decant is a power with respect to an administrative matter of the trust.” A trustee thus may use the statutory decanting power if New Hampshire law governs the trust’s administration. Unless the terms of the trust provide otherwise, New Hampshire law governs administrative matters if the trust’s principal place of administration is located in New Hampshire.227

General Power

The decanting power is a general trustee power.228 The trustee can decant regardless of whether the trustee has the discretion to distribute income or principal.229 The trustee can decant regardless of whether the trust is irrevocable,230 can be amended or modified,231 226 RSA 564-B:4-418(a). 227 RSA 564-B:1-102(c). See also RSA 564-B:1-108(f). 228 RSA 564-B:4-418(a). 229 RSA 564-B:4-418(l)(4). 230 RSA 564-B:4-418(l)(1). 231 RSA 564-B:4-418(l)(2).

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or contains a spendthrift provision.232 The power is subject to certain limitations and safeguards, which generally aim to protect settlor intent, vested beneficial interests, and tax benefits.

Beneficiaries

The beneficiaries of the second trust may include only one or more of the beneficiaries of the first trust.233 A trustee can eliminate one or more beneficiaries: “The second trust may exclude one or more of the beneficiaries of the first trust.”234 Through decanting, a trustee potentially can modify the classes of beneficiaries. For example, a trustee may be able to expand the class of current beneficiaries by adding one or more persons who were remainder beneficiaries under the originating trust. A trustee, however, cannot directly add beneficiaries through decanting.235

Through the creation of a power of appointment, a trustee indirectly may be able to add a beneficiary to a trust. A trustee can decant into a new trust that grants to a beneficiary a power of appointment, under which the permissible appointees include persons who were not beneficiaries of the originating trust.236 The statute provides that “a person is not a beneficiary of the second trust solely by reason of being a permissible appointee of a power of appointment under the terms of the second trust.” The powerholder subsequently could exercise the power and appoint the trust property into a third trust that includes one or more additional beneficiaries.

Under the decanting statute, the trustee generally has broad discretion to modify the dispositive terms. As discussed below,

232 RSA 564-B:4-418(l)(3). 233 RSA 564-B:4-418(b). 234 Id. 235 Id. 236 Id.


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there are some important limitations and safeguards on the trustee’s discretion.

Safeguards

While providing broad flexibility, the statutory decanting power is subject to four key safeguards. First, a trustee cannot use decanting to violate a material purpose of the trust. Second, and closely related to the first, a trustee must exercise the decanting power in a manner consistent with the settlor’s intent. Third, a trustee cannot add a beneficiary. Fourth, a trustee cannot reduce or eliminate a beneficiary’s vested interest.

Material Purpose

A trustee cannot use decanting to violate a material purpose of the trust.237 As is the case in so much of trust law, the sine qua non is the preservation of a trust’s material purposes. That holds true in decanting. The statute expressly provides that a trustee can decant only to the extent that the decanting would not violate a material purpose of the originating trust. The trustee thus must ensure that the new trust preserves the originating trust’s material purposes. If the new trust incorporate the material purposes of the originating trust, then the trustee can decant into the new trust.

Settlor Intent

When decanting, a trustee must exercise the power in a manner consistent with the settlor’s intent.238 “In exercising the power to decant, a trustee has a duty to exercise the power in a manner that is consistent with the settlor’s intent as expressed in the terms of the

237 RSA 564-B:4-418(f). 238 RSA 564-B:4-418(o).

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trust.”239 Decanting is a tool for helping to accomplish settlor intent. It is not a tool for frustrating settlor intent.

Adding Beneficiaries

As discussed above, a trustee cannot decant to the extent that the decanting would add one or more beneficiaries.240 A trustee, however, potentially could decant into a new trust that grants to a beneficiary a power of appointment, which the beneficiary subsequently exercises to appoint the trust property into another trust in which there are one or more additional beneficiaries.

Vested Interests

Once a beneficiary has a vested interest in a trust, decanting cannot reduce or eliminate that interest.241 A vested interest is:

A current right to a mandatory distribution of income or principal, a mandatory annuity interest, or a mandatory unitrust interest.242

A currently-exercisable power of withdrawal.243

A noncontingent, unconditional right to receive an ascertainable portion of the trust property upon the trust’s termination.244

Under that rubric, a beneficiary’s interest thus is a vested interest if the terms of the trust direct the trustee to distribute a portion of the trust property to the beneficiary upon the beneficiary attaining a stated age and the beneficiary has attained that age. Similarly, a

239 Id. 240 RSA 564-B:4-418(b). 241 RSA 564-B:4-418(g)(1). 242 RSA 564-B:4-418(g)(2)(A). 243 RSA 564-B:4-418(g)(2)(B). 244 RSA 564-B:4-418(g)(2)(C).


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beneficiary has a vested interest if, upon the trust’s termination, the trustee must distribute a fractional share of the trust property to beneficiary or the beneficiary’s estate.245

The existence of a vested interest in a trust is not a bar to decanting. The trustee can decant if the new trust preserve the vested interest.246 The terms of the new trust cannot reduce or eliminate the vested interest that exists under the originating trust.

Savings Provisions

The decanting statute contains two savings provisions. First, the statute contains a tax-savings provision. Under that provision, a trustee may decant only to the extent that the decanting would not jeopardize a deduction, credit, exclusion, or exemption for purposes of any income, gift, estate, or generation-skipping transfer tax.247 The statute does not prohibit decanting; it only limits its scope so that the decanting does not spoil the tax benefits for which a transfer to the originating trust had qualified.

Second, the statute contains a savings provision relating to public benefits. The state’s department of health and human services recommended the savings provision. Under that provision, a trustee may decant only to the extent that the decanting would not jeopardize the settlor’s or beneficiary’s eligibility or qualification for those public benefits.248 The savings provision applies only in two circumstances. The savings provision applies if the settlor or a beneficiary of the originating trust is an applicant for public benefits. The savings provision also applies if the settlor or a beneficiary receives public benefits and the eligibility or

245 RSA 564-B:4-418(g)(3). 246 RSA 564-B:4-418(g)(1). 247 RSA 564-B:4-418(h). 248 RSA 564-B:4-418(i).

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qualification for those public benefits is dependent on the nature and scope of his or her rights, powers, and interests in the first trust.

Notice

A trustee of a noncharitable trust does not have a specific duty to notify the beneficiaries.249 The trustee may notify the beneficiaries.250 Although there are occasions in which withholding notice of a proposed decanting may be appropriate, it often will behoove the trustee to notify the beneficiaries. If the trustee notifies a beneficiary of a proposed decanting and includes certain magic language in the notice, then the beneficiary has a 60-day period in which to object to the proposed decanting.251 The magic language is a statement informing the beneficiary of the right to object and the time allowed for objection.252

A trustee of a charitable trust or a trust in which a charitable organization has a vested interest must notify the director of charitable trusts.253 The trustee must provide that notice at least 30 days before the effective date of the decanting.254

Trustee Duties

Under the decanting statute, the trustee does not have a specific duty to decant or an ongoing duty to consider whether to decant.255 If the trustee decants, the trustee must act in accordance with the trustee’s duties under the originating trust.256 For example, the

249 RSA 564-B:4-418(m). 250 Id. 251 Id. 252 Id. 253 Id. 254 Id. 255 RSA 564-B:4-418(o). 256 Id.


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trustee generally must consider the duty to impartiality in deciding whether to reduce or eliminate a beneficiary’s beneficial interest. The terms of the trust may modify or eliminate the trustee’s duties in a manner that affects their application when the trustee exercises the decanting power. For example, the terms of the trust may modify or eliminate the duty of impartiality so that the trustee has broader discretion to reduce or eliminate a beneficiary’s interest in the trust.

If a trustee decants, the trustee must act in accordance with the settlor’s intent under the originating trust. Given the tensions that can exist between settlor intent and the beneficiaries’ interests (or their perception of their interests), a trustee should undertake any decanting in a careful and thoughtful manner. Decanting is a powerful tool, which can help to accomplish better a settlor’s intent and can greatly improve the administration of a trust. Decanting’s power, however, demands respect. A trustee or the trustee’s advisor should not approach decanting lightly. Decanting’s misuse can lead to undesirable results.

Nonjudicial Modification

In addition to decanting—which sometimes is used in a manner akin to modification—New Hampshire has two methods of nonjudicial modification. The key statutes are:

RSA 564-B:4-419 (Trustee’s Power of Modification)

RSA 564-B:1-111 (Nonjudicial Settlement Agreements)

Under RSA 564-B:4-419, a trustee has a power of modification. That power is similar to the trustee’s decanting power, but does not involve the creation of a new trust. The modification power is exercisable only by an independent trustee, generally is limited to modifying administrative provisions, and importantly cannot be used to violate a material purpose of the trust. In the case of a noncharitable trust, a trustee can exercise the modification power without prior notice to the beneficiaries, although a trustee may be

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wise to provide notice. If, however, the trust is a charitable trust or a charitable organization has a vested interest, then the trustee must notify the director of charitable trusts before exercising the modification power.

Under RSA 564-B:1-111, the trustee, qualified beneficiaries, and other interested persons can agree to modify the terms of the trust. The statute recognizes nonjudicial settlement agreements, which expressly can include the modification of a trust. A nonjudicial settlement agreement cannot violate a material purpose of a trust.

Nonjudicial Settlement Agreements

In New Hampshire, many trust-related matters can be resolved without court involvement. The trustee and beneficiaries generally can agree to resolve a matter, so long as the agreement does violate not a material purpose of the trust.257

The parties to a nonjudicial settlement agreement must include all of the interested persons.258 For purposes of a nonjudicial settlement agreement, the interested persons are the persons (other than the settlor) whose consent would be required to achieve a binding settlement to be approved by a court.259

Although the statute contemplates the termination of a trust by an NJSA, that use of an NJSA is inadvisable in most cases, because the NJSA is ineffective to the extent that it violates a material purpose of the trust. In most cases, it will not be sufficiently clear that the continuation of the trust is not a material purpose of the trust.

257 RSA 564-B:1-111. 258 RSA 564-B:1-111(b). 259 RSA 564-B:1-111(a).


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An interested person may ask a court to approve a nonjudicial settlement agreement.260 Judicial approval is not required by statute, but can be beneficial for purposes of confirming the nonjudicial settlement agreement’s validity. In connection with determining whether to approve the nonjudicial settlement agreement, the court would determine whether the interested persons interests were adequately represented in accordance with the statutory rules for virtual representation.261 The court also would determine whether the agreement contains terms and conditions the court could have properly approved.262 A court would not approve a nonjudicial settlement agreement if it violates a material purpose of the trust.

Virtual Representation

New Hampshire allows virtual representation.263 The key statutes are:

RSA 564-B:3-301 (General Rule)

RSA 564-B:3-302 (Representation by the Holder of a Testamentary General Power of Appointment)

RSA 564-B:3-303 (Representation by Fiduciaries and Parents)

RSA 564-B:3-304 (Representation by Person Having Substantially Identical Interest)

RSA 564-B:3-304 (Appointment of Representative)

With virtual representation, certain persons may represent and bind the interests of other persons. This concept is one of the most important developments in trust law, because, in conjunction with nonjudicial settlement agreements, it facilitates the more efficient

260 RSA 564-B:1-111(e). 261 Id. 262 Id. 263 RSA 564-B:3-301 et seq.

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administration of trusts. With virtual representation, many matters can be resolved without seeking a court’s appointment (or waiver of appointment) of a guardian-ad-litem to represent the interests of certain beneficiaries.

A person’s representative can represent and bind that person. A notice to a person’s representative has the same effect as notice directly to that person.264 In other words, virtual representation allows substitute notice.265 Similarly, the consent of a person’s representative has the same effect as the consent of that person.266 If, however, the represented person objects to the representation before the consent becomes effective, then representative’s consent will not bind the represented person.267

The statutes identify the persons who can act as another person’s representative:

A parent may represent and bind the parent’s minor, incapacitated, or unborn child, unless there is a guardian of the child’s estate or person.268

A parent may represent and bind a minor, incapacitated, or unborn descendent of the parent’s minor, incapacitated, or unborn child, unless there is a guardian of the child’s estate or person or a guardian of the descendant’s estate or person.269

A conservator may represent and bind the conservatee’s estate.270

264 RSA 564-B:3-301(a). 265 See, e.g., the comments to model UTC § 301. 266 RSA 564-B:3-301(b). 267 Id. 268 RSA 564-B:3-303(7). 269 RSA 564-B:3-303(7). 270 RSA 564-B:3-303(1).


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A guardian of the estate may represent and bind the ward’s estate.271

A guardian of the person may represent and bind the ward, unless there is a guardian of the ward’s estate.272

An agent may represent and bind the principal in connection with any matter in which the agent has authority to act.273

The holder of a testamentary general power of appointment may represent and bind the permissible appointees and the takers in default.274

A person may represent and bind a minor, incapacitated, or unborn individual if they have a substantially identical interest with respect to the particular question or dispute, unless that individual is otherwise represented.275

A person may represent and bind a person whose identity or location is unknown and not reasonably ascertainable if they have a substantially identical interest with respect to the particular question or dispute, unless the other person is otherwise represented.276

A trustee may represent and bind the trust’s beneficiaries.277 For example, the trustee of a trust that is the beneficiary of a pour-over will generally can represent and bind the trust’s beneficiaries in connection with matters involving the decedent’s estate.278

271 RSA 564-B:3-303(2). 272 RSA 564-B:3-303(3). 273 RSA 564-B:3-303(4). 274 RSA 564-B:3-302. 275 RSA 564-B:3-304. 276 RSA 564-B:3-304. 277 RSA 564-B:3-303(5). 278 Comments to model UTC § 301.

