New Hampshire

By: Todd D. Mayo

New Hampshire has seen several significant judicial and legislative developments over the course of the past two years. The courts have addressed issues involving decantings, the doctrine of special standing for matters involving charitable trusts and rules of construction. Meanwhile, the legislature revamped the laws governing self-settled spendthrift trusts (SSSTs), generally excluded interests in irrevocable spendthrift trusts from equitable division on divorce, allowed unlicensed private trust companies (PTCs) and made New Hampshire the first state to recognize foundations, a special type of entity commonly used by families in civil law jurisdictions. A legislative study committee, however, may attract the most attention at least in the near term.

Study Committee

New Hampshire recently passed a law creating a study committee to re-evaluate the state’s trust laws and consider whether to tax trusts. The committee has the following mandate:

The committee shall investigate whether past New Hampshire trust legislation is having its desired effect. The committee shall determine if it is in the best interest for the state to continue to evolve the trust code to make it more favorable to trust settlors and trust companies. If the committee determines that there have been unintended consequences resulting from prior legislation, the committee shall make recommendations to mitigate any possible risk or exposure to the state.  Additionally, the committee shall consider if there is a state revenue opportunity to be generated from the assets which reside within these New Hampshire chartered trust companies to offset the cost of administration by the state of New Hampshire.1

The committee will begin meeting within 45 days after the bill’s enactment and will issue its report on or before Nov. 1, 2019.2 Although it’s uncertain what the outcome of the committee’s work will be, that uncertainty alone has the potential for generating significant noise.

Special Standing Doctrine

In In re Trust of Mary Baker Eddy,3 an Australian church sought to challenge the actions of the trustees of two charitable trusts created by Mary Baker Eddy, who founded the Church of Christian Science. A threshold question was whether the Australian church had standing. The New Hampshire Supreme Court noted that, as a rule, a potential beneficiary of a charitable trust lacks standing, and the attorney general has the power to enforce a charitable trust. Based on judicial precedent and statutory law, however, the court recognized the doctrine of special interest standing in matters involving charitable trusts.

For purposes of determining whether a person has special interest standing, the court adopted the 5-factor test articulated by Mary Grace Blasko, Curt S. Crossley and David Lloyd in “Standing to Sue in the Charitable Sector.”4 Those factors are:

1. the extraordinary nature of the acts complained of and the remedies sought;

2. the presence of bad faith;

3. the attorney general’s availability and effectiveness;

4. the nature of the benefited class and its relationship to the charity; and

5. the social desirability of conferring standing.

Applying the Blasko et al. test to the case at hand, the court concluded that the Australian church lacked standing.

Decanting

In Hodges v. Johnson,5 the New Hampshire Supreme Court voided a series of decantings. In 2004, a successful real estate developer created two irrevocable trusts, into which he transferred interests in the family business. The trusts’ key purpose was to maintain the family business. A family dispute subsequently arose. Two family members were fired from their jobs in the family business (allegedly armed guards were hired to keep one of them away from the business), and the settlor got divorced.

Through a series of decantings, the trustees eliminated four beneficiaries: the two family members who were fired from the family business, the settlor’s former spouse and the settlor’s estranged daughter. Under the terms of the trusts, the trustee had the power to decant into a trust “for the benefit of any one or more, but not necessarily all, of the group consisting of [the settlor’s spouse] and [the settlor’s] descendants, or any trust established by [the settlor] under another trust instrument for the benefit of any one or more, but not necessarily all, of the members of such group.” The settlor, who was living at the time of the decantings, apparently encouraged the trustees to eliminate the four beneficiaries.

Two of the excluded beneficiaries sued the trustees, seeking to set aside the decantings. In a divided opinion, the court voided the decantings, finding that the trustees violated their statutory duty of impartiality. On this point, the majority seems to have missed the mark. Under the New Hampshire Trust Code, a settlor can expand, restrict or eliminate the statutory duty of impartiality.6 In this case, the settlor seemingly did so, expressly allowing a decanting that excluded one or more beneficiaries.

The court, however, was clearly troubled by the manner in which the trustees exercised the decanting power. The trustees didn’t have any emails, memoranda or other records regarding their deliberative process. Notably, one trustee testified that he hadn’t considered the beneficiaries’ interests when deciding whether to decant the trusts. Although the trial court didn’t make a finding concerning whether the trustees acted in bad faith, it questioned the credibility of some of the trustees’ testimony, and it described the trustees as engaging in “neglectful, if not contrived behavior.” Query whether the court would have voided the decantings if there had been a more thoughtful and better documented deliberative process.

