Low start-up and operating costs attract trust companies, but state legislature is dragging its feet to support infrastructure.

UPDATE: Randy Hahn reminded us of First American Bank, which has been operating with trust powers under a federal charter since 1963. We’ve added it to the list.

If you’re a banker, RIA or trust officer ready to get out of the rat race, New Mexico may be the place to go to set up a pet project: starting your own trust company.

Capital requirements for new trust companies are low, only $150,000, and the operating environment couldn’t be better, as long as you’re not married to asset protection or perpetual trusts, don’t mind some taxes and don’t require the prestige of a Delaware or South Dakota.

One local player that’s grown well beyond the hobby level is Santa Fe Trust. With a half billion dollars in assets and an active directed trust model, the company has grown into a significant force since it got up and running in 1997.

Santa Fe CEO Kathy Roberts told me that the state presents companies like hers with a combination of a solid trust-friendly regulatory climate and fringe benefits.

“The operating environment in New Mexico is wonderful,” she explained. “And of course there are the normal positives: wonderful place, wonderful weather. Simply being where we are makes us appealing to both potential clients and their advisors who might be looking for an excuse to get some sun or hit the ski slopes.”

Compared to other Sun Belt states, New Mexico missed most of the real estate boom and so weathered the bust in relatively good shape. The unemployment rate in Santa Fe was 6.6% in December, well below the 8% to 13% that cities in Arizona and Nevada are suffering. Foreclosures are well below the national average, and only one of the state’s banks has failed during the credit crisis.

Labor costs are competitive. According to FDIC data, moving the average financial staffer from Nevada to New Mexico delivers a 2% savings on wages; the same move from Delaware would cut payroll costs 39%. (South Dakota’s still even cheaper.)

Prospective clients are a healthy blend of moneyed refugees from the big city, three- and four-home types who usually end up retiring in the area, and pockets of old money families, many of which have most of their wealth tied up in real estate and so can readily see the value proposition of moving that ranchland into trust and managing it effectively once it’s there.

Too Good to Be True?

A search of New Mexico’s Regulation & Licensing Department’s records reveals ten active trust companies in the state. Three are captive departments of local banks; the rest range from relative giants like Santa Fe Trust and Avalon Trust to niche IRA and escrow servicers.

That’s not bad for a state that didn’t make our list of most trust-friendly jurisdictions. In fact, only four of the states that scored higher (Delaware, Nevada, South Dakota and New Hampshire) have attracted a larger trust company presence, and some like Wyoming and top-tier Alaska have given out far fewer charters despite their reputation as trust havens.

On one hand, New Mexico has a few things going for it on the statute side: Directed trusts are authorized in statute and any company incorporated in the state can get a trust business going as long as it can meet the $150,000 capital requirement and post $100,000 for the bond and $500 for the application.

Support for directed trusts was enough for Santa Fe Trust and Taos-based Heritage Trust. By design, neither has an in-house investment specialist on the payroll. Both were set up with the goal of wooing wealth managers eager to hand off the administration of a client’s trust as long as they could go on managing the money in it.

However, tax treatment could be better. There’s no state inheritance tax, but residents do pay local income tax. “It’s a relatively minor thing, but beneficiaries who live in non-income-tax states still have to file a New Mexico tax return,” Roberts explains. “Whether they actually owe any money depends on the situation, but there are those out there who may get offended simply because the state makes them file in the first place.”

On the column to your right, our research department compiled a list of 11 active trust companies in New Mexico; each name clicks through to the institution’s website. Please note that Desert State Life Management Services does not have a web site that we could locate.

Answering the Perpetual Question

Both Roberts and Heritage Trust founder Fred Winter acknowledge that because New Mexico still prohibits perpetual trusts, a company with a local charter can be a bit less flexible than a competitor from South Dakota or elsewhere in the same time zone (two hours behind New York).

Perpetual or “dynastic” trusts have become increasingly popular among families looking to shield their wealth not just for a single generation, but for centuries or even forever. In fact, Winter told me he has at least one client who’s thinking in dynastic terms. “It has actually come up in recent discussions,” he says. “They wouldn’t mind seeing our charter move.”

It probably won’t come to that. Kathy Roberts at Santa Fe Trust says that even if her clients were clamoring for perpetual trusts, it would take a lot to get her to move the charter. “We could always find a partnership with someone who can offer that kind of capability,” she told me.

Trust companies in the state can also wait for the rules to change. New Mexico lawmakers have argued several times to roll back the restriction on perpetual trusts, but so far nothing’s come of it.

Daniel Montoya, who works closely with Winter as secretary of Heritage Trust, says that the fact that so much of the state’s wealth is tied up in land is the sticky point here. The state’s lawyers just don’t want to see that real estate locked up for generations, he says.

“However, this year gives us a good opportunity to get things settled,” he told me. “I suspect something will happen.”

In the meantime, as long as a trust is located in a state that does allow perpetual trust or any other structure, New Mexico administrators will be happy to follow the rules.

Regulators Offer “Red Carpet” Treatment

Local land lobbies notwithstanding, every New Mexico trust officer I talked to loves the state’s regulators, especially Bill Verant, who runs the Financial Institutions Division, and Adrian Martinez, who has direct responsibility for trust companies in particular. “They’re both incredibly welcoming,” says Winter.

Kathy Roberts says that compared to life back in Wilmington, Santa Fe is “a very positive place to be” when it comes to getting things done. “It’s easy to talk to people,” she told me. “You can get in touch with the regulators or just call them up without any impediments—go to lunch. And the bankers’ association is what I would call proactive.”

Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and editing.

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