Last month, Hawaii added itself to the growing list of states that permit trusts that are both dynasty trusts and asset protection trusts by enacting the Permitted Transfers in Trust Act. The Governor’s office described the law as “strengthen[ing] Hawaii’s trust laws and allow[ing] Hawaii to compete with other states in this growing industry.”
So, how does Hawaii stack up against other asset protecting states?
While Alaska, Delaware, Nevada, and South Dakota may still be considered the gold standard for asset protection, Hawaii’s new rules now make it a more viable option for shielding assets. The asset protection trusts were actually permitted in Hawaii last year, but were cost prohibitive. Apparently, Hawaii thought it could woo billionaires into establishing these trusts in Hawaii and then hit them with a 1% tax on the money used to fund the trust thereby solving the state’s budget deficit. That didn’t work out. The new law removes the 1% tax and lifts the prior cap that only 25% of one’s net worth could go into the trust.
It will be interesting to see how these trusts and the laws that permit them hold up under court (or creditor) scrutiny. It seems that one of the biggest potential vulnerabilities of these trusts is that they might not make a lot of sense for people who cannot up and move to the state applying the protection. It’s the application of choice of law that will rule the day. If I established one of these trusts in Hawaii, but I live in Georgia and a judgment is entered against me in Georgia, what law is going to apply? The state law the courts apply is going to determine whether my creditors can get at my assets held in trust.
Of course, the simple answer is to probably just move to Hawaii and eliminate that concern, and who wouldn’t like to do that?