Hawaii set to take on Asset Protection Trust Competition
Hawaii’s latest trust structure known as the DAPT has been introduced in line with the Islands newly reformed trust law in a bid to attract wealthy investors back to the Island after recent downfalls in tourist and investor numbers. The DAPT structure has succeeded the previous FAPT structure to promote a more favorable environment for asset protection amongst the rich.
Reports indicated that Hawaii’s reputation for being an island known for its wealth, stability and booming tourism industry begun to diminish as a result of the Islands vulnerability against the world’s financial turbulence.
In a bid to help generate revenue into Hawaii, the Island last year introduced the foreign asset protection trust (FAPT), however the structure was deeply flawed in a number of ways. With little interest shown in the FAPT, Hawaii regulatory authorities were forced to re-examine its structure and execute an amended financial structure which would ensure high net worth individuals would be attracted back to Hawaii.
The FAPT structure was originally set to rival asset protection trusts in Nevada, Alaska, Delaware and South Dakota by offering a greater level of protection from creditor claims. However the 1% excise tax imposes on all assets held in the FAPT was particularly off putting to those with large estates. US states including Delaware and Nevada offered a similar FAPT structure minus the taxation and this proved far too competitive for Hawaii to compete against. Not only did the FAPT impose charges on assets held but it also restricted the types of asset this could be held. No real property could be held in a Hawaii FAPT. Although the trust was a proposed effective asset protection trust, the law did not protect the assets from divorce proceedings or secured creditor claims.
It was only last year that the FAPT was first introduced in Hawaii but its future was set to be short lived from the off, due to the unreasonable and uncompetitive costs involved. On redesigning the FAPT, Hawaii Launched (July 2011) DAPT’s to the market and it has caused a definite stir in offshore trust circles.
DAPT, otherwise known as the Domestic Asset Protection Trust, has proven to be a welcomed financial instrument for high net worth individuals seeking to safeguard their valuable estates against creditor claims. In line with the creation of the new asset protection trust structure, Hawaiian trust law has subsequently been amended to accommodate and regulate the new trust structure.
| “USA based trusts are more successful regarding protection of the assets than many other offshore locations…” |
The main feature of the new trust structure is that it is comparatively less expensive than the FAPT and as such, a far more popular choice among society’s wealthy cliques. The structure reports to be highly flexible and focuses on the principle of offering secure asset protection on estates for a number of decades.
The practical amendments made in order to create the newly sought after DAPT structure includes:
- 1% tax on trust creation removed
- 1% tax on trust assets removed
- Previous rule permitting a mere 25% of ones net worth to be deposited into the trust has been abolished
- The trust can now hold more than the previously authorized cash or marketable securities.
With the increasing popularity of asset protection trusts worldwide it is surprising only 12 other states provide asset protection orientated trusts. Industry experts speculate that because the first asset protection law was enacted in 1997 by Alaska, the concept of asset protection through a trust entity is still relatively knew to many US states. However this is good news for Hawaii as it means the Island currently has a strong and significant unique selling point to attract more investors and wealth back into the Island.
Hawaii was reportedly ranked 12th in a list demonstrating the most effective asset protection laws across the US in a recent government report, and it is strongly believed that Hawaii has the capability and resources to make a dramatic impact on the asset protection industry.
Hawaii’s economy is thought to benefit greatly as a result of the interest shown in the Islands DAPT’s. The Hawaiian economy, in particular the tourism industry, over recent months has taken a dip. Over 1/3 of Hawaii’s income is generated as a direct result from tourism and so it is vital the Island regains control.
It is reported fewer individuals are visiting Hawaii(2011) compared to 2010, and global economic crises appear to be responsible for this fall. Some reports blame the rise in fuel prices and increasing unemployment levels, while other reports claim disasters including the global economic recession, slow US growth, Japan Tsunami and Middle East revolutions to have played a pivotal role in affecting the numbers of tourists visiting expensive locations, such as Hawaii. It is expected that the DAPT structure will influence the extremely wealthy to invest in the Island, now more than ever before.
