Posts Tagged South Dakota
More Advisory Firms Seen Switching to Trust Charters to Ease Regulation
Posted by Scott Martin in News on January 29, 2012
As a hedge against possible FINRA oversight of advisors and re-enactment of the Glass-Steagall Act in a second Obama term, more RIAs are trading their SEC registration for trust licenses in top trust states.
States like New Hampshire and South Dakota report robust interest from wealth managers, family offices and other advisors looking to offer their clients the benefits of an in-house trust company as a hedge against possible FINRA oversight of advisors and more restrictions on how advisory firms can make money.
State chartered trust companies can do everything an SEC-registered advisor can do, plus serve as trustee and custodian. These privileges were given to both banks and trust companies with the enactment of the National Bank Act.
After a rocky year in the markets, high-net-worth clients are on the move — and advisors looking for a competitive edge are hunting whatever it takes to give those investors everything they want.
And what those investors want, according to the experts, is an easy way to pass their wealth on to future generations as securely and efficiently as possible. In other words, they want an advisor who can help them set up and fund trust funds.
“Clients are constantly seeking greater certainty over the safety, disposition and management of their assets,” says Bob Ellis, a consultant at Fast Track Advisors.
By creating their own captive trust companies, wealth advisors more strongly retain clients.”
That’s the logic that’s driven dozens of advisors to start trust companies across the country in the last few years, with the lion’s share going to the states that combine investor-friendly statutes with advisor-friendly regulatory environments.
South Dakota alone gained about a half dozen public trust companies last year, with more applications in the pipeline. Nevada, Delaware and other top-tier jurisdictions have also been big winners in what research firm Cerulli Associates calculates is a decade-long boom in trust company creation.
“Interest seems to be on the uptick,” says Mark Purpura, chair of Delaware’s state bar association’s banking committee.
“I currently have several trust company formations in the pipeline.”
Becoming the trust advisor
Advisors have gotten so hungry for information on this topic that the Trust Advisor is running an in-depth webinar in two weeks. (Register here.)
But all this interest is really business as usual, says former Nevada banking commissioner Scott Walshaw, who — like Purpura and Ellis — will be a panelist.
“The motives haven’t changed much,” he explains. “What’s changed is that there is more opportunity for people to open trust companies now than ever before.”
Wealth managers still see a trust charter as a way to differentiate themselves in the marketplace, tempt new clients and keep old ones from straying. Read the rest of this entry »
Bret Afdahl Appointed South Dakota Banking Chief
Posted by Scott Martin in News on May 14, 2011
As the state’s new top regulator, Afdahl inherits oversight over $75 billion in trust assets and an ever-growing list of independent trust companies looking to take advantage of world-class statutes.
The nationwide search to find a replacement for Roger Novotny as head of South Dakota’s Division of Banking has ended with a local favorite — Bret Afdahl — getting the job.
Previously the division’s counsel and trust examiner, Afdahl is known as a “business-friendly” regulator who’s willing to get tough when he sees a problem at an institution, but is also happy to work with South Dakota’s 52 trust companies.
Given the fact that lawmakers are still making the state’s trust rules even more attractive — driving plenty of applications from cross-border banks, RIAs and other entities hungry for a South Dakota charter — that attitude almost certainly makes him the right man for the job.
No real surprise, locals say
The fact that South Dakota promoted an insider comes as no surprise to members of the local trust community, who’ve been telling me for awhile now that given Governor Dennis Daugaard’s own background as a trust administrator, promoting this business is a priority in Pierre.
As Sioux Falls estate attorney Daniel Donohue told me, the public job listing that hit the message boards back in March was probably just a way to make sure the state wasn’t cheating itself out of any spectacular long-distance candidates willing to take the reins.
“The public listing served largely to make sure they were casting the widest net possible,” he says.
But at the end of the day, few outsiders could ever know South Dakota’s universe of trust companies better than Afdahl, who helped review several of their charter applications over the last five years.
“An extensive search was conducted for the director position,” says Pam Roberts, the state’s newly anointed secretary of labor and regulation and herself a veteran of the banking industry.
“The best candidate ended up being from within the division, and I am excited for Bret to exercise his leadership capabilities and industry knowledge in this new role.”
New rules are already driving fresh applications
The latest improvements in South Dakota’s trust code should give Afdahl plenty of applications to review from both established out-of-state trust companies and start-ups.
In just the last few weeks, Michigan RIA firm Old Mission Investment Company filed the paperwork to start a South Dakota trust company — and, perhaps optimistically, registered various domain names to get the business moving as soon as it has its charter.
Old Mission CEO Christopher Lamb confirms that he’s applied, but understandably didn’t want to say anything that might prejudice the process.
