As World Demands Transparency, US Trusts Sector Remains Haven Of Privacy
Financial privacy is under pressure around the world but one country is holding out against the trend to some extent: the US, as shown by its still-busy trusts sector.
(An earlier version of this item appeared on Family Wealth Report, sister news service to this one.)
There are 50 states to the US and yet out of this group, only a few of them are known for their trust laws, with Delaware king of the hill – so much so that Swiss bankers talk about it through gritted teeth. But as any observer of markets knows, staying in front is a constant battle.
Jurisdictions such as Delaware and “challenger trust states” of New Hampshire, Nevada, South Dakota and Alaska are important parts of the wealth management ecosphere. While reliable data is hard to pin down, there are an estimated $500 billion of assets in New Hampshire-chartered trust companies alone, according to a local wealth management house, Perspecta Trust. Which surely means the total runs to trillions across the US, although exact industry figures are difficult to quantify, as they are gathered by a mix of institutions such as the IRS and Federal Deposit Insurance Corp rather than held in a single data source. In Delaware, the oldest of the “trust jurisdictions” - its modern trust law dates back to 1903 - the asset size is likely to be far higher than New Hampshire’s, with non-Delaware sourced trust business generating more than $1.1 billion in annual revenues for the state’s financial organizations (source: Max Schanzenbach, Professor of Law, Northwestern University School of Law, May 2011).
Back in 1903, when Wilmington Trust was founded by the DuPont family of prominent industrialists, Delaware’s trusts sector - with structures such as Directed Trusts, and later entities such as Perpetual Trusts and Third-Party Trusts - took off. An infrastructure, including that of a strong local courts system, has evolved. What the present-day trusts sector of the US is perhaps an example of is the strength of clustering of expertise, married to innovation in certain types of states.
Trusts, as a feature of the Common Law system inherited from the UK, are a well-known feature of the wealth management toolkit, although today face pressures such as from governments trying to get their hands on more data to chase down alleged tax evaders. But the US appears to have gotten itself into an interesting, even enviable, position. While jurisdictions such as Switzerland have seen their bank secrecy laws crumble, the US - which is not a signatory to the global Common Reporting Standard regime on information sharing - ironically now stands as a country where financial privacy is relatively robust. That is not to say that have not been moves to crack down on perceived abuses, however.
“Delaware trusts are a big part of our business. Many of such trusts are created by people living abroad. There is going to be a higher profile of Delaware trusts outside the US,” Richard (“Dick”) Nenno, senior trust counsel and managing director in Wilmington Trust’s Wealth Advisory, told this publication recently. Nenno is in fact releasing the updated edition of his book, Delaware Trusts, this year, and is sometimes dubbed the “dean of Delaware trust and estate law”.
“There’s more confidentiality in the US via Delaware than there is abroad,” Nenno said. The US is seen as a stable jurisdiction in legal and economic terms, with plenty of opportunities for investors. With taxes rising in some parts of the country, such as in New York City (income taxes), use of Delaware trusts can mitigate some of the effect, Nenno said.
With an estimated $30 trillion due to transfer from the aging Baby Boomer generation to offspring over coming years, the need for trusts and other robust structures is only going to be more important, Nenno said.
People from around the world are taking note of US trusts and not all of the commentary about trust laws is particularly friendly. In these pages more than a year ago, Philippe Braillard, emeritus professor at the University of Geneva, Switzerland, wrote of how Swiss financial professionals, who have seen bank secrecy erode and who have lost business, regard places such as Delaware as enjoying privacy protections arguably more robust than their own. Academic studies on international financial centers increasingly cite states such as Delaware as privacy-friendly places.
News in and around the trusts sector remains busy. Nenno’s own firm, Wilmington Trust, a few weeks ago announced two senior appointments, with the promotion of Matthew Panarese to president of the Mid-Atlantic Region and elevation of Sharon L Klein to president of the firm’s Tri-State Region, which includes Greater New York, Connecticut, Long Island, and Northern New Jersey markets.
The Granite State
Up in New Hampshire, Perspecta Trust argues that the state is making big strides as a jurisdiction, bringing in a law as recently as 2004, with South Dakota doing so in 1983, Nevada in 1999 and Alaska in 1997. Since a change to New Hampshire law in 2006 (Trust Modernization Act), state-chartered trust company assets have been on a tear, rising from around $100 billion to $500 billion, Scott Baker, president of Perspecta Trust, told FWR.
“Competition with other states has been extremely helpful to consumers as statutes are becoming more refined and user-friendly over time,” Baker said. New Hampshire isn’t just winning business from other parts of the country but from abroad too, with clients from Europe, Asia and South America, he said.
One, perhaps obvious question is that if trust business is a great revenue-generator for a state – a point not likely to be lost on politicians – why aren’t more states in the US rolling out trust law innovations? Why haven’t California or Texas had a crack at the market, for example?
Part of the problem is sheer inertia, Baker said. Also, smaller states such as New Hampshire (smaller in population size anyway) can be politically more nimble: it is easier to get trust laws amended, he said. “It is not that Massachusetts or New York want to lose trust business, they of course don’t….they can’t really make changes as easily as New Hampshire or some other attractive tax jurisdictions and just can’t get it done,” he said. There are a number of stakeholders in more populated states where changes/innovations to trust law might be more controversial or demanding of the legislative schedule, he said.
To some degree, as Perspecta’s Baker and Wilmington Trust’s Nenno say, the states have the ability to be regional hubs for trust business.
Another issue affecting the ability of trust jurisdictions is the availability of skilled employees: the specialized kind of skillsets required are not always easy to find and the more remote jurisdictions have more difficulty attracting skilled staff, Baker said.
In such an environment, innovation is a constant feature as jurisdictions work to keep their competitive edge. At the University of Delaware, for example, the Alfred Lerner College of Business and Economics has brought out a Minor in Trust Management program specifically aimed at those seeking to build skills in the sector.
Whether the handful of states remain in charge of the market in a century’s time is anyone’s guess. The benefits of specialisation - identified by Adam Smith in his Wealth of Nations around 250 years ago - continue to be powerful forces for the North American wealth management industry.