Overhaul includes axing tax on inbound transfers and loosening other restrictions.  Bank of Hawaii and First Hawaiian Bank urge change as old law received few trusts.  Mainland experts are skeptical, saying “new rules don’t go far enough.”

The latest upgrade for the Aloha State’s trust code may be exactly what wealthy vacationers needed in order to eye the beauty and beaches of the islands and create a little asset protection fortress in the process.

But last year’s effort to woo trust accounts theoretically gave Hawaiian providers added tools — including the ability to shield trust assets from creditors — to compete with mainland jurisdictions.

As it turns out, once grantors learned Hawaii had wrapped these vehicles in unique restrictions and fees, the anticipated flood of out-of-state money never materialized.

“We saw very restricted movement of out-of-state trusts coming in” over the past year, says Jean Creadick, a vice president at the Bank of Hawaii.

“Eventually, the state legislature conceded that we needed to build more flexibility into the statute.”

For locals, the bugs are gone

Recognizing the complexities involved, Honolulu tapped Creadick and other local lawyers for help revamping the failed law.

They did so, and now, as of July 1, the 1% excise tax the state tried to charge on all asset protection transfers has been eliminated.

So is the rule limiting Hawaiian trusts to 25% of a grantor’s net worth, while forbidding them from holding anything but cash or marketable securities.

Honolulu estate lawyer Ethan Okura previously considered Hawaii’s trust code “practically worthless” in an environment where plenty of other jurisdictions offer comparable or better protection and none of the active disincentives.

But now, he’s no longer actively arguing against local trusts for local clients.

“If a client really wants to establish a Hawaii asset protection trust or work with a local Hawaii bank trustee, I would not dissuade her as I would have last year,” he says.

Nevada asset protection guru Steve Oshins agrees that “it’s a step in the right direction” as far as keeping Hawaiian trust assets in the state goes.

“Many Hawaiian residents will now take advantage of this since the law is ‘good enough’ that they don’t have to go to a better state and pay a co-trustee there,” he explains.

Competing for out-of-state accounts

Simply eliminating a reason for Hawaiian trust assets to flee to states like Alaska, Delaware, South Dakota or Nevada is indeed a win for local banks.

But it’s too early to tell whether the new rules will lure non-residents.

On the one hand, Jean Creadick has already seen significant early interest from wealthy out-of-state individuals.

“I think everybody has been holding back while we were working with the legislation, but there are a number of people on the mainland who are interested,” she says.

In fact, one of the three Hawaiian institutions with trust powers, First Hawaiian Bank, just opened a trust office in Guam in order to court clients beyond its home state’s borders.

However, neither Oshins nor Okura is quite convinced that Hawaii is ready to compete on a national basis, noting that while the new asset protection rules may be “good enough,” they just aren’t the best.

“Asset protection is not merely setting up an asset protection trust, transferring assets to the trust and waiting out the two-year period,” Okura explains.

As long as states like Nevada and Alaska offer more comprehensive protection, Okura will keep nudging clients “who are really serious about asset protection” toward the mainland.

Oshins may be a bit more charitable as far as smaller local accounts are concerned, but agrees that Honolulu still hasn’t given non-residents a good reason to set up trusts in the state.

“I don’t expect that any non-Hawaii residents will ever make use of this law, given that there are enough other states to choose from,” he says.

He’d probably rate the state “at the very bottom of the second tier” today, which would put it right under New Hampshire and well behind tier-one trust magnets Alaska, Delaware, Nevada and South Dakota.

Directed trust also improves

Despite concerns about whether Hawaiian trusts can keep up with the best asset protection out there, the new rules definitely improve state providers’ ability to work with directed trusts.

Hawaii’s amended trust code now explicitly allows grantors to appoint outside advisors who can direct trustee investment decisions and even veto distributions — if, for example, that would entail liquidating assets at a bad time.

An outside advisor can even remove and appoint trustees at will if the paperwork gives him or her that right.

As a result, Hawaii is now in a much better position to compete against directed trust states like New Mexico, which don’t really play in the asset protection space anyway.

That’s by design, Jean Creadick says.

“When we realized we had the opportunity to make amendments, we tried to think of ‘what if’ scenarios and build in future flexibility into the statute,” she says.

“Now there are a lot of different directions in which we can go.”

For advisors who might want to take a client on a trip to the tropics to create a trust — without giving up control of the underlying assets — the future indeed looks a little brighter now.

Scott Martin, senior editor. Steven Maimes contributed to the research and editing.

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