For an eager entrant like Old Mission, South Dakota offers several distinct advantages. First, the state supports all major forms of trust arrangement, including dynastic trusts, asset protection trusts and directed trusts.
Coupled with relatively low capital requirements and the complete absence of state income tax, the state has successfully captured tens of billions of dollars from entrenched top-tier competitors like Delaware.
And the state is nowhere near ready to rest on its laurels. One of Governor Daugaard’s first official acts in office was signing House Bill 1155 into law back in March.
The bill, which Dan Donohue notes was written under the auspices of South Dakota’s long-standing task force for trust law reform, is yet another salvo in a long-term crusade to compete even more effectively for trust assets.
Previously, South Dakota’s asset protection statutes were considered better than most, but still somewhat weaker than those of archrivals Alaska and Nevada.
Both Alaska and Nevada allow people to “retroactively” protect their wealth by transferring it into trust, even if legal claims on that money are already on the table — except, naturally, where the transfer would be a fraudulent conveyance.
HB 1155 removes the preexisting claim exemption from South Dakota’s trust code, putting the state on more equal footing with Alaska in particular.
Once the new law goes into effect on July 1, we could see more trust assets flow toward South Dakota — and in any event, the decision to seek the strongest asset protection out there will get a little less clear-cut.
Moving fast to avoid policy drift
While some insiders had expected confirmation that Afdahl would be taking the regulatory reins from retiring boss Roger Novotny as early as May 4, the official announcement came last Wednesday.
Despite that extra week, the process seemed to move incredibly fast compared to the nine months it took to hire Novotny back in 2004.
Back then, South Dakota’s evolution into one of the biggest success stories of the trust industry was just getting underway. When Novotny took over, the state could boast maybe 17 state-chartered trust institutions with a little over $20 billion in assets between them.
Now, Afdahl inherits a thriving regulatory portfolio of 52 public and private trust companies that manage $75 billion.
He’ll also be responsible for monitoring the health of 62 banks, which only have $18 billion collectively and so demonstrate that in South Dakota, trusts are the main attraction.
And no wonder. While the state’s banks are in better shape than their counterparts elsewhere in the country, the number of depositary institutions the Division of Banking oversees has steadily declined over the last 15 years and their assets plunged in 2008 and 2009 during the credit crisis.
Afdahl may spend some time in his new job nurturing the trust companies, but he may find his biggest challenges rooting out the weakest lenders.
Scott Martin, contributing editor, The Trust Advisor Blog. Steve Maimes contributed to the editing and research.
Permalink: http://thetrustadvisor.com/news/afdahl
South Dakota Trust Firm’s Future in Doubt as Owner Battles with Bank Regulators
Posted by Scott Martin in News on April 10, 2011
Toxic loans and brokered deposits influenced FDIC’s closure of Denver’s United Western Bank. Questions linger as to what action, if any, South Dakota bank regulator will take against the owner to protect state’s spotless reputation.
While South Dakota’s bank regulators are at least officially sticking to the sidelines as United Western Bancorp’s fight with the national supervisory agencies drags on, longtime observers warn that “corrective action” could be on the horizon.
The situation heated up back in January when the Office of Thrift Supervision shut down United Western’s $2 billion thrift unit and named the FDIC as receiver. It’s happened to a lot of institutions over the last few years.
But where the heads of those institutions went quietly, United Western CEO Guy A. Gibson fired back with a press release blasting the action as both “precipitous” and unnecessary, following it up a month later with a full-fledged federal lawsuit against the FDIC and OTS citing the closure as “arbitrary and capricious.”
Since then, the company’s affiliated trust services unit has remained open under its South Dakota charter and — as of now — still seems to be willing to accept new business.
But although state regulators currently refuse to speculate or otherwise comment on the trust company’s fate, industry experts warn that historically scandal-sensitive South Dakota will act decisively if it sees a problem.
“They can simply issue an informal cease and desist order preventing the trust company from taking any new clients,” says one longtime observer who talked to us only on condition of anonymity.
With its reputation on the hot seat as the trust firms owner delisted from the Nasdaq, the regulators could also have grounds to wonder whether United Western Trust can continue as a going concern with the current owner, our source added. In addition, according the United Western’s website, the firm is contemplating a bankruptcy filing. All of this may influence the South Dakota bank regulator.
A new bank charter elsewhere is probably not an option any time soon. The FDIC has a 15-month window for filing a new administrative action — this one potentially targeting the officers of the South Dakota trust company — and no state regulator is likely to invite that kind of risk to the table.