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A personal representative of a decedent’s estate may represent and bind persons interested in the estate.279

The statutes include two notable exceptions to persons who can act as representatives. First, a settlor cannot represent or bind a beneficiary in connection with the termination or modification of a trust.280 Second, a person cannot represent or bind another person if there is a conflict of interest between the putative representative and the other person.281

The statutes do not define what constitutes a conflict of interest. Divergent economic interests can create a conflict of interest. As the comments to the model UTC observe, “a typical conflict would be where the fiduciary or parent seeking to represent the beneficiary is either the trustee or holds an adverse beneficial interest.”282 For example, a holder of a testamentary general power of appointment cannot represent and bind the permissible appointees or takers in default in connection with a proposed modification that would increase the income payable to the holder.283 A conflict of interest also may arise outside of the trust, such as a pre-existing relationship between a trustee and a beneficiary.284

In the context of a trustee representing beneficiaries, the general rule barring representation when there is a conflict of interest is bolstered by a special (and perhaps redundant) rule barring representation on matters involving the administration or distributions.285 A similar special rule applies to personal representatives.286

279 RSA 564-B:3-303(6). 280 RSA 564-B:3-301(d). 281 RSA 564-B:3-302, RSA 564-B:3-303, and RSA 564-B:3-304. 282 Comment to the model UTC § 303. 283 Comment to the model UTC § 302. 284 Comment to the model UTC § 304. 285 RSA 564-B:3-303(5). 286 RSA 564-B:3-303(6).


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Nonjudicial Dispute Resolution

New Hampshire expressly recognizes a trust’s nonjudicial dispute resolution provisions. The key statute is RSA 564-B:1-111A. Enacted in 2014, RSA 564-B:1-111A(a) provides:

If the terms of the trust require the interested persons to resolve a trust dispute exclusively by reasonable nonjudicial procedures, then those interested persons shall resolve that trust dispute in accordance with the terms of the trust.

A trust dispute includes any trust-related matter over which the court would have subject matter jurisdiction, excluding the determination of the trust’s validity, a determination of a material purpose of the trust, or any determination of whether an action violates a material purpose of the trust.287

The dispute resolution procedures must be reasonable.288 The procedures’ reasonableness will be determined based upon the facts and circumstances of each particular case. The statute does not prescribe or proscribe any specific procedures. That lack of specificity provides flexibility in designing nonjudicial dispute resolution procedures, but obligates the persons designing those procedures to use care in ensuring the procedures’ reasonableness.

A settlor may include nonjudicial dispute resolution procedures in a trust agreement. Through the exercise of the power to decant or the power of modification, the trustee may include nonjudicial dispute resolution procedures in a trust agreement. Through a nonjudicial settlement agreement, the trustees, beneficiaries, and other interested persons may agree to add nonjudicial dispute resolution procedures, unless the addition of those procedures would violate a material purpose of the trust.289

287 RSA 564-B:1-111A(d). 288 RSA 564-B:1-111A(a). 289 See RSA 564-B:1-111.

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An interested person may commence a judicial proceeding for purposes of determining whether a trust’s nonjudicial procedures are reasonable.290 The terms of the trust are void to the extent that they purport to abridge an interested person’s right to seek a judicial determination of the procedures’ reasonableness.291 Thus, for example, an interested person would not trigger a no-contest provision by commencing a judicial proceeding to determine whether a trust’s nonjudicial procedures are reasonable.

In any matter involving a charitable trust, any nonjudicial dispute resolution procedures do not apply, unless the director of charitable trusts consents to those procedures.292 Similarly, in any matter in which the department of health and human services would be an interested person, the nonjudicial dispute resolution procedures do not apply unless the department consents to those procedures.293

No-Contest Provisions

New Hampshire enforces no-contest provisions.294 A no-contest provision is a provision that reduces or eliminates a beneficiary’s interest in a trust because the beneficiary commences or participates in any judicial proceeding contesting a trust or its administration. The key statutes are:

RSA 564-B:10-1014 (Trusts)

RSA 551:22 (Wills)

290 RSA 564-B:1-111A(b). 291 RSA 564-B:1-111A(b). See also RSA 564-B:1-105(b)(13). 292 RSA 564-B:1-111A(e). 293 RSA 564-B:1-111A(e). 294 RSA 564-B:10-1014. See also RSA 551:22 (relating to the enforcement of no-contest provisions in wills).


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Under those statutes, a settlor thus has broad latitude to design no-contest provisions that fit his or her needs and wishes. Of key import, a no-contest provision is enforceable regardless of whether the beneficiary contests the trust in good faith or based on probable cause,295 although a settlor may design a no-contest provision that imbeds those exceptions.

The statutes protect certain actions from potentially triggering a no-contest provision. Under the applicable statutes, there are nine exceptions to the general rule that a no-contest provision is enforceable:

Invalidity. A no-contest provision is unenforceable to the extent that the trust is invalid.

Breach of Trust. In the case of an action solely to challenge the acts of the trustee, trust advisor, or trust protector, a no-contest provision is unenforceable to the extent that the trustee, trust advisor, or trust protector breached his, her, or its fiduciary duties.

Actions Commenced by a Trustee, Trust Advisor, or Trust Protector. A no-contest provision generally is inapplicable to any action that a trustee, trust advisor, or trust protector commences, unless the trustee, trust advisor, or trust protector is a beneficiary.

Settlement Agreements. A no-contest provision is inapplicable to any nonjudicial settlement agreement or other agreement settling a dispute relating to the trust.

Safe Harbor Petitions. A no-contest provision is inapplicable to any action to determine whether a proposed or pending motion, petition, or other judicial proceeding would violate a no-contest provision.

295 RSA 564-B:10-1014(b).

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Interpretative Proceedings. A no-contest provision is inapplicable to any action that a beneficiary commences to seek interpretation of the terms of the trust.

Director of Charitable Trusts. A no-contest provision is inapplicable to any action that the director of charitable trusts commences to seek interpretation of a charitable trust or a trust containing a charitable interest if the director has probable cause to commence that action.

Proceedings Concerning Suspended Distributions. A no-contest provision is inapplicable to any judicial proceeding seeking a determination of whether a trustee acted in good faith in suspending or resuming distributions to a beneficiary who may have violated a no-contest provision.

Proceedings to Determine the Reasonableness of Nonjudicial Dispute Resolution Procedures. The terms of a trust are void to the extent that they purport to abridge an interested person’s right to seek a judicial determination of the reasonableness of nonjudicial dispute resolution procedures.296

A no-contest provision is a powerful tool for discouraging beneficiaries from challenging wills, trusts, and the actions of fiduciaries. In that vein, a no-contest provision can have the laudable effect of encouraging the nonjudicial resolution of disputes. Nonetheless, individuals and their advisors should use no-contest provisions judiciously and tailor those provisions to the particular circumstances. Under a no-contest provision drafted as strictly as allowable under the statute, a beneficiary stands to lose his or her entire interest under a will or trust, even if the beneficiary acts in good faith or with probable cause.

That dramatic result may not be warranted or appropriate in every situation. In some cases, it may be more appropriate to

296 RSA 564-B:1-111A(b). See also RSA 564-B:1-105(b)(13).


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include a good-faith or reasonable-cause exception in a no-contest provision. Although no-contest provisions tend to be universally applicable to a trust’s beneficiaries, a no-contest provision can be tailored so that imposes different standards on different beneficiaries or classes of beneficiaries.

Lifetime Approval of Trusts

A settlor may commence a judicial proceeding for purposes of determining the validity of a trust that he or she created. The key statute is RSA 564-B:4-406(d). Similarly, under RSA 552:18, a testator may commence a judicial proceeding for purposes of determining the validity of a will that he or she created.

The settlor personally must commence the judicial proceeding, and the parties include the settlor’s spouse, the settlor’s children, the beneficiaries, and the trustee. The trust instrument must expressly provide that this state’s laws govern the trust’s validity, interpretation, and administration. In addition, the trust must have its principal place of administration within this state. After a court declares a trust valid, the settlor can amend or revoke the trust in the same manner as a trust for which there is no declaration of validity. The statute expressly vitiates any implication that a trust is invalid if the settlor does not seek a declaration of validity.

RSA 564-B:4-406(d), which was enacted in 2014, apparently revived old law. Before the enactment of the state’s guardianship laws in the early 1970s, the common-law “inquisition” had been used to determine the validity of a trust during the settlor’s life.297

297 Hearing on SB 289 before the House Judiciary Committee (April 1, 2014) (testimony of Robert A. Wells).

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Limitation Periods for Claims Against Trustees, Trust Advisors, and Trust Protectors

The UTC establishes limitation period for claims against trustees, trust advisors, and trust protectors. The key statutes are:

RSA 564-B:10-1005 (Trustees: Claims by Beneficiaries)

RSA 564-B:10-1005A (Trustees: Claims by a Trustee, Trust Advisor, or Trust Protector)

RSA 564-B:12-1206 (Trust Advisors and Trust Protectors)

Under current law, a beneficiary must initiate a judicial proceeding against a trustee for a breach of trust within three years after a trustee’s report that adequately discloses the potential claim for breach of trust was sent to the beneficiary. 298 The limitation period is shortened to one year if the trustee’s report contains magic language informing the beneficiary that he or she must initiate a judicial proceeding against a trustee within one year after the report was sent to the beneficiary.299 The statute was amended in 2011 to add that three-year limitation period.

Under prior law effective before September 11, 2011, a trustee’s report would not start a limitation period unless it contained magic language about the one-year period in which to initiate a judicial proceeding against the trustee. Thus, a trustee could have sent a trustee’s report that adequately disclosed the potential claim, but that disclosure would not start any limitation period unless the report also contained the magic language or the trustee sent a separate notice containing that magic language.

Adequate disclosure is essential to commencing the applicable limitation periods, and the adequacy of disclosure will turn on the specific facts, including the scope, nature, and complexity of a potential claim and the sophistication of the beneficiary.

298 RSA 564-B:10-1005(a). 299 RSA 564-B:10-1005(a).


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In the absence of adequate disclosure, the limitation period does not begin to run until the beneficiary’s interest ends, the trust ends, or the trustee ceases to serve. Under those conditions, a beneficiary must initiate the judicial proceeding within three years after earliest of beneficiary’s interest ending, the trust ending, or the trustee ceasing to serve.300 In the Houlahan Trust case decided in 2014, the New Hampshire Supreme Court decided that, if there may be a claim against a trustee, then the trust does not terminate by the distribution of the trust property out of trust and instead only terminates when, by its terms, the trustee must distribute the trust property out of trust.301 In that case, the court treated the claim as undistributed trust property. The court’s decision defies a practical, common-sense application of the statute and is ripe for legislative correction.

The limitation periods do not toll.302 In 2011, the statute was amended to add a no-tolling rule. In dicta in the Billewicz case decided in 2010, the New Hampshire Supreme Court had noted that the statute was silent regarding tolling, but suggested that the limitation periods might toll under certain circumstances (although not under the facts of that case).303 In response, the statute was amended and now provides that the limitation periods do not toll, except by court order or an agreement of the interested parties.304

In 2011, New Hampshire created a limitation period for a beneficiary’s claims against a trust advisor or trust protector. The new statute generally creates a three-year statute of limitations on claims against trust advisors and trust protectors, starting when the beneficiary is sent a trustee’s report that adequately discloses a

300 RSA 564-B:10-1005(c). 301 In re Houlahan Trust, ___ N.H. ___ (2014). For a more detailed discussion of the case, see the commentary on RSA 564-B:10-1005. 302 RSA 564-B:10-1005(d). 303 Billewicz v. Ransmeier, 161 N.H. 145 (2010). 304 Id.

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potential claim for breach of trust.305 Under prior law, New Hampshire did not have any limitation period specifically applicable to claims against trust advisors and trust protectors.

Material Purposes

A trust’s material purposes are the most important expressions of the settlor’s intent. The UTC treats a trust’s material purposes as sacrosanct, limiting the trustee’s powers—and even the court’s powers—so that they cannot ignore or erode the trust’s material purposes. For example, a court cannot terminate a trust if the termination would violate a material purpose of the trust.306 A trustee cannot decant to the extent that decanting would violate a material purpose of the trust.307 A nonjudicial settlement agreement is ineffective to the extent that it violates a material purpose of the trust.308

Too often, a the terms of the trust do not expressly identify the trust’s material purposes, and it can be challenging to discern from the trust’s material purposes from the terms of the trust. In six cases, the New Hampshire Supreme Court has been called upon to discern a trust’s material purposes. In the Citizens National Bank case decided in 1959, the court held that a trust’s termination would not violate a material purpose of the trust.309 The court stated:

In the present case all the life beneficiaries have deceased and all the remaining interested parties either pray for the

305 RSA 564-B:10-1005A. 306 RSA 564-B:4-411(a). 307 RSA 564-B:4-418. 308 RSA 564-B:1-111(c). 309 Citizens National Bank v. St. Peters Lodge, 102 N.H. 352 (1959). See Bellows v. Page, 88 N.H. 283 (1936) (quoting the Restatement of Trusts, “the beneficiaries of a trust, if all consent and none is under an incapacity, can compel its termination if the continuance of the trust is not necessary to carry out a material purpose of the trust, although the period fixed by the terms of the trust for its duration has not expired”).


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termination of the trust or do not object to it. Inasmuch as the trust will serve no useful purpose if continued for another twelve years and the charities are presently in existence, it can and should be terminated without interfering with any material purpose of the trust.

In reaching its holding, the court cited the Restatement (Second) of Trusts, for the proposition that, if all of the beneficiaries agree, the court may terminate a trust if “the continuance of the trust is not necessary to carry out a material purpose of the trust.”310

In the Bassett Estate case decided in 1963, the New Hampshire Supreme Court held that a trust’s termination would not violate a material purpose of the trust.311 The proposed termination apparently stemmed from an agreement to resolve some problems with the terms of the will that created the trust. The court noted that, “there were ambiguities in the will; there was a possibility of an interpretation which might result in partial intestacy; and there was a question whether the trust violated the Rule against Perpetuities.”312 Aside from noting those issues, the court did not elaborate on its holding that the trust’s termination would not violate a material purpose of the trust.

