Sanford K. Okura

         On July 1, 2011, the Hawai‘i Permitted Transfers in Trusts Act was amended. This is an important change in the law because you can now transfer assets to a trust and receive money from the trust and yet have the trust assets protected from lawsuits.

Under the new law, if you transfer property to an asset protection trust and you have no intent to “defraud, hinder or delay” the creditor, that property is safe from lawsuits. Even if you intend to defraud, hinder or delay the creditor, if the creditor’s claim arises after you transfer property to the trust, the property is safe from lawsuits two years after it is transferred. The protection from claims that arose before you transferred the property to the trust is unclear because there is a mistake in the way that provision was written. The property is not protected from claims of child support or alimony. Property that is transferred to the trust after marriage is not protected from property division in a divorce or dissolution of a civil union. Also, property that is transferred to the trust during the 30-day period before your marriage is not protected unless you give notice of the transfer to your future spouse.

Here are some other important things about the new law: The trust must be irrevocable. When you set up the trust, you can appoint a “trust advisor” who has the power to remove or appoint trustees and to direct or disapprove distributions from the trust. At least one trustee must be a person or a bank or a trust company in Hawai‘i. This means that your best friend could be either the trustee or the trust advisor. He can give you any amount of money you need at any time, and yet, if you are sued, the money and property still in the trust is safe. An asset protection trust can be attractive to anyone concerned about lawsuits.

Under the common law in the United States and England, it was not possible to set up a trust to protect yourself from lawsuits. If you set up a trust that could give money back to you and you put money or property in that trust, someone who won a lawsuit against you could go after the assets in that trust.

In 1989, the Cook Islands adopted the world’s first asset protection trust law, making it possible to set up a trust with a bank in the Cook Islands serving as trustee. Even though you put your own assets in the trust and the trustee could distribute money from the trust to you, the assets were protected from lawsuits. Other countries followed the Cook Islands. There are now probably more than 30 countries offering these trusts. These are called “offshore asset protection trusts.”

In 1997, Alaska became the first state in the U.S. to enact laws allowing asset protection trusts. Other states followed. In 2010, Hawai‘i became the 13th state to join this group. You do not have to go to a foreign country to set up these trusts, so these are called “domestic asset protection trusts.”

The law adopted by Hawai‘i in 2010 was not very helpful to someone who wanted to protect assets from lawsuits. States create asset protection trust laws so that they can attract trust business to their state. Hawai‘i was hoping that the law would encourage wealthy people on the Mainland (and in Hawai‘i) to move their money into trust accounts with Bank of Hawaii, First Hawaiian Bank and Central Pacific Bank. These are the three Hawai’i banks that act as trustees of trusts with large accounts. The 2010 law did not attract trust business to Hawai‘i. The Hawai‘i Legislature saw the problems and amended the law.

We do not yet know how well asset protection trusts will stand up in court. One thing is certain: we now have a better chance of protecting assets from lawsuits than we ever had before.