Trusts and Pretermitted Heirs

In In re Teresa E. Craig Living Trust,7 the New Hampshire Supreme Court concluded that the state’s pretermitted heir statute doesn’t apply to a trust. The court had previously addressed the issue in 2001, stating that “absent clear indication from the legislature that this is its intention, we decline to apply the [pretermitted heir] statute to the trust.”8 In 2004, New Hampshire enacted the Uniform Trust Code (UTC), which generally incorporates the rules of constructions applicable to wills. Specifically, the relevant statute provides that “the rules of construction that apply in this state to the interpretation of and disposition of property by will also apply as appropriate to the interpretation of the terms of a trust and the disposition of the trust property.”9 In Craig, the plaintiff argued that the pretermitted heir statute is a rule of construction, and the enactment of the UTC thus extended that statute to trusts.

The court disagreed. The court held that the pretermitted heir statute is a rule of law and isn’t a rule of construction. Accordingly, the enactment of the UTC didn’t overturn precedent, and the pretermitted heir statute doesn’t apply to trusts. The court observed that “unlike rules of law, rules of construction need not always apply; rules of construction may be dispensed with depending upon the circumstances.”10 

While the case was pending, the legislature also addressed the issue, amending the Trust Code. As amended, the relevant statute now expressly provides that the pretermitted heir statute isn’t a rule of construction and doesn’t apply to any trust.11

SSSTs

In 2008, New Hampshire enacted the Qualified Dispositions in Trust Act (QDTA), which generally gave effect to SSSTs.12 Under the QDTA, a settlor’s creditor generally couldn’t reach the settlor’s interest in a trust if four conditions were met. First, the trust had to have a qualified trustee. Second, New Hampshire law had to govern the trust. Third, the trust had to be irrevocable. Fourth, the trust agreement had to contain a spendthrift provision. To varying degrees, each of those conditions had its own set of requirements. The QDTA also contained certain exceptions.

In 2017, the legislature simplified the rules. It repealed the QDTA, incorporating those rules directly into a single (albeit long) statute in the Trust Code.13 Under the new statute, a creditor generally can’t reach a settlor’s interest in an irrevocable trust to the extent that the settlor’s interest is subject to a spendthrift provision. Gone are the specific requirements for a qualified trust and New Hampshire governing law, although settlors and trustees seeking to avail themselves of this new statute rightfully will endeavor to ensure that New Hampshire law will govern their trusts and venue will be in New Hampshire.

The new statute largely preserves the exceptions that were found in the QDTA. For example, a creditor can generally seek to void a transfer into an irrevocable trust as a fraudulent transfer within four years of the transfer or, if the person was a creditor before the transfer, one year after the creditor discovers or should have discovered the transfer.14 Similarly, a settlor’s spouse and children are exception creditors and have limited rights to reach a settlor’s interest in an irrevocable SSST.15 Notably, a spouse can reach a settlor’s interest only to the extent of basic alimony, which is the amount that covers basic food, shelter and medical needs. Special rules for charitable remainder trusts, marital deduction trusts and certain other trusts continue to apply.16

Marital Property

For couples divorcing in New Hampshire, a court may order an equitable division of the marital property.17 Marital property includes “all tangible and intangible property and assets, real or personal, belonging to either or both [spouses], whether title to the property is held in the name of either or both [spouses].”18 In In the Matter of Goodlander,19 the New Hampshire Supreme Court concluded that marital property doesn’t include a beneficiary’s interest in a discretionary trust. In that case, the court relied, in part, on the statute that provides that a beneficiary’s interest in a discretionary trust is a “mere expectancy.”20 The court also reaffirmed that, to the extent that a beneficiary has a vested interest in a trust, the vested interest is marital property.

In 2017, the legislature amended the Trust Code, giving effect to a spendthrift provision for purposes of determining whether an interest in a trust is marital property. In the case of a beneficiary who isn’t a settlor, the beneficiary’s interest in a trust isn’t marital property to the extent that the beneficiary’s interest is subject to a spendthrift provision.21 Because most trust agreements contain spendthrift provisions that apply to all beneficiaries, this provision has the effect of excluding interests in non-self-settled trusts from marital property. In the case of a settlor, the settlor’s interest in a trust isn’t marital property to the extent that: (1) the trust is irrevocable, (2) the settlor’s interest is subject to a spendthrift provision, and (3) the settlor transferred the property to the trust more than 30 days before the marriage or the settlor’s spouse expressly consented to the transfer.22

PTCs

Since 2006, New Hampshire has recognized licensed PTCs. It now also recognizes unlicensed PTCs. Specifically, a corporation, limited liability company or foundation has “trust powers to the extent that it … does not transact business with the general public.”23 Trust powers include acting as a trustee or other fiduciary, as a trust advisor or as a trust protector. An unlicensed PTC isn’t subject to any notice or other filing obligations with the banking department or other state regulatory agency.

An unlicensed PTC can’t offer or provide services to the general public. In that context, the statutes contain two safe harbors. Under the first safe harbor, an entity doesn’t transact business with the general public to the extent that it qualifies as a family office for purposes of federal securities laws.24 Under the second safe harbor, an entity doesn’t transact business with the general public to the extent that, if the entity was a licensed PTC, it offers and provides its services only to persons who would qualify as family clients.