In the Katz case decided in 1963, the New Hampshire Supreme Court decided that “keep[ing] the trust property within the family line” was not a material purpose of trust.313 Although the trust instrument provided that, “if [the beneficiary] should marry a woman who is not of Jewish faith and religion, then his interest in this trust shall thereupon cease entirely and forever,” the trust instrument also granted the trustee a power to terminate the trust (after the expiration of a 15-year period), and the trust instrument

310 Id. at 356. 311 In re Bassett Estate, 104 N.H. 504 (1963). 312 Id. at 508. 313 Katz v. Katz, 104 N.H. 478 (1963).

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did not constrain the contingent disposition to members of the Katz family or the Jewish religion.

In the Bedell case decided in 1947, the New Hampshire Supreme Court suggested that the continuation of a trust to protect a beneficiary from his or her own improvidence would be a material purpose.314 In that case, the testator directed the executors to purchase an annuity for his daughter. The daughter sought to receive the assets outright. While not deciding whether a trust was created, the court rejected the daughter’s argument that the trust’s continuation was not necessary to carry out any material purpose, because the trust must continue as long as necessary to carry out a purpose.

In the Eastman case decided in 1935, the court upheld a trust’s termination, concluding the termination would not violate any of the trust’s material purposes.315 In that case, all of the beneficiaries agreed to terminate the trust, and they asserted that the trust’s continuation was unnecessary to achieve any of the trust’s material purposes. The will creating the trust was not a model of clarity, and the court found that all of the trust’s “ascertainable purposes”—other than the outright distribution to the beneficiaries—had been fully accomplished. The court stated that “a trust must continue until the purposes for which it was created were accomplished,” but concluded that the trust’s termination was permissible.

Given the importance of a trust’s material purposes, a settlor often is well advised to identify expressly the trust’s material purposes. “A settlor who wants to guarantee that certain trust arrangements be respected may wish to consider declaring them ‘material purposes,’” wrote Ralph Holmes. “Such an express

314 Bedell v. Colby, 94 N.H. 384 (1947). 315 Eastman v. First National Bank, 87 N.H. 189 (1935).


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characterization should help preclude future tinkering by beneficiaries and the court.”316

Charitable Trusts

In New Hampshire, there are two primary bodies of statutes that govern charitable trusts. The UTC governs charitable trusts and incorporates several special rules applicable to charitable trusts and charitable interests in trusts. Those rules are supplemented by a smattering In addition, RSA 7 contains several statutes governing charitable trusts—as well as other charitable organizations—and those statutes apply a further overlay on the formation and administration of charitable trusts. Chapter 6 focuses on RSA 7.

The UTC applies to charitable trusts, as well as non-charitable trusts.317 For purposes of the UTC, a “charitable trust” is a trust or a portion of a trust created for a charitable purpose.318 A charitable purpose is (1) the relief of poverty, (2) the advancement of education or religion, (3) the promotion of health, governmental or municipal purposes, or (4) other purposes the achievement of which is beneficial to the community.319

As noted above, a charitable trust can be a portion of a trust. For example, a portion of a trust may be a share of a trust, or it may be a defined interest—such as an income interest or remainder interest—in a trust.320 Thus, a trust can be in part a charitable trust and in part a noncharitable trust.

Generally speaking, the UTC applies in the same manner to both charitable trusts and noncharitable trusts. Nonetheless, there are

316 Ralph F. Holmes, “Probate Litigation: Trusts: What Is Material Purpose?,” New Hampshire Bar News, May 13, 2011, p. 33. 317 RSA 564-B:1-102. 318 RSA 564-B:1-103(3). 319 RSA 564-B:4-405(a). 320 Comments to model UTC § 103.

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occasions when two sets of rules will apply to the same trust. The comments to the model UTC offers the following explanation:

Under the Uniform Trust Code, when a trust has both charitable and noncharitable beneficiaries only the charitable portion qualifies as a “charitable trust” (paragraph (4)). The great majority of the Code’s provisions apply to both charitable and noncharitable trusts without distinction. The distinctions between the two types of trusts are found in the requirements relating to trust creation and modification. Pursuant to Sections 405 and 413, a charitable trust must have a charitable purpose and charitable trusts may be modified or terminated under the doctrine of cy pres. Also, Section 411 allows a noncharitable trust to in certain instances be terminated by its beneficiaries while charitable trusts do not have beneficiaries in the usual sense. To the extent of these distinctions, a split-interest trust is subject to two sets of provisions, one applicable to the charitable interests, the other the noncharitable.321

The UTC contains some special rules applicable to charitable trusts. Those rules are discussed below. As a prerequisite to an exploration of those rules, an understanding of the term “person having the rights of a qualified beneficiary” is crucial.

Persons Having the Rights of a Qualified Beneficiary

The UTC uses the unwieldy term “person having the rights of a qualified beneficiary.” That term of art is not synonymous with the term “qualified beneficiary.” The distinction between those terms is important for understanding the manner in which certain statutes apply to charitable trusts and charitable interests in trusts.

321 Id.


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The distinction stems from the proposition that, by its nature, a charitable trust does not have any beneficiaries. The comments to the model UTC articulate this proposition:

The definition of “beneficiary” includes only those who hold beneficial interests in the trust. Because a charitable trust is not created to benefit ascertainable beneficiaries but to benefit the community at large (see Section 405(a)), persons receiving distributions from a charitable trust are not beneficiaries as that term is defined in this Code.322

As the comments further state, “charitable trusts … do not have beneficiaries in the usual sense.”323 A charitable trust, nonetheless, may designate one or more charitable organizations to which the trustee may or must make distributions. Although the UTC apparently would not characterize those charitable organizations as beneficiaries, the UTC effectively treats them as beneficiaries, so long as those charitable organizations otherwise would meet the definition of qualified beneficiaries.

The UTC identifies two classes of persons having the rights of a qualified beneficiary. Those classes are charitable organizations and the director of charitable trusts.

Charitable Organizations

In the case of a charitable trust, a charitable organization has the rights of a beneficiary if it is named in the trust and has interests comparable to those of a qualified beneficiary of a noncharitable trust. Specifically, RSA 564-B:1-110 (a) provides:

A charitable organization expressly designated to receive distributions under the terms of a charitable trust has the rights of a qualified beneficiary under this chapter if the

322 Comments to model UTC § 103. 323 Id.

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charitable organization, on the date the charitable organization’s qualification is being determined:

(1) is a distributee or permissible distributee of trust income or principal;

(2) would be a distributee or permissible distributee of trust income or principal upon the termination of the interests of the distributees then receiving or eligible to receive distributions; or

(3) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.

The comments to the model UTC state that “Section 110 expands the definition of qualified beneficiaries to encompass this wider group” of persons who have an interest in enforcing a charitable trust.324 Although it may not be precisely the case that the statute expands the definition of qualified beneficiaries, it generally has that effect, because qualified beneficiaries and persons having the rights of qualified beneficiaries generally are treated in the same manner.

The distinction between a qualified beneficiary and a person having the rights of a qualified beneficiary is rather nuanced. Perhaps unfortunately so. When a charitable organization has the rights of a qualified beneficiary, it is not apparent that, under the UTC, there are any instances in which the charitable organization would stand in any different position than if it simply was deemed to be a qualified beneficiary of the trust. Thus, this distinction seems to complicate unnecessarily the UTC. As a matter of legislative drafting, it may have been better simply to define beneficiary to include a charitable organization that is expressly identified under the terms of a charitable trust.

Within the UTC, there are several instances in which the statutes refer to both qualified beneficiaries and those having the rights of 324 Id.


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qualified beneficiaries. For example, the statute governing the trustee’s duty to inform repeatedly refers to both “qualified beneficiaries … and those having the rights of qualified beneficiaries.”325 This raises the question of whether, under the UTC, there might be instances in which a person having the rights of qualified beneficiaries might be treated differently than a qualified beneficiary.

In New Hampshire, the UTC at least partially brushes aside this distinction. In defining certain rights of the director of charitable trusts, RSA 564-B:1-110(c) refers to a “charitable organization as a beneficiary” of a charitable trust.

Director of Charitable Trusts

In the case of a charitable trust that has its principal place of administration in New Hampshire, the director of charitable trusts generally has the rights of a qualified beneficiary, unless the charitable trust designates a charitable organization as a beneficiary.326 The director of charitable trusts has the rights of a qualified beneficiary if (1) the charitable trust’s income or principal is distributable to carry out its charitable purpose, (2) the charitable trust’s income or principal would be distributable to carry out its charitable purpose upon the termination of the interests of the current distributees or permissible distributees, or (3) the charitable trust’s income or principal would be distributable to carry out its charitable purpose upon the trust’s termination on that date.327

The statute expressly provides that the UTC does not limit the authority of the director of charitable trusts to supervise and control charitable organizations.328 In addition, the 2014 act added a statute that creates a blanket protection for the director’s powers to enforce 325 RSA 564-B:8-813. 326 RSA 564-B:1-110(c). 327 Id. 328 RSA 564-B:1-110(d).

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charitable trusts.329 The new statute provides that the UTC “shall not limit the authority of the director of charitable trusts or the department of health and human services as otherwise provided by statute or common law.”330

Trustee’s Duty to Inform

A trustee generally has a duty to keep the beneficiaries reasonably informed about the administration of the trust.331 A settlor, however, can modify or waive the trustee’s duty to inform.332 The notices, reports, and information that a trustee of a charitable trust must provide to a charitable beneficiary or the director of charitable trusts (or, more precisely, a person having the rights of a qualified beneficiary) generally are the same as the notices, reports, and information that a trustee of a noncharitable trust must provide to a qualified beneficiary. There, however, are some special rules.

Instead of providing a copy of the trust instrument or the trustee’s reports to the director of charitable trusts, a trustee generally may make the trust instrument and trustee’s reports available for the director of charitable trusts to view at the trustee’s office.333 Specifically, RSA 564-B:8-813(h) provides:

In fulfilling the duty under this section to the director of charitable trusts pursuant to RSA 564-B:1-110(c), the trustee may permit the director of charitable trusts to view the trust instrument and reports upon request at the office of the trustee instead of providing a copy of the trust instrument and the reports.

329 Laws of 2014, ch. 195, § 6. 330 RSA 564-B:102(d). 331 RSA 564-B:8-813. 332 RSA 564-B:1-105(b). 333 RSA 564-B:8-813(h).


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Although the statute’s general thrust seems clear, a couple technical observations may be warranted.

As a practical matter, the director of charitable trusts may have difficulty viewing those documents, because the trustee’s office may be located out of state. The trustee’s duty to inform extends to the director of charitable trusts, if the trust’s principal place of administration is located in New Hampshire.334 Even though the trust’s principal place of administration is located within the state, the trust’s records may not be, especially if there are co-trustees.335 RSA 564-B:8-813(h) only obligates the trustee to make the documents available at its office, but does not specifically require the documents to available at its office within the state.

The trustee probably must provide any notices to the director of charitable trusts (rather than simply making them available), although the statute it not as clear as it could be on this point. RSA 564-B:8-813(h) speaks broadly about a trustee fulfilling the trustee’s duty to the director of charitable trusts under RSA 564-B:8-813. RSA 564-B:8-813(c) generally would require the trustee to provide various notices and a copy of the trust instrument to the director of charitable trusts (as a person having the rights of a qualified beneficiary). RSA 564-B:8-813(h) expressly allows a trustee to make a copy of the trust instrument and the trustee’s reports available to the director of charitable trusts, instead of providing them to the director of charitable trusts. RSA 564-B:8-813(h), however, does not expressly address the notices. As a practical matter, it seems implausible that, for purposes of the default rules, the trustee would be relieved from providing notices to the director of charitable trusts.336

334 RSA 564-B:1-110(c). 335 See, e.g., comments to model UTC § 108. 336 As noted above, the settlor can modify or eliminate the trustee’s duty to inform. See RSA 564-B:1-105, as amended by Laws of 2006, ch. 320, § 49. Although some modifications often are appropriate, eliminating the trustee’s duty to inform may be inadvisable.

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Appointment of a Trustee of a Charitable Trust

The UTC contains a special rule for the appointment of a trustee of a charitable trust. If, in a charitable trust, there is a vacancy that must be filled, the New Hampshire statute provides that the vacancy must be filled in the following order of priority:

(1) by a person designated in the terms of the trust to act as successor trustee (whether that person is specifically designated by name or designated by a procedure established under the terms of the trust);

(2) by a person selected by the charitable organizations expressly designated to receive distributions under the terms of the trust if the director of charitable trusts concurs in the selection; or

(3) by a person appointed by the court.337

In other words, one looks first to the terms of the trust for purposes of identifying a successor trustee. If the terms of the trust fail to identify a person who is willing and able to act as the successor trustee, then the charitable beneficiaries and the director of charitable trusts can appoint a successor trustee. If the charitable beneficiaries and the director of charitable trusts cannot agree upon the selection of a person to appoint as a successor trustee, then the court can appoint a successor trustee.

This special rule contrasts with the rule applicable to noncharitable trusts. In the case of the trusteeship of a noncharitable trust, one also looks first to the terms of the trust.338 If the terms of the trust fail to identify a successor trustee, then the qualified beneficiaries, by unanimous agreement, can appoint a successor trustee.339

337 RSA 564-B:7-704(d). 338 RSA 564-B:7-704(c)(1). 339 RSA 564-B:7-704(c)(2).


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The charitable beneficiaries probably must unanimously agree to the selection of the successor trustee. For a noncharitable trust, the statute expressly provides that the qualified beneficiaries must unanimously agree to the appointment of a successor trustee.340 For a charitable trust, the statute is silent. The comments to model UTC § 704 do not offer any illumination, simply stating that, “absent an effective designation in the terms of the trust, a successor trustee may be selected by the charitable organizations expressly designated to receive distributions in the terms of the trust but only if the attorney general concurs in the selection.”341 Nonetheless, the statute seems to imply unanimous agreement and, by analogy to the noncharitable trusts, likely does require unanimous agreement.

