In 2015, two new laws relating to trust administration in Washington State have gone into effect that will make the state a more attractive jurisdiction in which to establish and administer trusts.
These new trust laws were the product of the Enterprise Seattle’s Financial Services Cluster Study. The study concluded that this region could become a global financial-services hub and join the ranks of other Pacific Rim hubs, including San Francisco, Hong Kong, and Singapore. The study recommended several steps to take in order to achieve this goal, including optimizing and updating Washington State’s trust regulations.
Trust Institutions Modernization Act of 2014
The first law, the Trust Institutions Modernization Act of 2014 (TIMA) went into effect in January. This law was designed to clarify and enhance the Washington State Department of Financial Institution’s (DFI) role in the regulation of trust administration and fiduciary services, and to clarify what entities may operate as fiduciary services companies or non-bank trust companies in Washington. Any entities engaging in “trust business” must obtain a trust charter, called a Certificate of Authority, from DFI’s Division of Banks, and will not be authorized to engage in “trust business” without it. “Trust business” generally means acting as a fiduciary for hire and performing trust-company activities.
Certain entities are exempt from these trust-chartering requirements. Banks that are interested in entering the trust business are only exempt if they are national banking associations, federal mutual savings banks, federal stock saving banks, or federal savings and loan associations. State chartered banks and state registered trust companies will need to apply to the DFI for a trust charter. Out-of-state trust companies doing business in Washington must also register with the DFI. Trust companies that have already been approved by the DFI will need to supply evidence of that approval.
Entities seeking trust charters are required to submit an application to the DFI. After the application is made, the Division will investigate that the entity’s financial condition and history, the adequacy of the capital structure, future earnings prospects, the general character of management, and the needs of the community. There are no minimum statutory capital requirements. Rather, capital requirements are determined by the DFI after an evaluation of the trust company’s operations, the business model, insurance and bonding levels, and any history of losses.
The Division has the authority to start an enforcement action against any company that engages in the trust business that is not exempt and does not register with the Division. The Division is in the process of communicating with those who may be affected by TIMA, identifying those engaging in an unauthorized trust business and bringing those who should be under regulation into compliance with the law.
Washington Directed Trusts Act of 2015
The second law, the Washington Directed Trusts Act of 2015, took effect in July of this year. The DFI describes this law as an attempt to meet three major goals:
- To modernize the prudent investor rule to conform to the most progressive standard for present-day wealth management
- To further modernize the rights and obligations related to delegation of duties by trustees to third-party professional advisers and asset managers
- To establish an opt-in set of rules for the creation and administration of “directed trusts”
Traditionally, a trustee may seek advice and counsel from others but remain responsible for making the ultimate decision and bearing any liability for that decision. The new law permits directed trusts, which is where the creator of trusts can invest primary legal responsibility in third-party trust advisers and asset managers who increasingly do the vast majority of the real work of trust administration. If certain requirements are met, the trustee is relieved of any liability for the actions taken by its delegates. This new law applies only to a trust that has as its situs Washington, and only if the trust agreement specifies that Washington law applies to the trust. In addition, the delegate of such powers is required to agree to be subject to the jurisdiction of the Washington courts and has a duty to exercise reasonable care to comply with the terms of the delegation.
The new law also allows a trust agreement to give duties to a “statutory trust advisor.” A statutory trust advisor has fiduciary duties with respect to the powers given to it and has the power to take actions normally given to a trustee. Examples of the powers and duties that may be given to the statutory trust advisor include: the power to direct the purchase, sale, or retention of a trust asset, the power to make or withhold distributions to beneficiaries, the power to change a beneficiary’s interest in the trust, and the power to change the trust agreement to achieve tax benefits or to take advantage of changes in the governing law. The statutory trust advisor is not required to monitor the trust to determine whether the power should be exercised. Unless the trust agreement provides otherwise, the statutory trust advisor acts only upon a request made by the trustee or a trust beneficiary.
Residents of Washington State already benefit from no state income tax and the Trust and Estate Dispute Resolution Act, which is a law that allows for the efficient resolution of disputes involving trusts and estates. It is anticipated that the addition of these new laws will make Washington State a unique and more attractive jurisdiction in which to administer trusts.