Expect more sudden moves ahead
In the meantime, hair-trigger bank closures could become standard operating procedure as the regulators adopt a “no mercy” policy to what they consider potential sources of trouble even before they become a problem.
United Western Bank, famously, had $400 million in cash and was on the edge of closing another $200 million in fresh capitalization when its total capital ratio dipped below the OTS minimum.
Punishment was swift and, for those who considered the OTS a relatively lenient regulator, unexpected.
“The reality is that the regulators have been chastened by what we’ve seen and they are looking to put the weakest institutions out of business,” says Jim Bauerle, head of bank consulting group FiCap Strategic Partners.
“You have not seen the end of this,” he added.
If so, it may be time for trust companies across the country to reevaluate their banking relationships to ensure their accounts don’t trigger an FDIC-driven administrative nightmare.
Part of the controversy surrounding United Western was the status of its three anchor customers — all trust companies — which accounted for 74% of its deposits.
The OTS and the FDIC classified these relationships as brokered “hot money” accounts, which provoked additional scrutiny on the bank on the premise that they might pull out at any time and create a liquidity crisis, simply because they were so big.
In reality, United Western notes, these were simply long-term institutional accounts, going back as much as 13 years.
If the line between institutional accounts and hot money is now so blurry, trust companies need to be even more careful picking a place to park their funds.
“Casual depositors may view all banks as being alike, but fiduciaries looking to place meaningfully sized deposits in particular should be careful to do their own analysis to ensure that an institution is not only ‘sound enough’ but has a significant margin for error,” Bauerle says.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the editing and research.
New Banking Chief Wanted in South Dakota ASAP
Posted by Scott Martin in News on March 20, 2011
Director’s retirement means a new era ahead for the trust-friendly state’s Division of Banking. Outsiders with experience reviewing applications are welcome to apply.
When the listing for “Director, Division of Banking” hit the employment websites last Thursday, it came as a surprise to out-of-state industry observers.
But while early speculation focused on whether Roger Novotny had parlayed his 7 years of success in wooing trust companies to Pierre into an even better job elsewhere, the official word on the ground is that he’s retiring.
“He simply wrote his letter of resignation and now we’re collecting applications to find his replacement,” says a state government spokesperson.
Members of the South Dakota trust community say Novotny — who worked an almost uninterrupted four decades for the state — has been laying the groundwork for stepping down for awhile now, but the timing was always on the vague side.
“I met with him for a half hour about a month ago, and he indicated then that he would be retiring in the near future,” says Sioux Falls estate attorney Daniel Donohue.
“At the time, I thought it was more along the lines of long-term guidance, and not an immediate proposition,” he concedes.
In fact, Novotny’s resignation is effective on May 1, which only gives the state’s human resources department a month and a half to collect resumes and then make a decision if it wants to ensure that there’s no interruption at the top.
What they’re looking for
The advertisement gives the public a rare window into exactly what a state banking director does.
At least in South Dakota, Novotny’s replacement will review all examinations, enforce the regulations, oversee a staff of 20 and weigh in on applications for state trust and banking charters. The buck will stop at his or her desk.
As currently envisioned, the job will also involve a remarkable amount of PR in the form of “responding to media and consumer questions.” Unlike other states where banking regulation is a bureaucratic black hole, South Dakota apparently expects its new banking director to maintain a fairly high public profile — and to be able to play the political game.
The listing spells out exactly what the government’s HR team is looking for:
“Preference will be given to applicants with bank management or regulatory experience, have proven success working with a team, excellent public speaking and communication skills and strong negotiation skills. Progressive experience in a professional management position that included budgeting, policy development, strategic vision, stakeholder relations, supervising professional staff and graduation from an accredited college or university with a degree in banking, finance, business administration or related field is desired.”
Members of the Trust Advisor Blog community may want to take a shot — if the state is willing to consider someone actually from the trust industry. Serious applicants need to be willing to relocate and start salary negotiations at a base of $85,000. Three references are required.
The state will start looking at resumes on April 1 and the government spokesperson tells me they’ll announce a decision fast once they find the right candidate.
Lessons from the last regime
The question is whether that announcement can come before Novotny leaves on May 1.
Last time around, back in 2003-4, there was no need to rush the process. When Novotny took the job, it was after a 9-month gap that Catherine Brandner — long-time deputy to the state’s top banking cops — filled in as temporary replacement for Richard Duncan.
But Brandner herself retired back in 2007, which means that unless the state moves fast, current deputy director Tim Ahartz will probably fill in.
Naturally, there’s nothing preventing Ahartz or any other Division insiders from applying for the position on their own behalf, in which case the process may move faster.