Enforcement of Charitable Purposes

The UTC contains a special rule regarding the enforcement of a charitable trust. In the case of a charitable trust, the settlor or the director of charitable trust can initiate judicial proceeding to enforce the trust.342 In addition, “others” may also initiate proceedings to enforce the trust. Specifically, RSA 564-B:4-405(c) provides that “the settlor of a charitable trust or the director of charitable trusts, among others, may maintain a proceeding to enforce the trust.” The statute does not provide any illumination as to who those others may be, but they probably include the charitable beneficiaries. The director of charitable trusts is a necessary party to any proceeding to enforce a charitable trust.343

340 RSA 564-B:7-704(c)(2). 341 Comments to the model UTC § 704. 342 RSA 564-B:4-405(c). 343 Id.

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Modification of a Charitable Trust

The UTC contains special rules applicable to the modification of a charitable trust. A trustee or beneficiary generally can commence an action to modify or terminate a charitable or noncharitable trust.344 The settlor can commence an action to modify a charitable trust under the cy pres doctrine, but cannot otherwise commence an action to modify or terminate a charitable or noncharitable irrevocable trust.345

The director of charitable trusts is a necessary party in any cy pres action that the settlor commences.346 Specifically, RSA 564-B:410(b) provides that “the settlor of a charitable trust may maintain a proceeding to modify the trust under RSA 564-B:4-413, and in such proceeding, the director of charitable trusts shall be joined as a necessary party.”

The UTC provides a statutory framework under which cy pres applies to charitable trusts. If a charitable purpose becomes impossible, impracticable, illegal, obsolete, ineffective, or prejudicial to the public interest to achieve, then a trustee, a settlor, the director of charitable trusts, or other interested person may commence a judicial proceeding seeking the modification or termination of the trust.347 The modification or termination would be effected by applying or distributing the trust property to a charitable purpose which is useful to the community and which fulfills as nearly as possible the general charitable intent of the settlor.348 The statute

344 RSA 564-B:4-410(b). RSA 564-B:4-410(b) does not specifically limit itself to irrevocable trusts, but, by the nature of a revocable trust, the settlor generally has the power to amend or revoke it. See RSA 564-B:6-602. 345 Id. 346 Id. 347 RSA 564-B:4-413(a). The settlor’s right to commence a proceeding seeking the modification of a charitable trust under cy pres emanates from RSA 564-B:4-410(b). 348 RSA 564-B:4-413(a)(3).


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limits the effect of a gift-over to a settlor or other noncharitable beneficiaries.349

Trustee’s Power of Adjustment

In New Hampshire, a trustee has a statutory power of adjustment.350 A trustee, however, is prohibited from exercising the statutory power of adjustment from “any amount that is permanently set aside for charitable purposes under a will or the terms of a trust unless both income and principal are so set aside.”351

Trustee’s Power of Adjustment for Taxes

A trustee generally has the power to make adjustments between income and principal for purposes of offsetting shifting economic interests or tax benefits that result from taxes, tax elections, and other tax matters.352 A trustee‘s decision to deduct certain amounts for income tax purposes rather than estate tax purposes can require an adjustment if it reduces the estate tax charitable deduction and shifts the tax benefits and burdens.

Unitrust Conversion

In New Hampshire, a trustee generally has the power to convert a trust into a unitrust.353 For charitable trusts and trusts with charitable interests, some special rules apply. First, there are some trusts that a trustee cannot convert to a unitrust:

Any trust in which the unitrust distribution would be made from any amount which is permanently set aside for

349 RSA 564-B:4-413(a)(1) and (b). 350 RSA 564-C:1-104. 351 RSA 564-C:1-104(c)(4). 352 RSA 564-C:5-506. 353 RSA 564-C:1-106.

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charitable purposes, unless both income and principal are set aside (i.e., the trust is wholly a charitable trust).

A trust having a guaranteed annuity interest or fixed percentage interest as described in section 170(f)(2)(B) of the Internal Revenue Code (i.e., certain charitable lead trusts).

A pooled income fund (within the meaning of section 642(c)(5) of the Internal Revenue Code).

A charitable remainder trust (within the meaning of section 664(d) of the Internal Revenue Code).

A trust in which one or more settlors retained a qualified interest (within the meaning of section 2702(b) of the Internal Revenue Code) (which includes qualified charitable lead trusts).

Second, if the trust is a charitable trust, the director of charitable trusts must receive notice, the director has the right to object to the conversion, and the director has the right to petition to convert a trust into a unitrust.

No-Contest Provisions

In 2011, New Hampshire enacted two statutes that expressly recognize no-contest provisions in wills and trusts.354 Under those statutes, special rules protect actions that the director of charitable trusts commence.

The statutes governing wills and trusts contain similar, but not identical, provisions shielding the attorney general’s actions from a no-contest provision. In the case of a will that contains a charitable bequest or a charitable trust, the pertinent statute provides that the following action shall not trigger a no-contest provision:

354 RSA 551:22 and 564-B:10-1014. The statutes became effective September 11, 2011.


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Any action brought by the attorney general for a construction or interpretation of a will containing a charitable trust or charitable bequests or if a provision exists in a will or trust purporting to penalize a charity or charitable interest for contesting the will or trust or instituting other proceedings relating to the estate or trust if probable cause exists for instituting proceedings.355

In the case of a charitable trust or a trust that contains a charitable interest, the pertinent statute provides that the following action shall not trigger a no-contest provision:

Any action brought by the attorney general for a construction or interpretation of a charitable trust or a trust containing a charitable interest if a provision exists in a trust purporting to penalize a charity or charitable interest for contesting the trust if probable cause exists for instituting proceedings.356

The carve-out applicable to wills includes “other proceedings relating to the estate,” but the carve-out applicable to trusts does not contain a comparable clause. Despite the slight differences between those provisions, the provisions substantively should apply in nearly identical manners.

Testamentary Charitable Trusts

A couple of special considerations come into play for testamentary charitable trusts. A trustee of a testamentary trust generally must file an annual account with the probate court.357 A trustee, however, can opt out of filing annual account if certain

355 RSA 551:22, III(e). 356 RSA 564-B:10-1014(c)(5). 357 RSA 564:19, I.

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conditions are met.358 Those rules apply to both charitable trusts and noncharitable trusts. As a practical matter, however, there may be no compelling reason to seek excusal from filing annual accounts for charitable trusts.

A trustee of a charitable trust generally must file with the director of charitable trusts an annual report under RSA 7:28. To the extent that the trustee still must prepare annual accounts for purposes of complying with that filing obligation, the trustee would not see any meaningful lessening of administrative burdens. There also is no privacy advantage, because those annual reports are subject to public inspection. If a trustee must prepare and file annual accounts with the director of charitable trusts, the trustee might welcome the benefits that come with judicial approval of those accounts.

A trustee of a testamentary trust generally must furnish a bond.359 A trustee, however, is relieved of providing a bond if the trustee is exempt from filing annual accounts.360 Even with the opt-out provisions, the probate court can require a trustee to file accounts or provide a bond.361 For a charitable trust, excusal from filing annual accounts may be advantageous from the standpoint of avoiding the cost of providing a sureties on a bond, although the trustee may prefer to request a waiver of the bond (with the assent of the director of charitable trusts) and continue filing the annual reports.

358 RSA 564:19 as amended by Laws of 2011, ch. 243, § 5. The opt-out rules are effective as of September 11, 2011. 359 RSA 564:1. 360 RSA 564:1, II. 361 RSA 564:19, IV.


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Judicial Restraint

New Hampshire courts demonstrate an impressive degree of judicial restraint. In an oft-repeated refrain, the state supreme court’s justices explain their view of their role:

In matters of statutory interpretation, we are the final arbiter of the intent of the legislature as expressed in the words of the statute considered as a whole. We first look to the language of the statute itself, and, if possible, construe that language according to its plain and ordinary meaning. We interpret legislative intent from the statute as written and will not consider what the legislature might have said or add language that the legislature did not see fit to include.362

When a statute is unambiguous, the court will not create exceptions, even in cases in which the court recognizes competing public policy considerations. As Justice James Bassett wrote in a 2012 case involving a business corporations statute, “we are constrained by the clear language of the statute and we will not rewrite it; that is the province of the legislature.”363

“Consistent with our jurisprudence, … we will not undertake the extraordinary step of creating legislation where none exists,” wrote Justice Linda S. Dalianis, who would later become chief justice, in a 2003 opinion concerning the statutory formula for calculating child support. “Rather, matters of public policy are reserved for the legislature.”364

The court’s tradition of deferring to legislative prerogative was vividly illustrated in the Krueger case.365 In that case, Kyle Krueger was a beneficiary of a trust created by his grandmother. The trust contained a spendthrift provision. Some years later, Mr. Krueger 362 In re G.G., ___ N.H. ___, ___ ( 2014) (internal citations omitted). 363 Carleton, LLC v. Balagur, 162 N.H. 501 (2012). 364 In re Plaisted, 149 N.H. 522, 526 (2003). 365 Scheffel v. Krueger, 146 N.H. 669 (2001).

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sexually assaulted on a two-year old child. On the child’s behalf, the child’s mother sued Mr. Krueger, obtaining a $551,000 judgment against him, which she sought to enforce against his interest in the trust.

Despite a beneficiary’s heinous acts, the state supreme court, which only a month earlier had upheld the beneficiary’s conviction on 90 criminal charges,366 upheld a statute enforcing a spendthrift provision. In the court’s opinion, Justice James E. Duggan wrote:

The plaintiff argues public policy requires us to create a tort creditor exception to the statute. … In this state, the legislature has enacted a statute repudiating the public policy exception sought by the plaintiff. This statutory enactment cannot be overruled, because “[i]t is axiomatic that courts do not question the wisdom or expediency of a statute.” Therefore, “[n]o rule of public policy is available to overcome [this] statutory rule.”367

With that, the court applied the statute and enforced the spendthrift provision against a very sympathetic creditor.

366 State v. Krueger, 146 N.H. 541 (2001). 367 Scheffel v. Krueger, 146 N.H. 669, 672-673 (2001), quoting Brahmey v. Rollins, 87 N.H. 290 (1935) (internal citations omitted).

8 Trust Court

In 2014, the New Hampshire Judicial Branch created a dedicated trust court. The trust court, which formally is the trust docket of the probate division of the circuit court, will focus on complex trust litigation. With the formation of the trust court, New Hampshire became the first state in the nation with a specialty court dedicated to complex trust litigation.

Beginning in 2011, members of the trust bar and members of the judiciary discussed the formation of a trust court. Although there was a general consensus on the benefits of a trust court, timing was a challenge for the judicial branch. In 2011, the state had created the circuit court through the unification of the district court, the probate court, and the judicial branch family division.373 In late 2013, judicial staffing and timing finally aligned, and the judicial branch moved ahead with forming the trust court.374

David King, the Deputy Administrative Judge of the Circuit Court and previously the administrative judge of the probate court, played a key role in the trust court’s formation. On the announcement of the trust court’s formation, Judge King said “I think it’s the right thing to do, and it makes sense for moving these more complex cases.”375

Judge Gary R. Cassavechia became the trust court’s first presiding judge. A seasoned probate judge, Judge Cassavechia had

373 Laws of 2011, ch. 88. 374 Kristen Senz, “Court to Launch Trust Docket,” New Hampshire Bar News, December 13, 2013, p. 1. 375 Id.

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sat on the probate bench since 1981, and was the presiding judge in the Tamposi case, which involved a 27-day trial.376

In the trust court, one judge will preside over all aspects of the dispute, and a trial generally will be held on consecutive days without interruption. As Judge King has said, “one judge, one case.”377

Materials and Commentary

Administrative Order 2014-04

State of New Hampshire Circuit Court

Administrative Order 2014-04

Pursuant to RSA 490-F and Supreme Court Rule 54, and in the interest of responding to the needs of the public and promoting judicial and caseflow efficiency, there is hereby established a Trust Docket within the probate division of the New Hampshire Circuit Court. The presiding judge of the Trust Docket shall have the authority to hear and decide all matters assigned to him by the Administrative Judge of the Circuit Court.

Cases may be referred for consideration of inclusion on the docket by any circuit court probate division judge before whom the case is pending, or any party or counsel of record for a party in a matter pending before the probate division. Additionally, pursuant to RSA 490-F:2, the Administrative Judge of the Circuit Court may, in his sole discretion, reassign any pending matter to the Trust Docket.

All referrals by a party or counsel shall be made to the court at which the matter is pending, with a copy to the Administrative 376 Id. 377 Id.


487

Judge and to all parties and counsel of record. Requests for referral by a judge of the circuit court may be made directly to the Administrative Judge. The reassignment of any case shall be in the sole discretion of the Administrative Judge after consultation with the current presiding judge and the presiding judge of the Trust Docket.

Pursuant to RSA 490-F: 6 I, The Honorable Gary R. Cassavechia is hereby assigned to serve as Presiding Judge of the Circuit Court Trust Docket. Hearings in any matter reassigned to that docket shall be conducted at 7th Circuit – Probate Division (Dover), unless otherwise ordered by the presiding judge.

February 27, 2014

Edwin W. Kelly Circuit Court Administrative Judge

Frequently Asked Questions

What is the Trust Docket?

The Trust Docket is, in essence, an administrative reassignment of complex trust, estate, and probate cases pursuant to RSA 490-F:2 and Supreme Court Rule 54(4)(h) to a judge specially assigned to manage this docket of cases.