Foundations

A foundation is a specialized type of entity commonly used by families in many civil law jurisdictions for multigenerational wealth planning. In many respects, a foundation is like a trust, except that it has legal personality.25 In 2017, New Hampshire became the first state to allow the formation and domestication of foundations when it enacted the New Hampshire Foundation Act.26 Given the laws in their home countries, the Foundation Act mainly appeals to families from continental Europe and South America.

Under the Foundation Act, a foundation doesn’t have any owners, and the directors typically manage the foundation’s property for the benefit of one or more beneficiaries. Alternatively, a foundation can have no beneficiaries, in which case it operates more like a purpose trust. The founder’s tax and non-tax objectives will guide the foundation’s design and what rights, powers and interests the founder retains and the beneficiaries receive.

In 2018, the legislature amended the Foundation Act, making several technical corrections. Three are noteworthy. First, the amendment added a definition of “principal office.” The definition removes any doubt that a foundation’s principal office may be located outside of New Hampshire. Second, the amendment clarified certain standards that apply to protectors. For example, as originally enacted, the statute governing a protector’s duty of loyalty spoke in terms of the protector managing the foundation and its property. The foundation’s governing documents, however, generally define a protector’s powers, and a protector ordinarily doesn’t have the power to manage the foundation. The amendments tie the standards to the protector’s exercise of his or its powers and duties, rather than the foundation’s management.

Third, the amendment clarified that, when a founder contributes property to a foundation, the founder doesn’t retain any rights, powers or interests solely by reason of making the contribution, except to the extent that the default statutory rule applies. Under that rule, a founder reserves certain powers, such as the power to direct distributions and the power to dissolve the foundation. Before the amendment, the statute governing contributions didn’t expressly refer to the default statutory rule.

Precatory Language

The recently passed law that created the study committee also gives limited legal effect to precatory language in a trust instrument or a letter of wishes. Previously, New Hampshire’s courts didn’t consider a letter of wishes or any other extrinsic evidence of a settlor’s intent, unless the trust instrument was ambiguous. In In re Estate of Donovan, the New Hampshire Supreme Court stated that “To determine the settlor’s intent, we first look to the language of the trust. … We examine the instrument as a whole, and look to extrinsic evidence of the settlor’s intent only if the language used in the trust instrument is ambiguous.”27

The new law will change that, allowing a court to consider a letter of wishes, even when the trust instrument is unambiguous. A trustee won’t have any duty to act in accordance with the precatory language or letter of wishes. In addition, a trustee, trust advisor or trust protector won’t have a duty to provide a copy of a letter of wishes to a beneficiary, unless the terms of the trust impose that duty. A settlor thus will be able to limit the degree to which a letter of wishes would be disclosed in the ordinary course of administering a trust. Of course, in litigation involving the trust, a letter of wishes generally would be discoverable.  

Endnotes 

1. 2019 SB 98, Section 7.

2. Ibid., Section 9.

3. In re Trust of Mary Baker Eddy, 2018-0309 (N.H. 2019).

4. Mary Grace Blasko, Curt S. Crossley and David Lloyd, “Standing to Sue in the Charitable Sector,” 28 U.S.F. L. Rev. 37 (1993).

5. Hodges v. Johnson, 170 N.H. 470 (2017).

6. RSA 564-B:1-105(a).

7. In re Teresa E. Craig Living Trust, 171 N.H. 281 (2018).

8. Robbins v. Johnson, 147 N.H. 44, 47 (2001).

9. RSA 564-B:1-112 (before its amendment by the Laws of 2018, ch. 120, Section 2).

10. Supra note 7, at p. 284 (2018).

11. RSA 564-B:1-112(a), as amended by the Laws of 2018, ch. 120, Section 2.

12. RSA 564-D. The act became effective on Jan. 2, 2009.

13. RSA 564-B:5-505A.

14. RSA 564-B:5-505A(f).

15. RSA 564-B:5-505A(q).

16. RSA 564-B:5-505A(e).

17. RSA 458:16-a, II.

18. RSA 458:16-a, I.

19. In the Matter of Goodlander, 161 N.H. 490 (2011).

20. RSA 564-B:8-814(b).

21. RSA 564-B:5-502(e)(1).

22. RSA 564-B:5-502(n)(1).

23. RSA 293-A:3.05 (corporations); RSA 304-C:22-a (limited liability companies); and RSA 564-F:8-802 (foundations).

24. For the definition of “family office” for purposes of federal securities laws, see 15 U.S.C. Section 80b-2 (a)(11)(G).

25. For an in-depth discussion of the similarities and differences between foundations and trusts, see Paolo Panico, “Private Foundations and Trusts: Just the Same but Different?” Trusts & Trustees (February 2016), at pp. 132-139.

26. For an in-depth discussion of the Foundation Act, see Todd D. Mayo, “The New Hampshire Foundation Act,” Trusts & Trustees (July 2018), at pp. 606–611.

27. In re Estate of Donovan, 162 N.H. 1, 6 (2011).