“They may have groomed a replacement from within, in which case the public listing would serve largely to make sure they’re casting the widest net possible,” Dan Donohue says.
A solid legacy to continue
Novotny left his successor — whoever it is — with a solid foundation on which to build.
“He’s been a pretty steady good hand for South Dakota,” says Donohue.
Although South Dakota first started to emerge as a center of the national trust industry back in the 1980s, the process kept going in Novotny’s 7-year regime.
The state’s low capital requirements encouraged applications from out-of-state companies looking for a place to do business, while their clients were grateful to get access to South Dakota’s top-of-the-line trust code.
All in all, 33 public and private trust companies launched in South Dakota during the Novotny era.
That’s easily half of the current roster of trust companies doing business in the state that owe their genesis to his approval, and the raw numbers will be hard for his successor to match.
Still, with three applications left in the pipeline and a typical turnaround time of a few months, Novotny may even christen a few more trust companies before he leaves.
In addition to Santa Fe Trust, which is looking to add a South Dakota charter to its New Mexico-centered operation, Concord Trust and Covenant Trust have also filed the paperwork to do business in South Dakota.
Permalink: http://thetrustadvisor.com/news/novotny
Alaska, Delaware, Nevada, South Dakota Remain Top Trust States
Posted by Scott Martin in News on February 5, 2011
Tennessee and Rhode Island make our favorites list, but Hawaii just doesn’t get the recipe right. New rules predicted for new South Dakota trust firms.
The battle to woo trust business heated up last year as trust advisors and estate planners rushed to take advantage of the 2010 tax environment — and lawmakers scrambled to make their states look as attractive as possible.
Our 2011 ranking of the top trust states corrects a few oversights from last year, updates for new developments and addresses a few controversies.
Tennessee and Rhode Island make the list this year, at Tier 2 and Tier 3, respectively. Idaho and Wisconsin, which offer out-of-state trusts little real benefit beyond dynastic trust arrangements, drop off.
Checking all the boxes…or else
To make a serious bid for a share of the $1 trillion personal trust market, you really need to provide dynastic trusts, directed trusts and asset protection trusts, plus favorable tax treatment for non-residents.
“Fail to check a box as you go through the list, and that state might automatically get crossed off,” says South Dakota trust attorney Daniel Donohue, a partner in Davenport Evans Hurtwitz & Smith.
“You might not need to use a type of trust now, but family members are always active and doing things, so you might want to make use of those statutes down the road,” he added.
This is especially important in dynastic scenarios where advisors have to reckon with family members who haven’t even been born yet, but may eventually need a way to shield a trust’s assets from creditors decades from now.
In fact, despite Florida’s efforts to allow asset protection trusts this year, its failure to do so was one reason that kept it from joining the Big Four — Alaska, Delaware, Nevada and South Dakota — which offer just about everything on the menu.
As it is, Florida does allow directed trusts, which let outside advisors manage the underlying assets, as well as a substantial 360-year dynastic trust period.
“Florida is a good example of a state that doesn’t belong near the top but doesn’t belong at the bottom either,” explains Steve Oshins, Las Vegas estate attorney and author of Nevada’s 365-year dynastic trust statutes. “Their dynasty trust provisions are okay.”
Delaware has taken care to keep its trust code current while building on its own reputation as a high-net-worth mecca where assets can remain in trust not just for centuries, but forever.
|
The Best States for Trusts |
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|
Tier |
State |
State Income Tax |
Directed Trust Statute |
Asset Protection Trust |
Dynasty Trust Ability |
Number of Trust Cos. |
Time Zone (from NY) |
|
1 |
No |
Yes |
Yes |
1000 yrs. |
5 |
(-) 4 |
|
|
1 |
Residents |
Yes |
Yes |
Perpetual |
53* |
(-) 0 |
|
|
1 |
No |
Yes |
Yes |
365 yrs. |
18 |
(-) 3 |
|
|
1 |
No |
Yes |
Yes |
Perpetual |
58 |
(-) 1 / 2 |
|
|
2 |
No |
Yes |
No |
360 yrs. |
29 |
(-) 0 |
|
|
2 |
Residents |
Yes |
Yes |
Perpetual |
25 |
(-) 0 |
|
|
2 |
Residents |
Yes |
Yes |
360 yrs. |
22 |
(-) 1 |
|
|
2 |
No |
Yes |
Yes |
1000 yrs. |
11 |
(-) 2 |
|
|
3 |
Yes |
Yes |
Uncertain |
1000 yrs. |
11 |
(-) 2 |
|
|
3 |
Residents |
No |
No |
Perpetual |
20 |
(-) 0 |
|
|
3 |
Yes |
No |
Yes |
Perpetual |
6 |
(-) 0 |
|
|
3 |
Yes |
No |
Yes |
1000 yrs. |
7 |
(-) 2 |
|
|
All tiers listed in alphabetical order. States links to state trust statutes. |
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Data: February 2011. © 2011 TheTrustAdvisor.com |
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South Dakota is too good to be true
And South Dakota has definitely established its credentials for no-nonsense service on directed trusts in particular.