What is the Goal of the Trust Docket?

The primary goal of the Trust Docket is to foster speedy resolution of complex trust cases or other complex probate litigation. By assignment of complex cases to one docket and one presiding judge, the Circuit Court seeks to increase efficiency in managing complex Probate Division cases for the benefit of the parties and others whose cases are impacted by the resource demands of such complex matters.

Which Cases Are Appropriate for Reassignment to the Trust Docket?

There is no mathematical formula or precise benchmark for determination whether a case belongs on the Trust Docket.

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“Complex” cases appropriate for reassignment may involve one or more of the following factors:

Multi-Faceted Issues—Do the issues raised involve multiple layers of complexity? Does the instrument at issue include novel, ambiguous, or complicated provisions? Is the law unclear, complicated, or is there a choice of law controversy?

Multitude of Instruments at Issue—Does the case involve interpretation of multiple types of probate documents?

Number of Parties—Does the case involve multiple parties or parties with competing or differing interests? Are there a number of creditors with competing preferences for estate assets?

Potential Tax Implications—Does the case involve complicated tax questions or does the outcome implicate various tax consequences?

Projected Length of Trial—Do the parties project a multi-day trial as opposed to only a few hours?

Multiple Forums—Are the parties involved in related litigation in other Circuit Court divisions that are best consolidated into one matter? Does resolution of the case affect, or is itself affected by, litigation in another division of the Circuit Court, the Superior Court, or Federal Court?

Urgency of Adjudication—Is there a critical need for fast resolution?

Efficiency—Can the case be more efficiently resolved in a specialized docket?

What is the Process for Reassignment to the Trust Docket?

There are three possible paths to the Trust Docket. See Circuit Court Administrative Order 2014-04. Cases may be reassigned by the Administrative Judge of the Circuit Court upon referral by any Circuit Court Probate Division judge. Parties may request reassignment by filing a request with the court. Finally, the Circuit


489

Court Administrative Judge, in his sole discretion, may initiate reassignment of a case to the Trust Docket.

A party requesting reassignment must file its request in the court where the matter is pending, and forward copies of the request to both the Administrative Judge and all parties and counsel of record. The Circuit Court will have a request form available on its website next week for use by parties requesting reassignment. The request form will mirror that presently used for Rule 7 discretionary appeals to the Supreme Court. Until the form is available, parties should file a separate written request with the forum judge setting forth reasons for reassignment based on one or more of the criteria listed above.

How Selective is the Process?

The Administrative Judge will carefully consider each request in consultation with the Deputy Administrative Judge, the Presiding Judge of the Circuit Court Trust Docket, and the forum judge. The process will be very selective and only those cases that clearly belong in the Trust Docket will be reassigned.

Reassignment of any case shall be in the sole discretion of the Administrative Judge. See RSA 490-F:2; Super. Ct. R. 54. There is no appeal from the decision on a request for reassignment.

What is the Venue for the Trust Docket?

The Honorable Gary R. Cassavechia is the Presiding Judge of the Trust Docket. Hearings will normally be held in the 7th Circuit-Probate Division location in Dover. The Dover Probate Division facilities are well-equipped to accommodate multi-party litigation.

In very unusual circumstances, however, proceedings may be held in other circuit court locations. Very brief hearings may be scheduled by videoconference or teleconference, however, advance notice to the court will be required.

How Does the Trust Docket Differ from the Usual Probate Docket?

The goal of the Trust Docket is to foster efficient resolution of complex cases. The Presiding Judge will be the only judge hearing

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Trust Docket cases except where exigent circumstances require the case to be transferred to another probate judge. Consequently, each case will be managed very closely. Parties will be firmly held to filing, discovery, and other scheduling deadlines. Open discovery will be expected by the court. The Circuit Court will be publishing a series of standing orders to facilitate completion of discovery in a reasonable time and manner.

What if My Client Objects to a Request for Reassignment?

Parties may file a response to the request for reassignment setting forth reasons that transfer is inappropriate. Copies of the response must be filed in the Circuit Court where the matter is pending within five business days of receipt of the request for reassignment. Additional copies of the request must be sent contemporaneously to both the Administrative Judge and all parties and counsel of record.

How Long Does the Case Stay on the Trust Docket?

Cases will remain on the Trust Docket until resolution of all complex legal issues in the case. The case may be referred back to the court of origin at the discretion of the Administrative Judge if a determination is made that the court of origin is best suited for disposition of remaining or routine matters.

Will Other Circuit Court Cases Automatically Be Consolidated in the Trust Docket?

If the Administrative Judge, in his sole discretion, determines that reassignment to the Trust Docket of any related matters pending before any Circuit Court will further the goal of efficient resolution then, pursuant to RSA 490-F:2, those cases will be reassigned and consolidated in the Trust Docket for global review and disposition.

Is Mediation Available?

Mediation is available and will be encouraged.


491

What About E-Court? Will the Trust Docket Have Electronic Filing?

Filing will continue to be paper-based for the near term. All Trust Docket case files will eventually be electronic, however, that is not expected to occur for at least three to five years.

Parties are encouraged to file particularly lengthy exhibits via CD or other easily accessible electronic media.

What About Cases with Confidentiality Concerns?

Transfer of case files is completed internally and as such confidentiality will be respected. The Court expects that parties will be aware of, and closely follow, any outstanding protective orders in the case.

Comment

Judge Cassavechia distributed these Frequently Asked Questions at a New Hampshire Bar Association meeting held on March 26, 2014.

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Model Transfer Order

THE STATE OF NEW HAMPSHIRE

STRAFFORD COUNTY TRUST DOCKET 7TH CIRCUIT COURT PROBATE DIVISION

PETITIONER

v.

RESPONDENT

31_-201_-EQ-0000

ASSIGNMENT, TRANSFER, AND ACCEPTANCE OF CASE TO TRUST DOCKET AND

ORDER REGARDING FUTURE SUBMISSIONS

This trust case has been assigned and transferred into, and accepted by, the Trust Docket for further address and adjudication. All future submissions of the parties shall be filed with the Trust Docket at the 7thCircuit—Probate Division—Dover utilizing the same 316-2012-EQ-02051 docket number earlier assigned to it by the 7th Circuit Court—Probate Division, and are not to be appended to, accompanied by, incorporated into, or sandwiched within, the cover of the pre-printed format of its namesake (e.g., Petition/Motion, Objection, etc.) available at the court website. Any person filing a pleading or correspondence shall contemporaneously file an original and two copies with the Court. The parties shall certify that a copy or copies have been furnished to all parties to the case pursuant to Circuit Court-Probate Division, Rule 21.

SO ORDERED

Dated:

Gary R. Cassavechia, Judge


493

Comment

Judge Cassavechia distributed this model order at a New Hampshire Bar Association meeting held on March 26, 2014.

Self-Settled Spendthrift Trusts under New Hampshire Law

Todd D. Mayo

Principal and General Counsel

Perspecta Trust LLC

One Liberty Lane East

Hampton, NH 03842

[email protected]

+1 603 929 2671

© 2015 Todd D. Mayo. All rights reserved. These materials are adapted from Todd D. Mayo, New Hampshire Trust

Laws: Statutes and Commentary (Perspecta Trust LLC, 2014). Nothing contained in this materials is to be considered as

the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own

legal counsel. These materials are intended educational and informational purposes only.

Self-Settled Spendthrift Trusts

under New Hampshire Law

New Hampshire recognizes several types of self-settled spendthrift trusts. In contrast to

traditional trust law, a self-settled spendthrift trust is an irrevocable trust in which a settlor’s

creditor cannot reach the settlor’s interest in the trust. In 2008, New Hampshire enacted the

Qualified Dispositions in Trust Act (QDTA),1 which generally enables settlors to design self-

settled spendthrift trusts. In addition to trusts created under the QDTA, charitable remainder

trusts, certain marital trusts, and self-settled supplemental needs trusts are recognized as self-

settled spendthrift trusts.2

1. Self-Settled Spendthrift Trusts

A. Traditional Rule

Under traditional trust law, a settlor’s creditor can reach the settlor’s interest in a trust.

In some states, the creditor can reach only the settlor’s interest.3 In other states, the creditor can

reach all of the trust property.4

The model Uniform Trust Code incorporates the traditional rule. Under Section 505 of

the model UTC, a settlor’s creditor can reach the maximum amount that, under the terms of the

trust, could be distributed to the settlor. It does not matter whether the trust contains a

spendthrift provision. If the trustee has the discretion to distribute all of the income and

principal to the settlor, then the settlor’s creditor can reach all of the trust property, even if the

settlor is only one of several beneficiaries.5 For example, if a settlor creates an irrevocable trust

and, under the terms of the trust, the trustee may distribute some or all of the income and

principal to the settlor, the settlor’s spouse, and the settlor’s descendants, then the settlor’s

creditor can reach all of the trust property.

1 The QDTA is codified in RSA 564-D.

2 RSA 564-B:5-505(a)(2).

3 See. e.g., Menotte v. Brown, 303 F.3d 1261 (11th Cir. 2002) (settlor’s bankruptcy estate included the settlor’s

unitrust interest in a charitable remainder unitrust, but did not include the charitable remainder interest).

4 See, e.g., N.Y. Est. Powers & Trust Law § 7-3.1(a).

5 See Comments, Section 505 of the Uniform Trust Code.

3

The drafters of the model UTC described the traditional rule as “sound public policy,”

although they did not explain their rationale for their conclusion.6 They also specifically rejected

the concept of domestic asset protection trusts.7

B. New Hampshire

In 2004, New Hampshire adopted the model UTC with limited changes. The general

rule, which is unchanged from its enactment, provides that a settlor’s creditor “may reach the

maximum amount that can be distributed to or for the settlor’s benefit.”8 If a trust has more

than one settlor, then a settlor’s creditor may reach an amount up to the portion of the trust

property attributable to that settlor’s contribution.9

There are six exceptions to the general rule. New Hampshire’s UTC contains five of

those exceptions, and the QDTA embodies the sixth exception. The six exceptions are:

Charitable Remainder Annuity Trusts. In the case of a charitable remainder

annuity trust, a settlor’s creditors cannot reach any of the trust property.10

This exception became effective July 1, 2014.

Charitable Remainder Unitrusts. In the case of a charitable remainder

unitrust, a settlor’s creditors cannot reach any of the trust property.11 This

exception became effective July 1, 2014.

Marital Trusts. In a lifetime general power of appointment marital trust or a

lifetime QTIP trust, the settlor may retain a beneficial interest that is

contingent upon surviving his or her spouse.12 The 2014 amendment ensured

that those trusts, which are created primarily to benefit the settlor’s spouse,

would not be subject to the settlor’s creditors. This exception became effective

July 1, 2014.

Self-Settled Supplemental Needs Trusts. The general rule does not apply to

a self-settled supplemental needs trust for the benefit of for a disabled person

6 Id.

7 Id.

8 RSA 564-B:5-505(a)(2).

9 Id.

10 RSA 564-B:5-505(a)(2)(A).

11 RSA 564-B:5-505(a)(2)(B).

12 RSA 564-B:5-505(a)(2)(C) and (D).

4

as described in 42 U.S.C. 1396p(d)(4).13 In the statute, the trust is called a

“special needs trust.” This exception became effective October 1, 2004.

Tax Reimbursement Provision. A trust may contain a tax reimbursement

provision, and the inclusion of that provision will not cause a trust to be

subject to the settlor’s creditors.14 A tax reimbursement provision commonly

is found in a trust that is a grantor trust for federal income tax purposes. In

Rev. Rul. 2004-64,15 the IRS held that a settlor’s gross estate does not include

the assets in a trust solely by reason of a trust provision that grants to the

trustee the discretionary power to reimburse the settlor for the income tax

attributable to the inclusion of the trust’s income in the settlor’s taxable

income. The 2008 amendment added this paragraph, and the 2014

amendment renumbered it. This exception became effective September 9,

2008, and the amendment became effective July 1, 2014.

Self-Settled Spendthrift Trusts. Under the QDTA, a settlor may create a self-

settled spendthrift trust. Generally speaking, the settlor’s creditors cannot

reach the trust property.16 This exception became effective January 2, 2009.

2. Qualified Dispositions in Trust Act (QDTA)

In 2008, New Hampshire enacted the QDTA, which recognized self-settled spendthrift

trusts. The QDTA was modeled on Delaware’s Qualified Dispositions in Trust Act. In 2011, the

state amended the QDTA, expanding the powers that a settlor could permissibly retain. In 2014,

the state again amended the QDTA, further expanding the powers that a settlor could

permissibly retain and generally improving the clarity and readability of a key section.

A. General Requirements

Under the QDTA, a self-settled spendthrift trust must satisfy the following four

requirements:

Qualified Trustee

New Hampshire Governing Law

Irrevocable

Spendthrift Provision

13 RSA 564-B:5-505(a)(2)(E).

14 RSA 564-B:5-505(a)(2)(F).

15 Rev. Rul. 2004-64, 2004-2 C.B. 7.

16 RSA 564-D:9. See RSA 564-B:5-505(c).

5

Those requirements are embodied in the QDTA’s provisions which affords enhanced creditor

protection for a “qualified disposition,” which is a transfer from a settlor (whom the QDTA’s

calls a “transferor”) to a “qualified trustee” by means of a “trust instrument.”

Those four basic requirements —qualified trustee, governing law, irrevocability, and

spendthrift provision—are essential elements of a self-settled spendthrift trust. A well-drafted

trust instrument thus should provide that those elements are material purposes of the trust. By

doing so, the trust instrument will foreclose the possibility of the trust losing the protections

afforded by the QDTA through modification, decanting, a change of trustee, or other means.

