Posts Tagged DAPT states
Biggest revision of high-profile jurisdiction map in years shows creditor exceptions and a four-year seasoning period pushing the venerable East Coast banking enclave down the list. Previously unranked Ohio leaps from zero to the top tier.
Last year, estate planners and family offices could check off four states to find the right jurisdiction for client trust funds and feel like they’d done their job.
But now, a new generation of competitors has shifted the fundamentals and opened up the map.
And as a sum of the parts proposition, it’s mighty Delaware – ancestral center of the fiduciary universe – that looks most vulnerable to billions of dollars in out-of-state assets slipping away.
The problem in trust-rich Wilmington isn’t that its statutes have gotten unfriendly to cross-border trusts or that its white-glove professionals have fallen down on the job.
It’s just that other states have been moving the trust lines forward while Delaware’s legislators were content to maintain the status quo.
“In the past few months alone, we saw quite a lot of domestic asset protection trust legislation,” notes estate planner Steve Oshins, who puts together an influential jurisdiction rankings chart every year.
“South Dakota, Alaska, Ohio, Tennessee, Wyoming and Utah all had positive DAPT legislation.”
Delaware, ranked No. 4 last year, didn’t make Oshins’ list of innovators and the state falls to No. 6 in his rankings as a result.
Ohio and (provisionally) Tennessee take its place in the top tier.
“Quiet revolution” knocks First State off its perch
For years, Alaska, Delaware, Nevada and South Dakota were all more or less evenly matched on the big issues – even in Las Vegas-based Oshins’ admittedly Nevada-centric perspective.
All four offered the right mix of trust types and the right tax environment, so decisions often hinged on client-specific details as well as intangibles like climate and time zone.
But as states like Ohio watched their residents’ wealth flow across the country when it was time to put the money into trusts, they revised their trust statutes to get back in the game.
Last year, Oshins didn’t even rate Ohio because its rules didn’t allow self-settled asset protection trusts designed to shield wealth from creditors while letting the grantors enjoy the benefits.
No asset protection, no ranking – and not much interest from estate planners trying to get their clients the best trust vehicles available anywhere in the country.
Then a cadre of Ohio attorneys got together to spearhead the state’s Asset Management Modernization Act, which brought in asset protection, tightened existing trust-friendly provisions and created a clear path for those looking to move out-of-state assets into new Ohio trusts.
“It really has been a quiet revolution,” says Bo Loeffler, a Sandusky lawyer who helped write the bill. “We borrowed from the best of what we saw in Delaware and Nevada and South Dakota.”
The combination was evidently strong enough for Steve Oshins to award the state 87 out of a possible 100 points on asset protection, leapfrogging it ahead of Delaware with a comparatively modest score of 80.
“Ohio, the newest jurisdiction to enact a DAPT statute, is immediately a first-tier state,” he explains, while noting he had to take points away for the state’s insistence that an affidavit of solvency accompanies every transfer into a trust.
Short seasoning period pushes the status quo
Creating exceptions for divorcing spouses and child support claims also counted against the state, but Bo Loeffler points out that locking homemakers and kids out of the assets wouldn’t have gone over well in the family-friendly Midwest.
Even so, Ohio’s new rules – which formally went into effect March 27 – would only have put the state on only slightly better footing than Delaware in the asset protection realm.
But while states like Hawaii and New Hampshire have been content to match developments elsewhere, Loeffler and company knew they needed a unique differentiator to put their trusts on the map and get the transfers flowing.
They came up with the shortest statute of limitations in the country as their edge. The clock on Ohio asset protection starts at just 18 months after formation, at which time neither preexisting nor future creditors have any claim on that property.
Compare that to Nevada and South Dakota, which make trust grantors wait a full two years, and suddenly estate planners around the country have an active incentive to at least talk about situating a trust in Ohio.
And Delaware with its four-year wait drops pretty far down the list. If not for the lack of solvency affidavits, asset protection in Wilmington would barely rate above a relatively obscure but rising state like Wyoming.
Why sweat over such fine details? For one thing, out-of-state trusts add up to big money. Bo Loeffler’s research indicates that attracting cross-border accounts generates $600 million to $1.1 billion a year for Delaware.
Delaware is such a national trust mecca that its institutions bring in 90% of the fiduciary fees as Ohio does, despite a local population 1/12 the size.
And those fees support local jobs, which is part of why local business and Ohio-based money center banks came out swinging to get the bill passed and bring that money back to the state.
Great rules, but will the flows follow?
Bo Loeffler tells me he’s already hearing about local trust companies thinking about bringing their back office operations home from other states.
While there hasn’t been any boom of independent trust companies forming in the office buildings of Cleveland, Cincinnati, Columbus,Toledo or Akron, the new rules have only been in effect for a few weeks.
It took South Dakota the better part of a decade to rise to the top of the rankings, much less amass about $75 billion in out-of-state trust assets across dozens of start-up institutions.
As for wooing non-residents, Ohio is now one of the only asset protection states in the entire Midwest. Tennessee is making a strong move to level the playing field — Steve Oshins has them provisionally tied for No. 4 — and we’ll keep you posted on developments there.
Either way, states around the country will almost certainly keep revising their statutes to ensure that the map stays fluid.
“South Dakota nearly caught Nevada this year with its 2013 legislative changes, although Nevada remains the leading jurisdiction,” Oshins points out.
Scott Martin, senior editor, The Trust Advisor