However, South Dakota’s long ride with a $200,000 capital requirement may come to rest this year as more state trust regulators continue to complain that their entry rules are too easy.
States like Nevada, New Hampshire, Pennsylvania, Delaware, Florida and others all require $1 million or more to qualify for a trust license.
Recently, a South Dakota trust firm was prevented from doing business in Pennsylvania unless it posted $2 million in capital.
For several years, banking authorities in Florida have been annoyed with South Dakota trust firms operating there without meeting their $2 million capital requirements to do business.
Last year, the Florida banking department denied a new South Dakota trust company local operating privileges because its capital was too low. Experts say more of that is to come.
With 58 trust firms now based in South Dakota and operating in all 50 states and abroad, the South Dakota regulator will likely feel the heat and tighten up to prevent more regulator complaints and bad publicity.
Is it a matter of asset protection or nothing?
However, the ability to provide a high level of asset protection may emerge as the most important factor in how the various more-or-less trust-friendly states differentiate themselves in 2011.
“I believe more and more emphasis is being put on asset protection,” Oshins says.
“If so, that helps break away Nevada from the other top-tier states, given that it has the leading self-settled asset protection trust laws,” he added.
Last year, uncertainty about the future of the tax code drove a lot of middle-market families to move their money into trusts.
But since the eleventh-hour Congressional compromise raised the exemption to $5 million — well above the level where it could apply to any but the wealthiest Americans — the trust industry’s priorities are rotating.
The logic here is fairly simple. While raising the estate tax exemption from $1 million to $5 million lets all but 3,500 families a year off the estate tax hook, the number of affluent doctors, entrepreneurs and potential divorcees out there who could benefit from asset protection trusts remains fairly constant.
Asset protection may become a more important factor in next year’s rankings, but that may not help Hawaii make it onto the list.
The Aloha State tried to make a big splash in the industry by allowing asset protection trusts last summer. But the statute was so diluted by restrictions and added fees that it just didn’t impress many onshore family offices.
Shortly after we published our 2010 survey, we reported that New Mexico was moving closer to enacting more trust friendly rules to attract trust business. That may not be the case. Shortly before press time this week, we learned that one of New Mexico’s largest trust firms was jumping ship and filed for a South Dakota trust charter this week.
Scott Martin, contributing editor, The Trust Advisor Blog. Jerry Cooper and Steve Maimes contributed to the reporting and research.
Permalink: http://thetrustadvisor.com/news/states2011
Trust Firm Launches “Directed Trusts Made Simple” Campaign
Posted by Scott Martin in News on September 11, 2010
Wealth Advisors Trust Company gives advisors a crash course in how to provide a full range of trust services without losing their best clients to the competition.
In the past, trust companies and independent investment advisors have had an uneasy relationship at best. But now, with about $41 trillion at stake as the Baby Boom retires, the stakes have never been higher — and directed trusts are emerging as a way to let everyone win.
South Dakota-based Wealth Advisors Trust Company is one of a new generation of independent trust companies that cater exclusively to the investment advisors themselves.
But as the firm’s co-founder Christopher Holtby told us, “We are finding that advisors and clients alike simply don’t understand how trusts work.”
He added, “In order for us to do our job right, we need to make sure that our client’s and the advisors we work with understand the basics of how trusts work.”
Wealth Advisors published a new special report, “Directed Trusts Made Simple,” that tells advisors everything they need to know about how these vehicles work and why they reduce friction between advisors and traditional trust companies.
You can receive a complimentary copy here, click here.
Wealth Advisors Trust retained Mass. based, Financial Marketing Associates to help produce the report and launch an email marketing campaign to estate planners and advisors. “Directed Trusts is the first in a series to come,” Holtby promises.
After an overview of how traditional trust accounts work and how directed trusts are different, authors Christopher Holtby and Chuck Sharpe (now the president of Wealth Advisors Trust) focus most of the discussion on the nuts and bolts of bringing trust services into an investment-based practice.
Holtby and Sharpe have good, actionable advice on everything from how to pick a trust company for your client to how to integrate trust into your prospecting activities.
While they probably wouldn’t mind if readers used Wealth Advisors Trust exclusively, they recognize that there are a lot of directed trust companies out there and that the important thing is finding the right client-trustee-advisor fit.