1. Qualified Trustee

Under the QDTA, the trust must have at least one qualified trustee.17 A qualified trustee

is an individual who is a New Hampshire resident or a bank or trust company that has a place

of business in New Hampshire.18 The bank or trust company must perform some or all of the

trust administration within New Hampshire.19 The administration may include maintaining or

arranging for custody for some or all of the trust property, maintaining record for the trust,

preparing or arranging for the preparation of fiduciary income tax returns, or otherwise

materially participating in this state in the trust’s administration.20

A settlor is ineligible to act as a qualified trustee.21 Under the QDTA, a settlor is not

precluded from serving as a non-qualified trustee, although it rarely would make practical

sense and may be inadvisable for tax reasons.

A nonresident individual or an entity that does not have trust powers within the New

Hampshire ineligible to act as a qualified trustee.22 Under the QDTA, a nonresident individual

or an entity that does not have trust powers within the New Hampshire could serve as a non-

qualified trustee. As a practical matter, however, it often is best to minimize the trust’s contacts

with other states. A court in another state potentially could acquire jurisdiction over some or all

of the trust and its administration.23 In a conflicts-of-laws analysis, a court may find that another

state has a strong public policy against self-settled spendthrift trusts.24 For that reason, it may be

17 RSA 564-D:2, I(a).

18 RSA 564-D:3.

19 Id.

20 Id.

21 RSA 564-D:3 and RSA 564-D:4.

22 RSA 564-D:4.

23 See, e.g., In re IMO Daniel Kloiber Dynasty Trust, 98 A.3d 924 (Del. Ch. 2014).

24 See, e.g., In re Huber, 201 B.R. 685 (2013).

6

inadvisable to appoint as a trustee any individual who is not a New Hampshire resident.

Similar care should go into appointing a corporate trustee, trust advisor, or trust protector.

A qualified trustee is deemed to resign upon ceasing to meet the requirements of a

qualified trustee, unless there is one or more qualified trustees serving at that time.25 If the trust

instrument appoints a successor qualified trustee, then the successor qualified trustee will serve

upon its acceptance. If the trust instrument does not appoint a successor qualified trustee, then

an interested party can petition the probate court to appoint a successor qualified trustee. Good

drafting, however, generally will avoid relying on the court to appoint a successor trustee.

The trustee succession provisions should include a qualification provision that requires

a qualified trustee’s successor qualifies as a qualified trustee, unless perhaps there is one or

more qualified trustees continuing to serve.

As a part of modern trust design, a trust instrument typically empowers a trustee to

change the trust’s principal place of administration. In the case of a self-settled spendthrift trust,

the trust instrument could provide that, if the trustee transfers the trust’s principal place of

administration to a jurisdiction other than New Hampshire, then a qualified trustee is a person

who, under the laws of that jurisdiction, would qualify to serve as the sole trustee without

materially expanding creditors’ rights with respect to the property that is subject to that

qualified disposition.

2. Governing Law

The trust instrument must expressly provide New Hampshire law governs the validity,

construction, and administration of the trust.26

3. Irrevocability

The trust must be irrevocable.27 The trust instrument must expressly provide that the

trust is irrevocable.28 For purposes of the QDTA, a trust is revocable only to the extent that a

settlor retains a revocation power or a general power of appointment.29 A settlor’s retention of

any other powers will not cause the trust to be deemed revocable.30

25 RSA 564-D:6.

26 RSA 564-D:2, I(a).

27 RSA 564-D:2, I(c).

28 RSA 564-B:6-602(a).

29 RSA 564-D:2, II and III.

30 Id.

7

(a) Revocation Power

A trust is revocable to the extent that the settlor can revoke the trust and, upon the

trust’s revocation, would be a distributee of trust property.31 The trust thus is revocable only to

the extent that a settlor can reacquire some or all of the trust property. A trust, however, is not

revocable if a qualified trustee or any person holding an adverse interest must consent to the

settlor’s revocation of the trust.32

(b) General Power of Appointment

A trust is revocable to the extent that the settlor has a general power of appointment.33 A

general power of appointment is a power of appointment in which the appointees include any

one or more of the settlor, the settlor’s creditors, the settlor’s estate, and the creditors of the

settlor’s estate.34 A trust, however, is not revocable if a qualified trustee or a person holding an

adverse interest must consent to the settlor’s exercise of the power of appointment.35

(c) Settlor as Trust Advisor

A settlor generally can serve as a trust advisor. 36 If a settlor serves as a trust advisor, the

trust will not be deemed revocable, unless the settlor has a revocation power or a general power

of appointment.37

4. Spendthrift Provision

The trust instrument must contain a spendthrift provision.38 A spendthrift provision is a

term of a trust that retains both voluntary and involuntary transfer of a beneficiary’s interest.39

A spendthrift provision is valid only if it restrains both voluntary and involuntary transfers.40 A

well-drafted spendthrift provision thus will explicitly state that it prohibits both voluntary and

involuntary transfers. In the provision’s operative terms, it is useful to recite that it is a

31 RSA 564-D:2, II.

32 Id.

33 Id.

34 Id.

35 Id.

36 RSA 564-D:5.

37 Id.

38 RSA 564-D:2, I(d).

39 RSA 564-D:2, I(d), and RSA 564-B:1-103(17).

40 RSA 564-B:5-502(a).

8

spendthrift provision.41 If the trust agreement contains a provision that renders headings

meaningless for interpretive purposes, then merely entitling a paragraph “Spendthrift

Provision” will not achieve the usefulness of including the recitation within the body of the

paragraph.

B. Permissible Retained Rights, Powers, and Interests

In a New Hampshire self-settled spendthrift trust, a settlor can retain any rights, powers,

and interests other than a revocation power or a general power of appointment.42 For purposes

of providing additional comfort to settlors and their advisors, the statute contains a non-

exclusive list of permissible rights, interests, and powers.

For purposes of determining the scope of the settlor’s retained rights, powers, and

interests, the trust instrument exclusively embodies the operative provisions. Any side

agreement or implied agreement is void.43 This rule helps to minimize potential disputes over

whether there is an implied agreement between the settlor and the trustee, and it places

singular emphasis on the trust instrument as the source of the settlor’s retained powers.

1. Power to Veto Distributions

A settlor may retain the power to veto a distribution from the trust.44

2. Powers of Appointment

A settlor may retain a power of appointment,45 other than a general power of

appointment exercisable without the consent of a qualified trustee or a person holding an

adverse interest.46 Thus, a settlor may retain a non-general power of appointment exercisable

during his or her life (i.e., a lifetime non-general power of appointment) or a non-general power

of appointment exercisable upon his or her death (i.e., a testamentary non-general power of

appointment).

The ability to retain a lifetime non-general power of appointment attracted more

attention after the IRS published CCA 201208026 (February 24, 2012). In that ruling, the IRS

concluded that the settlor had made a completed gift of a remainder interest in a nongrantor

trust, but made a completed gift of the income interest. The settlor’s retention of a lifetime non-

41 See RSA 564-B:5-502(b).

42 RSA 564-D:2, II and III.

43 RSA 564-D:8.

44 RSA 564-D:2, III(a).

45 RSA 564-D:2, III(b).

46 RSA 564-D:2, II.

9

general power of appointment, however, would have rendered the gift of the income interest

incomplete.

3. Beneficial Interests

A settlor’s potential or actual receipt of income or principal is permissible.47 Similarly, a

settlor’s potential or actual use of trust property is permissible.48 The statute expressly

recognizes the following beneficial interests:

Mandatory income distributions

Mandatory principal distributions

Mandatory unitrust distributions (i.e., an annual amount equal to a percentage,

as set forth in the trust instrument, of the initial value of the trust property or the

value of the trust property as determined from time to time).

Discretionary income distributions (whether or not subject to any standard of

distribution)

Discretionary principal distributions (whether or not subject to any standard of

distribution)

Distributions at the direction of a trust advisor

In addition to those general categories of beneficial interests, the QDTA’s non-exclusive list of

permissible rights, interests, and powers also identifies interests in certain specific types of

trusts.

4. Charitable Remainder Trusts

A settlor may retain a vested or contingent right to receive an annuity from a charitable

remainder annuity trust or a unitrust amount from a charitable remainder unitrust.49 A settlor

also may retain the right to release some or all of his or her retained interest in a charitable

remainder unitrust or charitable remainder annuity trust in favor of one or more charitable

organizations that have an interest in that trust. 50

47 RSA 564-D:2, III(c).

48 Id.

49 RSA 564-D:2, III(d).

50 RSA 564-D:2, III(e).

10

In addition to potentially qualifying as a self-settled spendthrift trust under the QDTA,

charitable remainder trusts also qualify as self-settled spendthrift trusts under New

Hampshire’s UTC.51

5. GRATs, GRUTs, and Personal Residence Trusts

A settlor may retain an annuity interest in a grantor retained annuity trust (“GRAT”) or

a unitrust interest in a grantor retained unitrust (“GRUT”).52 A settlor also may retain a

noncontingent remainder interest in either a GRAT or a GRUT.53 A settlor also may have a

vested or contingent right to use of real property held under a personal residence trust.54

6. Reimbursement of Income Taxes

A trust may contain a tax reimbursement provision, and the inclusion of that provision

will not cause a trust to be subject to the settlor’s creditors. 55 A tax reimbursement provision

commonly is found in a trust that is a grantor trust for federal income tax purposes. In Rev. Rul.

2004-64,56 the IRS held that a settlor’s gross estate does not include the assets in a trust solely by

reason of a trust provision that grants to the trustee the discretionary power to reimburse the

settlor for the income tax attributable to the inclusion of the trust’s income in the settlor’s

taxable income.

The statute expressly recognizes that the trust instrument structure a tax reimbursement

provision in the following ways:

Mandatory Reimbursement. Under the trust instrument, a trustee must pay the

taxes to the settlor or the taxing authority.

Qualified Reimbursement. Under the trust instrument, a qualified trustee has the

discretion to pay the taxes to the settlor or the taxing authority.

Directed Reimbursement. Under the trust instrument, a trust advisor or trust

protector has the power to direct the qualified trustee to pay the taxes to the settlor

or the taxing authority.

51 RSA 564-B:5-505(a)(2)(A) and (B).

52 RSA 564-D:2, III(g).

53 Id.

54 RSA 564-D:2, III(f).

55 RSA 564-D:2, III(h). See also RSA 564-B:5-505(a)(2)(F).

56 Rev. Rul. 2004-64, 2004-2 C.B. 7.

11

7. Removal and Appointment of Trustees, Trust Advisors, and Trust

Protectors

A settlor may retain the right to remove a trustee (including a qualified trustee), a trust

advisor, or a trust protector.57 A settlor also may retain the right to appoint an additional or

successor trustee, trust advisor, or trust protector.58 The statute generally provides that the

successor trustee, trust advisor, or trust protector must be a person who, with respect to the

settlor, is not a related or subordinate party (within the meaning of section 672(c) of the Internal

Revenue Code). The settlor, nonetheless, could retain the power to appoint anyone as a

successor trustee, trust advisor, or trust protector, because the statute describing that power is

part of a non-exclusive list of powers.

8. Debts, Expenses, and Taxes

A trust instrument may provide that, upon the settlor’s death, a qualified trustee may or

must pay some or all of the settlor’s debts, the expenses of administering the settlor’s estate, or

any estate or inheritance tax imposed on or with respect to the settlor’s estate.59

C. Trust Advisors

A settlor or any other person may serve as a trust advisor of a self-settled spendthrift

trust.60 As a trust advisor, the settlor’s rights and powers are limited. As a trust advisor, the

settlor may not have any right or power that would cause the trust to be deemed revocable.

Thus, a settlor-trust advisor may not have the power to revoke the trust or a general power of

appointment.61

A settlor may retain the right to appoint one or more trust advisors.62 Those trust

advisors may have the right to remove and appoint qualified trustees and trust advisors. Those

trust advisors also may have the right to direct, consent to, or disapprove distributions from the

trust.

D. Creditor’s Claims

Under the QDTA, a creditor cannot reach the trust property, unless one of the following

three exceptions applies:

57 RSA 564-D:2, III(i).

58 RSA 564-D:2, III(j).

59 RSA 564-D:2, III(k).

60 RSA 564-D:5.

61 Id.

62 RSA 564-D:4.

12

Unprotected Property. The creditor is seeking to reach trust property other

than property that was subject to a qualified disposition. The QDTA only

protects property that was subject to a qualified disposition.

Fraudulent Transfers. The creditor is pursuing a claim under the Uniform

Fraudulent Transfers Act (RSA 545-A).

Exception Creditors. The creditor is an exception creditor. Subject to certain

conditions, exception creditors include a spouse, former spouse, child, and

tort creditor.

Unless one of those exceptions applies, a creditor seeking to reach a settlor’s interest in a self-

settled spendthrift trust is limited to asserting a claim under New Hampshire’s Uniform

Fraudulent Transfer Act (RSA 545-A).63

1. Limitation Periods

Under the QDTA, the limitations period depends upon whether the claim arose before,

on, or after the qualified transfer. For purposes of starting the applicable limitation periods (and

determining a creditor’s status as an exception creditor), each qualified disposition stands

independently.64 For example, if a settlor makes a qualified disposition to a trustee on January 2,

2010, then the general four-year limitation period expired on January 2, 2014, regardless of

whether the settlor makes any additional contributions to the same trust.

