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 June 01, 2010
States Vying to Win More Banks' Trust

 -- US Banker. June 2010

You might say United Western Bancorp in Denver is going out of its way to set up a trust company.

Though all of its branches and most of its customers are in Colorado, the $2.5 billion-asset company has applied for a trust charter two states and hundreds of miles away - in South Dakota.

Its reason: "South Dakota law is very favorable to trust companies," says Paul Maxwell, chairman and chief executive of United Western's trust company.

That's an understatement. With low capital requirements, no state income tax and a slew of new business-friendly laws, the Mount Rushmore State beckons trust companies like its famous monument beckons RVs.

Last year, South Dakota overtook Delaware as the state with the most trust companies - 41 as of April 1, compared with Delaware's 37 - according to, a trust industry blog affiliated with Advisors Institutional Services, both of Marshfield, Mass. (In terms of trust assets, Delaware, home to the trust businesses of companies like Citicorp, BNY Mellon, Deutsche Bank and HSBC, still ranks No. 1.)

And South Dakota is not alone in its efforts to become a trust haven.

For the past several years, states have been rolling out the red carpet for what they expect to be dramatic growth in the trust industry as baby boomers accumulate more wealth.

They are lowering capital requirements for trust businesses and changing their legal codes for the benefit of trust customers. The changes help provide protection against creditors and allow trust assets to be passed down for several generations, not just one.

For banks and others that want to form trust companies relaxed restrictions mean they can shop for the states that fit their needs best. For instance, laws shielding trust companies from frivolous lawsuits were a big reason United Western chose South Dakota, says Maxwell.

Trusts are legal instruments that hold assets and specify their beneficiaries. They are used for everything from protecting money from creditors to caring for disabled children. They are particularly attractive to those who plan to transfer wealth after their deaths.

In the past, many baby boomers saw trusts as part of the stodgy culture of old money, says Les Revzon, principal of the Revzon Consulting Group, a consulting firm in Marshfield, Mass. "But now they have a huge amount of wealth, trusts are starting to make more sense," he says.

Most trust companies choose state charters because they generally have much lower capital requirements than what's typically required by the main federal trust regulator, the Office of the Comptroller of the Currency. And states are widely perceived as being more lenient regulators.

From banks' perspective, there's very little downside to having a trust business chartered in another state. Clients and trust officers don't have to travel to the charter state to do business, and most states have reciprocal agreements to honor each other's trust rules.

South Dakota has long had one of the lowest capital requirements in the nation for firms looking to start trust firms, at $200,000, and it continues to tweak its rules. Most recently, it passed a law that limits trustees' liability in certain cases where insurance policies within trusts go bad.

Nevada recently cleared the way for trustees to appoint investment advisers to manage assets within a trust. That means trust companies there have a selling point for clients who want to get their adviser involved.

In March, Kentucky became the latest state to permit trust assets to be passed down in perpetuity.

Even Alaska has been sweetening its trust environment; a recent revision to its trust code makes it easier for a member of a divorcing couple to shield assets from a spouse.

For states, more trust assets mean more tax and fee revenue - and that's important at a time when many are strapped for cash.

In South Dakota, state-chartered trust companies had $53 billion of assets under management at the end of 2009, up 61 percent from just three years earlier. The state's division of banking last year brought in a record $262,651 in combined examination and supervision fees from hosting trust companies.

Still, loosening restrictions too much could encourage investment advisors to set up trust shops even if they have little or no experience managing trust assets.

That's why South Dakota has a provision in its trust statute that allows regulators to raise capital requirements on existing trust companies if an examination shows the need, says Bret Afdahl, division counsel for South Dakota's Division of Banking.

And it's why Nevada last year passed a law raising its capital requirements for trust companies from $300,000 - one of the lowest in the nation - to $1 million.

You can view the Previous News item: Wed May 19, 2010, Helping Wealth Firms Start Trust Companies

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