In fact, some of the best advice in the white paper is on how to interview prospective trust companies to make sure an individual client gets the best possible service.
No need to compete with advisors
Directed trusts formally split the duties of running the trust from the responsibility for managing the assets in it.
The trustee handles the complex paperwork and earns an administration fee. The investment manager — usually the advisor who suggested that a client open the trust in the first place — keeps control of the investment account.
Because the advisor isn’t losing the assets, this arrangement eliminates a lot of the internal conflict that putting client assets into trust used to entail.
On the one hand, wealthy clients can reap big benefits from shielding their money from estate and income tax or from creditors.
But on the other side of the coin, advisors were understandably reluctant to refer their best accounts to full-service trust companies that have built up aggressive in-house wealth management teams of their own.
However, directed trust companies like Wealth Advisors Trust are happy to handle the trust side of the business and leave the investing to the specialists. In fact, very few even have the ability to manage the investment side even if they wanted to do so.
Scott Martin, contributing editor, The Trust Advisor Blog.
To receive a copy of the report, click link below: http://www.thetrustadvisor.com/email/scripts/watc_sr_requests_subscribe.html
Permalink: http://thetrustadvisor.com/news/watc
Kansas Trust Company To Restart in South Dakota
Posted by Scott Martin in News on August 14, 2010
Great Plains becomes the second trust company to restart in South Dakota this year. Both will reap the benefits of strong asset protection, perpetual trusts and no state taxes.
Overland Park-based Great Plains Trust has become the second established trust company this year to file the paperwork to transfer to the bustling jurisdiction of South Dakota.
According to the South Dakota Division of Banking, Great Plains—which claims over $1 billion in fiduciary assets—applied for a trust charter in July.
In June, Denver-based United Western Trust got its South Dakota charter. General counsel Ted Abariotes tells The Trust Advisor that the rationale was pretty simple.
“We just couldn’t find all the compelling benefits that South Dakota has to offer anywhere else,” he says.
Restarts are popular
United Western and Great Plains are only the leading edge of a record-breaking wave of 11 out-of-state trust companies starting in or moving to South Dakota this year.
Applicants are coming from as far away as Pennsylvania, and even include institutions based in states like Nevada that are normally considered centers of the trust industry in their own right.
Seven have received their charters so far, while Great Plains and three others are pending. If they all get approval from the Division of Banking, it would bring the state’s roster of trust companies to well above 50, compared to 40 in Delaware and 25 in Nevada.
As a result, trust services have become big business in the trust-friendly state. South Dakota booked a record $262,651 in trust-oriented revenue last year in the form of examination and supervision fees.
Great Plains trust officer Michael Sears wouldn’t speculate about the appeal of South Dakota or his company’s motivations for letting go of the Kansas charter it had held since 1994.
However, local estate planners are pretty sure Great Plains, like United Western before it, is going to South Dakota in order to give clients access to trust structures and tax breaks they couldn’t get at home.
“I can easily see the upside,” says Sam Scott, a financial planner at Sunrise Advisors who does a fair bit of trust work. “There are some scenarios where the move to South Dakota jurisdiction could save a Kansas client quite a bit of money.”
Taxes and flexibility
First and foremost, moving the trust administration out of state translates into freedom from Kansas income tax liability, Scott explains. Because South Dakota has no state income tax, this immediately generates 6.45% a year in extra income for beneficiaries.
Beyond that, South Dakota provides a retail-oriented trust company like Great Plains with much wider flexibility in the types of account structures it can offer.
Kansas doesn’t even support total return trusts, Scott says. Especially in the current rate-squeezed environment, shifting clients who need cash flow out of state-mandated income-only accounts could go a long way toward improving their lifestyles and making them happier.
When asked to speculate why Great Plains might be moving, Northwestern University law professor Max Schanzenbach—who has studied state-versus-state competition for trust company business in partnership with Harvard professor Robert Sitkoff—went immediately to the chance to offer perpetual trusts and asset protection trusts.
South Dakota and a few other states allow trusts to operate forever, unlike Kansas, where the amount of time wealth can remain in trust is capped at 21 years after the death of the last original beneficiary.
And while neighboring Missouri, where Great Plains has been operating as a fiduciary since 2006, allows domestic asset protection trusts, moving the primary charter will help the company offer these increasingly popular products to all of its clients.
Kansas doesn’t offer them, but South Dakota, Nevada, Delaware and nine other relatively trust-friendly states do.
Asset protection trusts aren’t just for celebrities looking to shield their wealth from a divorce decree, says Rick Kahler, a financial planner based in Rapid City, South Dakota.