Although Hawaii has reportedly experienced a drop in visitor numbers this year so far, statistics reveal Hawaii’s real GDP growth to be steadily, if slowly, increasing in spite of the fall in tourism.
| Hawaii GDP | 2008 | 2009 | 2010 | 2011 |
| $ billions | 50 | 51 | 52 | 54 |
Source: The State of Hawaii’s Economy (2010)
One of the main reasons why the DAPT is so popular in today’s financially turbulent climate is due to its unprecedented high levels of asset protection against creditor claims. A DAPT trust allows for the settlor (person who set up the trust) to also be the beneficiary of the trust (person who will receive the assets held in the trust). This is music to the ears of the worlds socially elite as it gives wealthy individuals a perfect solution for protecting their assets without having to loose ownership or them.
Hawaiian trust law has been amended in accordance with the new DAPT structures, and July saw the introduction of the Hawaii Permitted Transfers in Trust Act. This act was specifically designed to modernize Hawaii’s trust legislation and to support the creation of DAPT’s which unsurprisingly was readily welcomed by authoritative bodies on the Island.
Speaking to an expert and experienced professional in the field of offshore trust formations, he voiced his opinion on US based asset protection trusts.
”USA based trusts are more successful regarding protection of the assets than many other offshore locations as there are regulations and controls at place as well good juridical practice that protects the interest of the beneficiaries”
Giving his professional opinion on the best practices for asset protection he cited,
“The10-year claw back by itself should be enough to keep people for using DAPTs for asset protection, therefore I would personally suggest the use of offshore structures as they can provide more freedom regarding decision making, flexibility and management of the assets as well as better privacy protection.”
Speaking on Hawaii’s attempt at generating investment and revenue through favorable trust laws, he said
“In order to have greater volume of investments there should be also a well developed free market.”
The DAPT legislation is reporting notably positive results and has been adopted in a number of states including Nevada, Delaware and Tennessee. Experts in the asset protection industry have cited their opinion on DAPT formations stating that unless the country offering DAPT’s also adopts DAPT legislation or an appropriate form of asset protection law, the benefits of a DAPT may fall redundant there.
Hawaii DAPT structures are considered by many as highly effective for those who are resident in Hawaii. However, utilizing a DAPT structure if you live out with a DAPT legislative state will prove exceedingly difficult and restrictive to set up.
Our industry expert spoke of additional limitations of the DAPT structure, he commented as follows,
“The 2005 changes to the Bankruptcy Code have created a new 10-year limitations period for transfers to self-settled trusts which are meant to hinder, delay or defraud creditors. This effectively means that all transfers to domestic asset protection trusts will be suspect for the 10 years prior to the date that a bankruptcy petition is filed. Because of this, domestic asset protection trusts should not be considered for asset protection planning and, indeed, in most circumstances it might be malpractice per se for an advisor to form a DAPT for his client if asset protection is a concern.”
More commonly sought after and easily accessible jurisdictions for setting up asset protection trusts are notably, Belize and the Seychelles. These favorable tax havens provide up to date trust legislation’s ensuring maximum levels of asset protection is achieved. Belize reportedly has one of the most advantageous and modernized trust laws in the world, which aims to accommodate asset protection trusts to its highest degree. Comparatively the Seychelles International Trust Act 1994 aims to provide flexibility in trust structures while also ensuring individuals gain effective levels of asset protection against creditor claims.
Many people are put off forming an offshore trust due to ever changing trust laws and the level of secrecy associated with trust formations. There is also a grave misconception that offshore trusts are only for the ridiculously rich, but in fact many trust set up do not require any minimum capital input. Despite Hawaii’s strenuous efforts to reform their trust law to encourage the rich to the island it seems clear that the global state of the economy has hampered the number of offshore trusts set up. Hawaii is not one of the most readily used jurisdictions for forming a trust and as such it puts potential investors off due to the level of unknown associated with the Island.
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Category: Asset Protection
