Experts say Hawaii’s new asset protection law is “dead on arrival.” With a 1% user fee and onerous investment restrictions, few billionaires will find Hawaii a proper bastion for their family fortunes.
The economic pinch has even affected paradise. Hawaii is suffering from a decline in tourists and as a result is scrambling for new ways to bring more money to the state. Ambitious plans are underway that include the revival of the 1970s hit CBS TV show “Hawaii Five-O.”
As part of the revival initiatives, Hawaii’s trust firms and the estate planners have embarked on a bold campaign to attract the world’s super rich by making it the premier trust haven of the Pacific.
On June 28, 2010, Hawaii Governor Linda Lingle signed into law a new trust law designed to compete with Nevada, Delaware, Alaska, South Dakota and other domestic asset protection trust states by allowing local trusts to shield assets from creditors or, theoretically, the courts.
With the new law, Act 182, as ammunition, local legislators hope their state will become a powerful “sun, swim and protect” combo that entices mega-rich families who may be vacationing in paradise to leave more of their cash behind.
“We believe that trust business is very compatible with our visitor industry,” explains state senator Rosalyn "Roz" Baker, who sponsored the bill back in January.
“Yes, the rationale was to woo offshore assets to a repository in Hawaii,” she adds.
DEAD ON ARRIVAL
Even though Honolulu is optimistic that asset protection trusts will bring in revenue, estate planners do not see a credible threat to established trust centers on the mainland.
Although Act 182 puts Hawaii ahead of the 37 states that do not support asset protection trusts at all, unique twists ensure that the Aloha State will remain a poor second choice compared to other asset protection states
Under the new law, wealthy families must pay an unprecedented 1% excise tax on all money and assets they move into an asset protection trust.
Given the potential size of these accounts, this can add up to real cash for the state government—but why would anyone pay it if a few phone calls to Nevada, Delaware or South Dakota will provide the same benefits without the added charge?
“The law won’t work as intended,” says Dan Rubin, a prominent estate planning attorney with the New York firm of Moses and Singer.
“Without very bad legal advice, no smart billionaire is going to set up a trust in Hawaii even if they have a $10 million house on the beach if it requires participants to pay a 1% user fee to gain trust benefits.”
If the extra expense weren’t enough, Hawaii also restricts asset protection trusts to 25% of the grantor’s net worth—and prohibits transfers of real property into trust.
And unlike states like South Dakota or Nevada, trusts administered in Hawaii pay state income tax whether their trustees are locals or tourists.
Someone in Hawaii must have done some quick math to work out a formula for political success. According the state's 2010 budget, Hawaii only had a $22.3 million shortfall. Therefore, if say only a few billionaires set up a handful of trusts, with a 1% excise tax, $3 billion would do the trick and generate $30 million in tax collections.
Finally, while Honolulu may hope Tiger Woods or other celebrities with contentious marriages will start flying in for sun, golf and protection, Act 182 does not shield assets from divorce—or even secured creditors.
Steve Oshins, a Nevada asset protection trust lawyer who rates asset protection trust states based on their benefits, agrees with Rubin that the new law is “dead on arrival.”
“I don’t even know if it’s got a lot of sizzle, let alone the steak,” he says. “Nobody’s going to use it.”
In fact, he gives Hawaii a failing grade where asset protection is concerned, and would be surprised if the new law will help the Aloha State carve out even 1% of the business currently dominated by Nevada, Alaska, South Dakota and Delaware.
“Laws need to be competitive with those of the Tier 1 states,” he explains. “Given the ability to forum-shop, nearly everybody from out of state uses one of these four states.”
Bank of Hawaii, far and away the biggest of the trio, does substantial trust business with locals, but so far this year its trust and asset management income has been flat or even slightly lower on a year-over-year basis.
Resident estate planners doubt that the new law will even give Hawaiian professionals and other wealthy residents an incentive to keep their assets at home.
“Now that I've chewed through this a bit more, I’m moderately certain we won't use many of these,” says Hawaii-born financial planner Lesley Brey.
“I suspect that it will not be very appealing to most professionals,” agrees Honolulu estate planning attorney Ethan Okura. “I see no reason to keep marketable securities with a trustee in-state.”
In fact, Okura believes that only relatively “unsophisticated” locals will take advantage of the new ability to create an in-state asset protection trust.
“Many local Hawaii residents prefer to work with other local professionals, so perhaps there will be quite a few who utilize the new law—especially if the local banks promote it with their clients,” he says.
Dan Rubin predicts the Hawaiian legislature to wake up to Act 182’s problems and start fixing them fairly soon.
But for Hawaii to become a real national competitor, just putting asset protection on the menu is not going to be enough, Steve Oshins says.
“Because they have a state income tax, they wouldn’t have a chance,” he says. “If you had the best state law, then you can say that you’re going to charge a little more because you’re the best. But this is a mediocre law anyway.”
Perhaps the revival of the TV show Hawaii-50 may have the same good luck it did 40 years ago and attract tons of tourists to the islands. But for now, as Dan Rubin says "if this were 1997 and Hawaii introduced the first domestic asset protection statute, this law might be taken seriously." He adds, "but this is 13 years later, and wealthy families expect a lot better."
Jerry Cooper, senior editor, The Trust Advisor Blog. Steven Maimes and Scott Martin contributed to the research and reporting.