“Doctors and other business owners also appreciate the protection,” he explains. “The power to block any distribution is a unique benefit and they’re pretty simple to put in place.”
Putting favorable statutes behind a local face
Max Schanzenbach rattles off a few other reasons why a trust company might move to South Dakota—favorable private trust laws, franchise tax or regulatory oversight issues, the chance to move closer to the state’s banking community.
Compared to Delaware and Nevada, the barriers to entry in South Dakota for a start-up are relatively low. While capital requirements can climb at regulators’ discretion, a new company only needs to post $200,000 for a South Dakota charter, versus up to $1 million elsewhere.
However, the key motivators for established institutions like Great Plains usually boil down to tax benefits and flexibility.
As Schanzenbach’s research with Robert Sitkoff revealed, about $100 billion in fiduciary assets shifted out of states like Kansas to tax-friendly asset protection jurisdictions like South Dakota between 1995 and 2003, and the trend seems to be continuing.
In fact, Kansas planner Sam Scott cites similar reasons for why he sets up his clients’ trusts through Charles Schwab’s Delaware-chartered trust company.
“Kansas is a state where it can be easy to get around some of the things you need to get around,” he explains.
“And let’s face it, as long as you have someone on the ground where your clients live, nobody knows where your charter is. It could be in Alaska.”
Correction: On September 21, the Trust Advisor Blog received an email from Mike Sears on behalf of Great Plains Trust Company informing us that (1) Great Plains Trust Company is not restarting in South Dakota; and (2) will not be letting go of its Kansas trust charter.
Scott Martin, contributing editor, The Trust Advisor Blog. Steven Maimes contributed to the research and the editing.
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Permalink: http://thetrustadvisor.com/news/greatplains
WSJ Reports on Firm That Helps Wealth Advisors Start Trust Companies
MARSHFIELD, Mass., May 28 /PRNewswire/ — The Wall Street Journal recently profiled Advisors Institutional Services in the context of increased interest from wealth managers, investment advisors, broker-dealers and other financial institutions in creating and operating trust companies in South Dakota.
Helping Wealth Firms Start Trust Companies
As the WSJ story points out, South Dakota is becoming the top choice for trust providers. With ten new launches this year and a roster of 50 institutions currently conducting trust business in the wealth-friendly state, it’s easy to see why banks and advisors alike are flocking to South Dakota.
Advisors Institutional Services helps financial professionals, law firms, pension plan administrators and banks determine whether a South Dakota-based trust company would complement their current service offerings and, if so, assists them in applying for a trust company license in the state and lining up operational support.
Most recently, Advisors International helped Pittsburgh-based fund processor Mid Atlantic Capital Group apply for a South Dakota trust charter, said President Les Revzon.
“The aging of the baby boomers has created an enormous need for trust services,” Mr. Revzon said. “Our outstanding launch team has helped both boutique wealth managers and large institutions like Mid Atlantic Capital Group – which has $19 billion on its platform — compete in this increasingly important market.”
In fact, the WSJ story highlights a 2007 study by asset manager Franklin Templeton that concluded that some independent investment advisors could see 80% of the assets they manage move into trust accounts over the next decade as aging clients retire.
“A full 40% of today’s wealthiest Americans have no will or trust in place,” Mr. Revzon said. “The opportunities for those who provide such services are enormous.”
South Dakota offers would-be trust providers numerous operational advantages, including low capital requirements, no state taxes on corporations or individuals, the ability to support all major types of trust structures (including asset protection trusts and multi-generational or “dynastic” trusts), and a favorable view on out-of-state entities setting up trust representative offices elsewhere.
For more on the opportunity that operating a trust business in South Dakota represents for financial professionals around the country, Advisors Institutional Services has published a special report, “Launching a South Dakota Trust Company: Guide to Operating Nationwide.”
Dow Jones Weighs in on South Dakota Trusts
Dow Jones is not blind to either the burgeoning interest in South Dakota as a trust-friendly jurisdiction or state regulators’ desire to make sure trust companies that set up shop are well capitalized and high quality.
Here’s an excerpt from DJ reporter Arden Dale’s recent article:
South Dakota began making a push to attract trust business with a key statute it put on the books in 1995. It now ranks with Delaware, Nevada and Alaska as one of the most popular places to set up a trust company.
South Dakota historically has attracted an especially large number of private trust companies, which are run by family members. About five years ago, though, more public companies began coming in, according to Bret Afdahl, division counsel at the South Dakota Division of Banking.
The state updates its trust law annually, through a governor’s task force on trust administration …
New SEC Custody Rule Boon for Directed Trust Providers
Posted by Jerry Cooper in News on March 19, 2010
Audit and compliance fees are sending RIA trustees to independent trust companies. Providers welcome the new business.