(a) Pre-Transfer Claims

For a claim that arose before the date of the qualified disposition, the UTFA’s limitation

periods apply.65 The UTFA creates two pertinent limitation periods:

Actual Fraud. For actual fraud, the limitation period is the later of (1) four

years after the settlor made the qualified disposition or (2) one year after the

creditor discovered or reasonably could have discovered the qualified

disposition.66 Actual fraud involves an actual intent to hinder, delay, or

defraud any creditor.67

63 RSA 564-D:9.

64 RSA 564-D:14.

65 RSA 564-D:10, I.

66 RSA 545-A:9, I.

67 RSA 545-A:4, I(a).

13

Constructive Fraud. For constructive fraud, the limitation period is four

years after the settlor made the qualified disposition.68 Constructive fraud

involves a transfer in which the settlor does not receive equivalent value and,

after the transfer, the settlor is insolvent.69

(b) Post-Transfer Claims

For a claim that arose on or after the date of the qualified disposition, the creditor must

commence a judicial proceeding within four years after the date of the qualified disposition.70

2. Property Reachable by the Creditors

If a creditor proves that a qualified disposition was a fraudulent transfer, then the

creditor generally can reach the property that was subject to the qualified disposition. More

specifically, a court generally can avoid the qualified transfer to the extent necessary to satisfy

the creditor’s claim.71 There are two exceptions:

Trustee Fees, Attorney Fees, and Other Trust Expenses. A qualified trustee

has a priority claim for trustee fees and reimbursement for attorneys’ fees

and other expenses, unless the trustee acted in bad faith in accepting the

property or administering the trust.72 A trustee other than a qualified trustee,

a trust advisor, or a trust protector does not have a similar priority claim.

Distributions. A settlor or other beneficiary may retain a distribution, if the

qualified trustee properly exercised his, her, or its discretionary power to

make the distribution and the qualified trustee made the distribution before

the creditor commenced a judicial proceeding to set aside the qualified

disposition.73 The applicable statute creates a last-in, first-out rule.74 As the

trustee distributes trust property to a beneficiary, the trustee is deemed to

have distributed property from the most recent qualified disposition before

distributing property from the next most recent qualified disposition.

68 RSA 545-A:9, II.

69 RSA 545-A:4, I(b).

70 RSA 564-D:10, II.

71 RSA 564-D:16.

72 RSA 564-D:16, I.

73 RSA 564-D:16, II.

74 RSA 564-D:14, III.

14

These rules do not apply to exception creditors, whose rights will be determined under

New Hampshire’s UTC, because the QDTA do not apply to exception creditors.75

3. Exception Creditors

The QDTA does not protect the trust property from an exception creditor’s claims. There

are three categories of exception creditors:

Spouse or Former Spouse. A settlor’s spouse or former spouse76 to the extent

that, under a prenuptial agreement, the settlor was indebted to that spouse or

former spouse before the settlor made the qualified disposition.77 The settlor’s

spouse or former spouse for support, alimony, or property division under an

order issued before the settlor made the qualified disposition.78

Children. A settlor’s children for support under an order issued before the

settlor made the qualified disposition.79

Tort Creditors. A settlor’s tort creditors for damages on or before the settlor

made the qualified disposition.80

For purposes of determining a creditor’s status as an exception creditor, each qualified

disposition stands independently.81 If, for example, a settlor made a qualified disposition on

January 2, 2014, entered into a prenuptial agreement on April 2, 2014, was married on July 12,

2014, and made another qualified disposition on September 6, 2014, then the settlor’s spouse

would not be an exception creditor with respect to the January qualified disposition, but would

be an exception creditor with respect to the September qualified disposition.

New Hampshire’s UTC will govern the extent to which an exception creditor can reach

the trust property.82 An exception creditor generally can reach the maximum amount that can

75 RSA 564-D:15.

76 For purposes of the QDTA, a “spouse” or “former spouse” means an individual to whom the settlor was married

at, or before, the time the qualified disposition is made.76 New Hampshire permits same-sex marriages.76 The state

generally recognizes out-of-state same-sex marriages.76 Accordingly, the terms “spouse” and “former spouse” will

include a spouse of a same-sex marriage conducted within the state and generally will include a spouse of a same-

sex marriage conducted outside the state.

77 RSA 564-D:15, I(a).

78 Id.

79 Id.

80 RSA 564-D:15, I(b).

81 RSA 564-D:14.

82 RSA 564-B:5-505.

15

be distributed to or for the settlor’s benefit.83 An exception creditor, however, cannot reach the

trust property in a charitable remainder trust, a marital deduction trust, or self-settled

supplemental needs trust.84

E. Claims Against Trustees, Trust Advisors, Trust Protectors and Advisors

A creditor does not have any claim against any trustee, trust advisor, or attorney for

advising a settlor or otherwise participating in the creation and funding of a self-settled

spendthrift trust.85 By implication, a creditor does not have any claim against any trust protector

for advising a settlor or otherwise participating in the creation and funding of a self-settled

spendthrift trust. To the extent that a creditor has a claim against a trustee, trust advisor, trust

protector, or attorney, the claim is subject to the limitation periods for a claim against the settlor.

F. Effective Date

The QDTA is effective with respect to transfers made on or after January 2, 2009.

Through decanting, a trustee of a pre-2009 trust potentially can make a qualified disposition,

thereby obtaining the benefits that the act affords self-settled spendthrift trusts.

83 RSA 564-B:5-505(a)(2).

84 Id.

85 RSA 564-D:12.

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There’s No Place Like Home - Domestic Self-Settled Asset Protection Trusts and Inter Vivos QTIP Trusts: Why Do Them and Where To Go When You Do

Domestic Asset Protection Trust Planning: Jurisdiction Selection Series

ARIZONA Tuesday, April 14, 2015 | 1:00 PM Eastern

Sponsored by The ABA Section of Real Property, Trust & Estate Law

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The materials contained herein represent the opinions of the authors and editors and should not be construed to be the action of the American Bar Association, Section of Real Property, Trust and Estate Law for Continuing Legal Education unless adopted pursuant to the bylaws of the Association. Nothing contained in this book is to be considered as the rendering of legal advice for specific cases, and readers are responsible for obtaining such advice from their own legal counsel. This book and any forms and agreements herein are intended for educational and informational purposes only. © 2014 American Bar Association. All rights reserved.

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ARIZONA TRUST CODE - HISTORY

• Adopted UTC Spring 2003 • Suspended December 2003 • Repealed Spring 2004


ARIZONA TRUST CODE - HISTORY

• Passed ATC unanimously May 27, 2008 • Effective January 1, 2009 • Largely, but not completely, retroactive


ARIZONA TRUST CODE - GENERAL

• Rejects Restatement (Third) in favor of

Restatement (Second) §14-10106(B) • Simplified notice requirements §14-10813 • Materially better creditor protection for

beneficiaries and somewhat for settlors • Significant deviations from UTC • Not a DAPT state


ARIZONA TRUST CODE – CREDITORS OF BENEFICIARIES

• No special spendthrift language required §14-10502(B) • Spendthrift reference alone is sufficient • Beneficiary controlled trusts permitted §14-10504(E) • Distributions subject to a standard also largely

treated as if spendthrift §14-10504(A) & (D) • But beneficiary can maintain action §14-10504(C)


ARIZONA TRUST CODE – CREDITORS OF THE SETTLOR

• Better not best §14-10505(A)(2) • Inter vivos QTIP trusts §14-10505(E)(1) • Power of appointment trusts §14-10505(E)(2) • ILITs simplified §25-213(D) • IDGTs protected §14-10505(A)(2) • Reciprocal trusts between spouses §14-

10505(E)(4)


ARIZONA TRUST CODE - EXCEPTIONS

• Beneficiary’s child support obligations are not protected §14-10503(A) • But are in a special needs trust §14-10503(B) • Spousal maintenance treated like any other

creditor • Governmental creditors when carved out §14-10503(C)


ARIZONA TRUST CODE – TRUSTEE ISSUES

• No duty to creditors §14-10501; §14-10814 • Trustee missteps are not fatal to asset protection

§14-10504(A)(2) • Discretion cannot be forced §14-10504(A)(2) • Life insurance proceeds §14-10504(D)


ARIZONA TRUST CODE - OTHER BENEFITS

• Use of trust protectors authorized §14-10818 • Family settlement agreements §14-10111 • Can import law from other jurisdictions—maybe

§14-10107(A); §14-10105 • Life insurance proceeds protected • Attorney’s duties limited §14-5652(A) • Asset protection is a material purpose of the

trust


Arizona Trust Code

Philip R. Rupprecht Aiken Schenk Hawkins & Ricciardi P.C.

2390 E. CAMELBACK ROAD #400

PHOENIX, AZ 85006

602-248-8203

[email protected]

Maryland Self-Settled Asset Protection Trusts

Fred Franke Annapolis, Maryland

www.fredfranke.com

ABA Section of Real Property, Trust & Estate Law

Domestic Asset Protection Trust Planning: Jurisdiction Selection Series eCLE

April 14, 2015

Self-Settled Asset Protection in Maryland

2 www.fredfranke.com

1. Md. Est. & Trusts § 14.5-511: Tenants by Entirety Trust 2. Md. Est. & Trusts § 14.5-1003: Inter Vivos QTIP Trust

www.fredfranke.com 3

Tenants by Entirety Creditor Protection Maryland is a full bar jurisdiction. Married couple must act jointly to

encumber and alienate the property.

Prevents a spouse’s individual creditors from being able to attach the property.

Watterson v. Edgerly


Husband and wife hold real estate as tenants by the entirety.

Husband’s creditor files a judgment lien against him.

After it is filed, husband transfers interest in entirety property to wife.

Wife dies 61 days after transfer. At wife’s death, property held in testamentary

trust with a spendthrift provision for benefit of husband.

Court holds transfer is not fraudulent; husband’s creditors cannot reach property due to spendthrift clause.

40 Md. App. 230 (1978)

Tenants by Entirety Immunity Trust Statute


Trust corpus enjoys the same immunity as though property is held as tenants by the entirety.

Requirements:

1. Couple held property as tenants by the entirety before transferring it to trust.

2. Property continues to be held in trust after transfer. 3. Both spouses are beneficiaries of trust. 4. Couples remain married after transfer. 5. Trust document or deed references statute.

Md. Est. & Trusts § 14.5-511


Md. Est. & Trusts § 14-113(c)(2)

This section provided that to the extent the surviving spouse remained a beneficiary of the trust, the property that was immune from the decedent’s creditors shall be subject to the claims of the separate creditors of the surviving spouse.

2015 Modification to Statute Md. Est. & Trusts § 14.5-511(c)

This provision was removed when the General Assembly adopted the Maryland Trust Act.


After the death of the first spouse to die, all property held in trust continues to have immunity from the claims of the separate creditors of the decedent. Md. Est. & Trusts § 14.5-511(c).

The share of corpus attributable to decedent,

therefore, is free from claims of the decedent's creditors.

First Spouse to Die is Debtor


Surviving Spouse is Debtor Corpus Attributable to Deceased Spouse

Can the surviving spouse’s creditors claim the decedent’s share?

2015 Modification to Statute (slide 6).

Trust property attributable to the deceased spouse may no longer be subject to the claims of the separate creditors of the surviving spouse. Compare Md. Est. & Trusts § 14.5-511(c) with § 14-113 (repealed).

Create a disclaimer spendthrift trust for the decedent’s share coming to the surviving spouse without a testamentary power of appointment to protect the decedent’s share from the surviving spouse’s creditors.

Corpus Attributable to Surviving Spouse

At first death, transfer principal to new irrevocable spendthrift trust.

Spendthrift clause may be valid even if trust is self-settled. See Watterson v. Edgerly, 40 Md. App. 230, 238 (1978).

Prevent self-settled status by

granting only the non-debtor spouse the ability to revoke entirety trust or withdraw assets contributed by debtor-spouse. In re Reuter, 499 B.R. 655, 672-75 (W.D. Mo. 2013); Md. Est. & Trusts § 14.5-103(t).


Limitations of Tenants by Entirety Trust Bankruptcy Considerations

11 U.S.C. § 548(a)(1): fraudulent transfers made two years before filing can be avoided.

11 U.S.C. § 548(e): fraudulent

transfers made to self-settled asset protection trust or similar device may be avoided if made ten years before filing.

Federal Tax Liens

Drye v. United States, 528 U.S. 49 (1999): tax liens may attach to property disclaimed by an heir.

United States v. Craft, 535 U.S. 274

(2002): tax lien filed against one spouse may attach to property held as tenants by the entirety.


Inter Vivos QTIP Trusts Md. Est. & Trusts § 14.5-1003

An individual who creates a trust is not considered to be the settlor when:

1. Trust is created for the benefit of individual’s spouse. 2. Trust qualifies for QTIP election under I.R.C. § 2523(f). 3. The individual’s interest in the trust property follows the

termination of the spouse’s interest in the property.

Creditors of the donor-spouse unable to attach assets because donor-spouse no longer enjoys control.

Creditors of the donee-spouse unable to attach assets because of

spendthrift clause. If the donor-spouse receives a remainder interest in trust after the

donee-spouse’s death, the donor-spouse is not deemed to be the settlor under the statute; spendthrift clause valid against creditors.

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Nevada Analysis: Nevada Asset Protection Trusts

Presented by: Kristen E. Simmons, EPLS, AEP®

Oshins & Associates, LLC [email protected]


Nevada Asset Protection Trusts

• Chapter 166 of the Nevada Revised Statutes (the Spendthrift Trust Act of Nevada) was introduced into law in October 1999

• Presentation will Cover: Basics: How to Create a Nevada Asset

Protection Trust (NAPT) The Nevada Advantage Designing and Integrating a NAPT into a

client’s overall plan


Nevada Asset Protection Trusts The Basics

• Requirements for Creation The trust must be irrevocable, must not require that any part of the

income or principal of the trust be distributed to the settlor, and must not be funded with an intent to hinder, delay or defraud known creditors (NRS 166.040)

Nevada Trustee with power to maintain records and prepare income tax

returns (NRS 166.015(2)): Nevada Resident Nevada Trust Company Bank with trust powers that maintains an office in Nevada

The trust must contain a spendthrift clause that places a restraint on the

voluntary and involuntary transfer of the interest of the beneficiary (NRS 166.020)



• Spendthrift Trust Act of Nevada (the “Nevada Act”) permits the settlor to retain significant powers while still qualifying as a spendthrift trust

• Primary power that may NOT be retained is the

power of the settlor to make distributions to himself or herself without the consent of another person



• Powers of Settlor Settlor may be a co-Trustee, as long as the role of co-Trustee does not

permit the settlor to make distributions to himself or herself without the consent of another person (NRS 166.040(3))

Settlor may remove and replace the trustees, direct trust investments and exercise other management powers over the trust assets (NRS 166.040(3))

Settlor may have a veto power, that permits the settlor to prevent a distribution from the trust (NRS 166.040(2)(a))

Settlor may retain lifetime or testamentary special power of appointment (NRS 166.040(2)(b))

Settlor may use real or personal property owned by the trust (NRS 166.040(2)(h))

QPRTs, GRATs and CRTs may all be characterized as Nevada Spendthrift Trusts to protect the settlor’s retained interests therein



• Creditor Exposure and Statute of Limitations Who is a creditor?

