Granite State has put together a first-class competitive framework with some unique frills. Boston advisory firms can’t get trust charters fast enough.

Until recently, finding a truly hospitable trust jurisdiction on the East Coast was a tough choice between reigning champion Delaware and everywhere else. Delaware guarded its exclusivity, but since it had the best statutes, everyone in the business wanted to get in.

However, New Hampshire — famous throughout the country as one of the original income tax havens — has been working hard to establish itself as an interstate trust company destination as well.

Since the last piece fell into place back in July, the state has been quietly enticing trust companies from old money Boston to move across the border. Now, it’s got its sights on capturing out-of-state business from all over the country.

If anything, the problem now seems to be that while New Hampshire’s trust environment is plenty enticing, the locals have been slow to get the word out.

“Nobody knows the great things going on up here,” confesses Scott Baker, principal of Hampton, NH-based Perspecta Trust.

“We need to do a better job of marketing it.”

To get the word out, Baker has started the New Hampshire Trust Council, an umbrella group that has already received notice from half the fiduciaries in the state and the support of its trust-friendly governor, John Lynch.

The group is working on a white paper outlining the unique advantages of operating a trust company in the state. To get on the waiting list for when it is released, click here.

The Best-Kept Secret in the Trust Business

In fact, since 2006, the New Hampshire state legislature has been aggressively modernizing local trust statutes in order to give local fiduciaries the flexibility that their competitors in Nevada, South Dakota, Alaska and Delaware have enjoyed for years.

As of last year, the state added asset protection trusts, which theoretically shield wealth from creditors, to the list of trust arrangements it supports.

Together with directed trusts, in which the duties of administering the trust and investing its assets are split, and dynastic trusts that can last for centuries, New Hampshire trust companies can give wealthy clients anything they can get anywhere else.

That kind of all-in-one proposition is essential in today’s hyper-competitive trust markets, says South Dakota trust attorney Daniel Donohue of Davenport Evans Hurwitz & Smith.

“For a state to be in the top tier of trust-friendly jurisdictions in the United States, it has to have just about every different type of trust administration and legislation in place,” he explains.

“Family offices have a checklist of all these different items. If a state falls short in even a couple of areas — even areas the family might not be interested in at the present time — that state might automatically get crossed off the list.”

In other words, there’s no sliding scale: You’re either a top-tier jurisdiction like Delaware or you’re not even a contender.

Once New Hampshire had its trust menu filled out, the one thing keeping it out of the top tier was the tax treatment of interest and dividends for out-of-state beneficiaries.

New Hampshire insiders have taken the position for years that the state tax code did not tax this income — but even though the state legislature went so far as to specifically eliminate the confusing language this summer, outsiders remain a little mystified by the rules.

With the tax issue officially off the table effective January 1, 2011, New Hampshire now offers non-resident beneficiaries the best of both worlds: the flexibility of South Dakota and, especially relevant for families based on the East Coast, the New York time zone of Delaware.

Bringing in Boston Business

So far, Boston law firms and banks have been the first to cross the border. By car, it is only about an hour to Boston from either Concord, the state capital, or Manchester, so local trust officers can even commute into the city to meet grantors and beneficiaries and then drive back to the office.

Although companies can get a New Hampshire trust charter without even establishing any kind of brick-and-mortar presence in the state, Massachusetts advisory firms are setting up shop in New Hampshire anyway.

To be sure there are no problems with Massachusetts tax authorities, Boston law firm Hemenway & Barnes recently opened a physical office for its trust affiliate Hemenway Trust and is reassigning trust officers and other staff to run it.

Also, just last Wednesday, Cambridge Bancorp announced that it is establishing a separate New Hampshire subsidiary, Cambridge Trust Co. of New Hampshire, with an office in New Hampshire, to handle the trust service needs of its wealthy clientele — and explicitly “to attract clients from other states who may be drawn to New Hampshire’s robust trust laws and favorable tax climate.”

Lower operational costs may be a factor in moving operations like these out of Massachusetts, but an even bigger factor is the need to establish credible separation between a Boston-based corporate parent and the New Hampshire subsidiary, Scott Baker says.

“You don’t have to have a physical presence here, but it’s important to be able to make sure Massachusetts tax officials can’t say you are operating out of Massachusetts,” he explains.

Otherwise, Massachusetts will find a way to tax trust income to its residents, eliminating the tax benefit of setting up their trust across the border in the first place.

Delaware Welcomes Competition

Compared to Delaware, which requires trust companies to keep at least a minimum of 1,500 square-foot office in the state, employ two qualified trust officers and keep $5 million in regulatory capital in place, the barrier to entry in New Hampshire is relatively low.

Since the local office and personnel are optional in the Granite State, the main requirement is $500,000 in regulatory capital — although the Department of Banking said they won’t issue a charter with less than $1 million. They also can require more at its discretion.

One unique perk here: New Hampshire is willing to let local trust companies invest their regulatory capital in assets beyond the effectively zero-yield money market funds that other states mandate.

“You can still put that $1 million to work,” Baker says.

While initial interest from Boston is extremely encouraging, New Hampshire’s ability to pull out-of-state assets over the long term will take a lot more than changing laws.

But with states like South Dakota pulling in an estimated $600 billion in trust assets in the last year or so, there may be plenty of cash to go around.

“Here in Delaware, we think it’s terrific,” says Peter Gordon, a partner in Wilmington law firm Gordon Fournaris & Mammarella. “We’re constantly working here to improve our trust laws, and we encourage other jurisdictions to do likewise.”

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