A new SEC rule that took effect last Friday leaves thousands of RIAs facing annual surprise audits and has triggered a surge of new business for trust companies that specialize in lightening the load.
The audits are part of a package of new rules adopted by the SEC last year in response to the Ponzi scheme perpetrated by Bernard L. Madoff. Under the new system, an advisory firm the SEC considers to have custody over client assets has to pay for an annual audit to properly account for all funds and trades.
According to SEC records, the new rule affects 10 percent of the 25,000 RIAs, including those who handle trust accounts for families, charities and retirement plans such as 401(k)s and ESOPS.
With few exceptions, trustees are now deemed to have custody, but advisors who let a corporate trustee handle the trustee work are off the hook.
Christopher Holtby, president of Wealth Advisors Trust Company, tells me that the new rule is a boon for companies like his, which specialize in doing just this.
“It lets us do your heavy lifting.” he said. Dan Ehrmentraut, JD is Wealth Advisors’ Director of Business Development, comes to Wealth Advisors Trust Company with over 20 years experience in the directed trust advisory business.
By partnering with a separate trust administrator, advisors can go on managing their clients’ assets without being considered the custody provider. The arrangement is known as a directed trust.
The decade-old trust feature that splits trustee and advisor into separate operations has become accepted practice for banks and trust companies nationwide. Trust Advisor Blog wrote a story several weeks ago that explained how they work.
I spoke to several accounting firms recently to determine how expensive the compliance audits will be. Estimates range from a low of $16,000 all the way to $100,000, largely depending on the stature of the firm.
The expensive part of the engagement involves an internal control report similar to a SAS‑70 audit, which must be received by the SEC within six months of becoming subject to the requirement. In addition, advisors must respond to new questions on a revised Form ADV.
Given these headaches, Christopher Holtby at Wealth Advisors Trust tells me that directed trust is a “win-win situation” because there aren’t any conflicts of interest and “if you work the math out, our fee is substantially lower than the compliance cost.”
Holtby’s firm is based in South Dakota, where trust rules are most favorable to advisors. His firm can also support dynasty and asset protection trusts, which are most desirable with high-net-worth investors to complement their estate plans.
MULTIFAMILY OFFICE PROVIDERS AFFECTED
Many advisors are still trying to work through compliance problems, says Valerie Baruch, assistant general counsel of the Investment Adviser Association, a Washington, D.C.-based trade group that has been on top of this issue since the beginning.
Over the last few months, advisors have wrestled with serious confusion as to who needed to comply. The SEC eventually posted clarifications on its website that dealt squarely with the central question:“If an employee of an advisory firm serves as a trustee to a firm, does the advisory firm have custody?”
The answer to the question, according to the SEC, is “yes.” However, the clarification, released only a week before the new rule went into effect, did not give advisors much time to shop for accountants or deal with the issue properly. While the Trust Advisor Blog received many questions from advisors over the last several weeks concerning this, the matter seems to have been laid to rest—for the time being.
In addition to advisors who serve as trustees, those who provide multifamily office services also come under scrutiny of the new SEC custody rules.
I spoke to Mari-Anne Pirsarri, a Washington, D.C.-based lawyer, who told me that any time an advisory firm has the ability to direct the custodian to pay a third party, the SEC says the advisor has custody.
David Newkirk, a managing director with Schwab Institutional, told me that when advisory firms serves as trustees or have the ability to tell us to send money to third parties, they effectively have trust custody. He added “We beat this question up pretty well,” he told me.
I also spoke to Steve Austin at Fidelity and that firm’s position is identical to Schwab’s. “It’s cut and dry,” he said. “The advisor has custody when they tell us what to do with the money.”
Mari-Anne Pirsarri told me the SEC has made additional clarifications (and a few exceptions) for multifamily office providers. For example, she says when a client calls up an advisor who is also a multifamily office provider and says, “Pay my taxes for $50,000,” that involves custody. However, if the client calls up the advisor and says, “Move my money from Schwab to Fidelity,” custody isn’t an issue.
She notes that there is so much confusion because, after awhile, the arguments start circling back on themselves. But the SEC means business, she says. “The SEC is not backing off on this one.”
Despite this, the SEC has made a few concessions. When the audits were first proposed last year, the SEC took the position that even deducting fees from client accounts represented custody. The SEC received over 1,000 letters and wound up agreeing that advisors who are simply authorized to collect their fees did not have true custody over their accounts.
Jerry Cooper, senior editor, The Trust Advisor Blog. Scott Martin contributed to the editing.
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