Hawaii Enacts Domestic Asset Protection Trust Legislation and Reinstates Separate State Estate Tax

The Hawaii legislature enacted two pieces of legislation this year that will affect trusts and estates. The first was to permit a form of domestic asset protection trust. The second was to reinstate a separate state death tax for Hawaii.

Domestic Asset Protection Trust Legislation

Until this year, eleven states permitted domestic asset protection trusts pursuant to which the settlor would receive spendthrift protection from creditors if certain requirements were met. The eleven states were Missouri, Alaska, Delaware, Nevada, Rhode Island, Utah, South Dakota, Wyoming, Tennessee, New Hampshire and Oklahoma (Oklahoma's law is more restrictive than those in the other states). Hawaii became the twelfth state this year.

The Hawaii legislature on April 27, 2010, adopted the Permitted Transfers in Trust Act to permit domestic asset protection trusts to be created in Hawaii on and after July 1, 2010.

Governor Lingle signed the bill into law on June 28, 2010. The purpose of the Hawaiian act was to "build on proven domestic and international estate and financial planning methodologies for the purpose of attracting foreign source capital." The act was designed to encourage high net worth individuals to transfer a portion of their liquid net worth into Hawaii for asset and trust management, thereby increasing tax revenues and positioning Hawaii to become a world-class financial management jurisdiction.

Creditor Protection

The Hawaii Act allows an individual to set up a self-settled spendthrift trust that is protected from most claims of the settlor's creditors. The trust must be an irrevocable trust. The assets in the trust are not subject to the claims of the settlor's creditors in Hawaiian courts. The settlor is permitted to retain certain rights without jeopardizing the spendthrift protection. These include:

The power to veto a distribution from the trust; A limited testamentary power of appointment; A mandatory right to income; The receipt of a fixed annuity or unitrust amount not exceeding five percent; The right to or receipt of discretionary distributions of principal; The right to remove a trustee or advisor and appoint a new trustee or advisor; The ability to act as investment advisor to the trust: The right to or actual receipt of distributions to pay income tax due on income of the trust; and The trustee's authority to pay all or part of the settlor's debts at the time of settlor's death. Limitations

As under most domestic asset protection...