A person is a creditor if the person has a claim A claim is defined as a right to a payment (NRS 112.150)

Different Statute of Limitations period for Future Creditors vs.

Current Creditors Future Creditors – 2 years from the date of transfer Current Creditors – longer of 2 years from date of transfer OR 6

months from when creditor discovers or reasonably should have discovered transfer (“tolling period”)



Statutory Exception Creditors? NO! • Nearly all other DAPT jurisdictions have

statutory exception creditors “Super-Creditors”

• Exception creditors include child support, divorcing spouses, alimony, and in some instances (such as Delaware) preexisting tort creditors

• Nevada does not have any statutory exception creditors



• Bankruptcy Every self-settled spendthrift trust is subject to a ten-year statute of

limitations period in Bankruptcy. The Bankruptcy Abuse Prevention and Consumer Protection Act of

2005 added new language to Section 548 of the Bankruptcy Code, which governs fraudulent transfers and obligations, as follows:

“(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition if-

(A) Such transfer was made to a self-settled trust or similar device; (B) Such transfer was by the debtor; (C) The debtor is a beneficiary of such trust or similar device; and (D) The debtor made such transfer with actual intent to hinder, delay, or defraud any

entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”


Nevada Asset Protection Trusts The Basics – Other Considerations

• Nevada Advantage: Limiting the Exposure of Tolling Nevada Act permits a transferor to make a public record of a transfer to

put potential current creditors on notice (thereby effectively eliminating the tolling period if the public record is made at the time of the transfer)

• Burden of Proof A creditor bears the burden of proving by clear and convincing evidence

that the transfer was a fraudulent transfer or that the transfer violated a legal obligation owed to the creditor bringing the action under a contract or court order that was enforceable by the creditor at the time of the transfer

Absent clear and convincing evidence, the property transferred would not be subject to the claims of the creditor, even if the transfer was made within the statutory period noted above (NRS 166.170(3))



• Permitted Transfers for Convenience Property in a NAPT may be distributed from the trust to a settlor or

beneficiary for purpose of obtaining loan secured by the property and, so long as it is re-conveyed to the trust, there is no “new” transfer when the property is re-conveyed to the trust (NRS 166.170(4))

• Protection of Advisors and Trustees Creditor may not bring a claim against a trustee or an advisor of the

settlor unless the creditor, by clear and convincing evidence, can prove that the advisor or trustee acted knowingly and in bad faith and that the action of the advisor or trustee caused damages to the person asserting the claim (NRS 166.170(5) and NRS 166.170(6))



• Coordination with Decanting Laws An existing NAPT may be decanted into another NAPT without

restarting the “clock” on the statute of limitations period for the assets transferred to the initial NAPT (NRS 166.170(9))

• Change of Situs If the situs of an existing trust is transferred to Nevada from another

Domestic Asset Protection Trust state or from a foreign jurisdiction that permits self-settled spendthrift trusts, then for purposes of determining the statute of limitations period applicable in Nevada, the date the property was initially transferred to the trust in the other state or foreign jurisdiction will be deemed the date of transfer in Nevada (NRS 166.180(2))


Nevada Asset Protection Trusts The Nevada Advantage

• No Exception Creditors • No Affidavit of Solvency Required • Short Statute of Limitations Period • No State Income Tax


Nevada Asset Protection Trust Design Considerations

• Incomplete Gift Nevada Asset Protection Trust Used for asset protection only

Drafting Considerations Veto Power Lifetime and Testamentary Power of Appointment

Benefits

No Gift Tax ramifications in funding More flexibility because of retained veto power and powers of

appointment



• Completed Gift Nevada Asset Protection Trust Used for estate tax and asset protection

Settlor may not retain dominion and control NO Veto Power NO Lifetime or Testamentary Power of Appointment

Nevada Advantage: No Exception Creditors Transfer will not be a completed gift if creditor can pierce trust to

satisfy a judgment (Rev. Rul. 76-103)

If structuring as Completed Gift, Nevada is best jurisdiction Use a Hybrid trust where possible



• Hybrid Nevada Asset Protection Trust Does not include settlor as beneficiary

Trust Protector may add and remove beneficiaries, including settlor

Treat as Rainy Day Fund since settlor is not a beneficiary



• When is a Hybrid NAPT Used?

Incomplete Gift NAPT: for non-Nevada residents avoiding Conflicts of Laws arguments

Completed Gift NAPT: for both Nevada residents and non-residents to

bolster argument that the settlor does not retain the right to income of the property transferred and does not retain a right to enjoy the property transferred

Nevada Incomplete Gift Non-Grantor Trusts (NINGs): to ensure that the trust is taxed as a complex trust for income tax purposes



• Nevada Incomplete Gift Non-Grantor Trusts (NINGs) Structured so that trust is its own independent taxpayer for state and

federal income tax purposes, but does not characterize transfers made by the settlor to the trust as completed gifts

Ideal client is resident of state with high income tax

Nevada is a leading jurisdiction for these types of trusts because of its

lack of exception creditors and superior Spendthrift Trust laws

New Hampshire Trust Laws

Todd D. Mayo Principal and General Counsel Perspecta Trust LLC Domestic Asset Protection Trust Planning: Jurisdiction Selection Series ABA Section of Real Property, Trust and Probate Law April 14, 2015

Agenda

Self-Settled Spendthrift Trusts under New Hampshire Law Select Aspects of New Hampshire Trust Laws

Note re written materials and citations. These materials summarize the written materials. Citations and other supporting information can be found in the written materials.

2

Self-Settled Spendthrift Trusts under New Hampshire Law

General rule (traditional rule) A settlor’s creditor may reach the maximum amount that can be distributed to or for the settlor’s

benefit. If a trust has more than one settlor, then a settlor’s creditor may reach an amount up to the

portion of the trust property attributable to that settlor’s contribution.

Exceptions Charitable remainder annuity trusts Charitable remainder unitrusts Lifetime general power of appointment marital trusts (trust described in IRC § 2523(e)) Lifetime QTIP marital trusts (trust described in IRC § 2523(f)) Self-settled supplemental needs trusts (trust described in 42 U.S.C. 1396p(d)(4)) Trusts containing a tax reimbursement provision Mandatory or discretionary reimbursement Consistent with Rev. Rul. 2004-64

Self-settled spendthrift trusts under the Qualified Dispositions in Trust Act (QDTA)

3

Qualified Dispositions in Trust Act

Qualified Dispositions in Trust Act (“QDTA”) Enacted in 2008 Effective for transfers on or after January 2, 2009 Modeled on Delaware’s statutes Substantial subsequent amendments

Four Basic Requirements Qualified Trustee New Hampshire Governing Law Irrevocable Spendthrift Provision

4

Basic Requirements: Qualified Trustee

Qualifications New Hampshire resident Bank or trust company that has a place of business in New Hampshire and performs some or all

of the trust administration within New Hampshire. Maintaining or arranging for custody of some or all of the trust property Maintaining record for the trust Preparing or arranging for the preparation of fiduciary income tax returns Otherwise materially participating within this state in the trust’s administration

Minimum Number A trust must have at least one qualified trustee. A trust may have any number of non-qualified co-trustees, but thought must be given to

subjecting the trust to another state’s jurisdiction.

Ineligible Persons Settlor Non-resident individual Bank or trust company that does not have trust powers in New Hampshire.

5

Basic Requirements: Governing Law

New Hampshire law must govern: Validity Construction Administration

Trust instrument must expressly provide that New Hampshire law governs.

6

Basic Requirements: Irrevocability

Irrevocability The trust instrument must expressly provide that the trust is irrevocable. For purposes of the QDTA, a trust is revocable only to the extent that the settlor retains: Revocation power General power of appointment

Revocation Power The settlor can revoke the trust and, upon the trust’s revocation, would be a distributee of trust

property (i.e., settlor can reacquire some or all of the trust property). A trust is not revocable if a qualified trustee or any person holding an adverse interest must

consent to the settlor’s revocation of the trust.

General Power of Appointment A power of appointment in which the appointees include any one or more of the settlor, the

settlor’s creditors, the settlor’s estate, and the creditors of the settlor’s estate. A trust is not revocable if a qualified trustee or a person holding an adverse interest must

consent to the settlor’s exercise of the power of appointment. 7

Basic Requirements: Spendthrift Provision

The trust instrument must contain a spendthrift provision.

A spendthrift provision is a term of a trust that retains both voluntary and involuntary transfer of a beneficiary’s interest.

A well-drafted spendthrift provision thus will expressly state that: It prohibits both voluntary and involuntary transfers. It is a spendthrift provision.

8

Permissible Retained Rights, Powers, and Interests

Anything except: Revocation power General power of appointment

Power to veto distributions Lifetime and testamentary non-general powers of appointment Beneficial interests Mandatory or discretionary income distributions Mandatory or discretionary principal distributions Unitrust distributions

Interests in charitable remainder trusts Vested or contingent annuity or unitrust distributions Power to release an annuity or unitrust interest

Interests in GRATs, GRUTs, and personal residence trusts Tax reimbursement provision Power to remove and appoint trustees, trust advisors, and trust protectors Substitution power (swap power) Settlor as trust advisor or trust protector

9

Creditors’ Claims

Under the QDTA, a creditor cannot reach the trust property, unless one of the following three exceptions applies: Unprotected Property Fraudulent Transfers Exception Creditors

10

Creditors’ Claims: Non-Exception Creditors

Uniform Fraudulent Transfers Act (UFTA) applies

Pre-transfer claims Actual fraud (intent to hinder, delay, or defraud) Four years after the qualified disposition One year after creditor discovers or reasonably could have discovered the qualified

disposition Constructive fraud (insolvency) Four years after the qualified disposition

Post-transfer claims Four years after the qualified disposition

Creditor can reach trust property to the extent that the qualified disposition was voided under those

rules, excluding: Trustee fees, attorneys fees, and other administrative expenses, unless trustee acted in bad faith Distributions to the settlor or other beneficiaries, unless the trustee acted in bad faith

11

Creditors’ Claims: Exception Creditors

Spouse or Former Spouse Amounts under a prenuptial agreement made before the qualified disposition Support, alimony, or property division under an order issued before the qualified disposition

Children Child support under an order issued before the qualified disposition

Tort Creditors Damages on or before the qualified disposition

12

Select Aspects of New Hampshire’s Trust Laws

Protection of settlor intent Strong tradition Examples of statutory protections include: Primary consideration Rejection of benefit-of-the-beneficiaries rule Protection of a trust’s material purposes in decanting

Divided trusteeship (directed trusts) Express recognition of trust advisors and trust protectors Division of duties and powers, as well as attendant liabilities No duty to monitor, no duty to advise, no duty to warn Judicial affirmation (Tamposi) A trust advisor or trust protector generally can be fiduciary or non-fiduciary A trust advisor or trust protector can be a corporation or limited liability company (no requirement

to obtain a charter as a bank or trust company)

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Select Aspects of New Hampshire’s Trust Laws

Investment powers Ability to waive duty to diversify Ability to waive any other aspects of the prudent investor rule

Duty to inform / quiet trusts Ability to waive unconditionally the duty to inform (e.g., not merely temporary) Warrants thoughtful trust design and drafting

Perpetual trusts Trust may have any type of property Conforms with Murphy No state constitutional issue No rule against accumulations

Purpose trusts Non-charitable purposes or unascertained beneficiaries Can be perpetual

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Decanting and Nonjudicial Modification

Decanting Broad, flexible power Not limited by discretion to distribute principal or any distribution standard Limitations Can’t violate a material purpose of the trust Can’t add a beneficiary Can’t eliminate a vested beneficial interest (e.g., current mandatory income distribution)

Can eliminate a beneficiary Can accelerate a beneficial interest Can eliminate a distribution standard No statutory notice requirement, except for charitable trusts

Trustee’s power of modification (“decanting lite”) Similar to decanting power, but generally limited to administrative provisions Avoids creation of new trust

Nonjudicial settlement agreements

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Avoidance and Resolution of Disputes

Statutory certainty and judicial restraint Scheffel: “We interpret legislative intent from the statute as written and will not consider what the

legislature might have said or add language that the legislature did not see fit to include.”

Enforcement of arbitration and other reasonable nonjudicial dispute resolution provisions

Lifetime approval of wills and trusts

Enforcement of no-contest provisions regardless of good faith or reasonable cause

Rejection of the fiduciary exception to the attorney-client privilege

Trust court Established in 2014 First-in-the-nation specialty court dedicated to complex trust disputes

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Taxes

Trusts No state taxes on nongrantor trusts Grantor trusts are disregarded

Individuals No general income tax; only interest and dividends tax No capital gains tax No estate tax

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Todd D. Mayo Principal and General Counsel Perspecta Trust LLC One Liberty Lane East Hampton, NH 03842 [email protected] +1 603 929 2671

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domestic asset protection trust jurisdiction selection

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