Two years ago, Hawaii joined Delaware, Nevada, and eleven other States in validating “self-settled spendthrift trusts.” What this means is that you can now create a trust for yourself that will protect your assets from your own creditors. This is a huge departure from prior law, which expressly prohibited such trusts. For convenience, we will call them “APTs,” which stands for “Asset Preservation Trusts.”
Not only do APTs provide asset preservation, they can also be made to last “forever,” or at least until all of the assets are used up. Hawaii law has long recognized something called the “rule against perpetuities,” which essentially says that a private trust (that is, any trust other than a charitable trust) can last for about 100 years, and then the trust must to terminate, and the assets must be distributed. This is a throwback to the law of England (where most American law comes from) and a time when the king did not want land being tied up in trusts because it impaired his ability to tax it. Now that our government has developed a solution to this problem, Hawaii has joined the ranks of States which allow the creation of so-called Dynasty Trusts.
Hawaii’s first attempt at allowing APTs, which was back in 2010, was doomed to failure. For one thing, the law imposed a 1% tax on all assets transferred to APTs. The law also limited the kinds of assets that could be put into APTs, and it allowed a trustmaker (someone creating an APT) to place assets comprising no more than 25% of his or her net worth into an APT. Since the laws of other States did not include these restrictions, there was very little incentive for someone to create a Hawaii APT.
In 2011, our Legislature removed the restrictions on APTs, so that a person can place any kind of property into his or her APT, and there is no 1% tax imposed on each asset transferred into the trust. The new law became effective on July 1, 2011, and Hawaii APTs are now viable tools in many people’s estate plans.
A Hawaii APT is not for everybody. You should create one only if you understand what it is and how it works, and before you do anything else, you should seek the assistance of competent legal counsel and other advisors who can help you evaluate whether this is a workable strategy for you.
The new Hawaii law says that you cannot be the trustee of your own APT, but you can pick any Hawaii resident or Hawaii financial institution as your trustee. The trustee can have the discretion to make distributions to you or for your benefit, but you cannot have the unfettered right to demand whatever you want whenever you want it. You can also retain the right to give the trustee investment advice, and you can also have the right to veto distributions from the trust.
Perhaps the most important thing to understand about Hawaii APTs is that they do not shelter assets from claims of existing creditors. In other words, you cannot incur a debt (for example, by way of a car accident or a bad business deal) and then create a Hawaii APT to shield your assets from liability on that debt. On the other hand, the ideal time to create a Hawaii APT is BEFORE you need one. Before you start a new business or launch a professional practice in a field such as medicine, law, or architecture, where legal claims against you are an ongoing risk.
You can find additional resources and links to information here.