WHY ALASKA?
Unique opportunities for estate planning
Alaska’s current trust statutes make it a competitive and unique option for estate planners and advisors. These statutes combined with Alaska’s state income tax laws provide a compelling case for advisors to consider using Alaska’s jurisdiction on behalf of their clients.
Self-Settled Spendthrift Trusts and Domestic Asset Protection Trusts:
Alaska was the first state to adopt trust laws allowing for self-settled trusts and domestic asset protection trusts. Alaska is the only state that has received a favorable ruling from the IRS in the form of PLR200944002.
Alaska statutes provide for self-settled spendthrift trusts allowing the grantor to set up an irrevocable trust, be a discretionary beneficiary, and avoid the assets being subject to creditors’ claims against the grantor and/or beneficiaries. The trust can be designed to exclude the assets from the grantor’s estate even though the grantor can be a trust beneficiary.
What planning opportunities are available for your clients?
Creditor Protection: Alaska’s self-settled laws contain the most comprehensive asset-protection laws in the country. Unlike the laws of other states, Alaska has no special class of creditors. Further, creditors must prove “actual fraud” rather than “constructive fraud” before self-settled trust assets can be attached. Under Alaska trust provisions, a beneficiary does not have a property right in beneficial interest of a discretionary trust; the beneficiary has a mere expectancy. Therefore, the creditors of a beneficiary have no legal interest to attach. Alaska law permits non-Alaskan residents to create an Alaskan Self-Settled Spendthrift Trust.
$11,580,000 (2020) exemption for estate & gift tax: The future of the higher estate and gift tax exemption is uncertain. Now is the time for advisors to weigh in on the advantages of gifting it away now at the higher level. While gifting makes sense for clients with larger estates, some people are concerned about losing control over and access to the assets. Many advisors are recommending Spousal-Lifetime Access Trusts (SLATS) as a means of maintaining access through spouses which can be problematic should divorce or death of the spouse occur. The Alaska self-settled trust and asset protection provisions provide for self-settled discretionary trusts allowing a person to form a trust and make a substantial “completed” gift (all or part of the $11,580,000) while still being a discretionary beneficiary of the trust. Clients who are hesitant about making substantial gifts because they are concerned that they may need access to the assets, can gift assets to an Alaska self-settled discretionary trust today, knowing that the trustee has the discretion to make distributions to the settlor as a permitted beneficiary of the trust.
No State Income Taxes:
Earnings on trust assets compound free from state and local income taxes, thereby enhancing the investment return on assets. Alaska has no state gift or estate tax and no intangible tax.
In a series of private letter rulings, the IRS has held that trusts drafted with certain provisions allow for transfers to be “incomplete” for gift and estate tax purposes and for the trust to be deemed a non-grantor trust. With a non-grantor trust, the trust is liable for the tax on income not distributed. The beneficiary is the income tax payer on distributed income. Thus a non-grantor trust should be created in a state with favorable income tax laws.
In North Carolina Department of Revenue v. The Kimberly Rice Kaestner 1999 Family Trust the Supreme Court ruled in favor of the trustee, affirming that taxing trust income based solely on an in-state discretionary beneficiary’s residence is a violation of due process. The key issue: does a state have the right to tax the income of a trust to which the state has no connection (not state sourced income) solely based on the domicile of a discretionary beneficiary who might never in fact be entitled to receive a distribution.
Incomplete Non-Grantor Trusts (ING): an ING trust is a trust with the following features:
Transfers to the trust are incomplete gifts
It is a non-grantor trust and is treated as a separate tax payer for income purposes
Established in states with self-settled spendthrift trust laws
Established in states with favorable income tax.
INGs can be an effective tool for state and local tax minimization and even avoidance and should be considered for clients who have non-source income in a state with high state and local tax rates (such as California) and/or clients who are considering selling appreciated assets in a state with high state and local tax rates (such as California).
Alaska Optional Community Property System:
The 1998 Alaska legislature enacted a community property system (The Alaska Community Property Act) based on the Uniform Marital Property Act. To participate in this community property system, couples must “elect in,” “partially or completely.” For example, a couple could opt to have only certain assets characterized as Alaska community property. The Alaska Community Property Act allows non-residents of Alaska to form Alaska Community Property Trusts. From an income tax standpoint, community property is presently given a significant advantage. At the death of the first spouse, both spouses’ interest in the community property receives a full basis adjustment. As a result, there will not be capital gains payable if property is sold for its value at the date of death of the first spouse.
Alaska Community Property Trusts: for couples with assets in non-community property states. Is there likely to be property (such as a home, farm, business) that will be liquidated on the first spouse’s death?
Alaska Ante-Mortem Probate Law:
Alaska is one of four states that let people guard their wills (and trusts) against challenges after death. Alaska Statute 13.12.530 allows people to prove a will in probate before their death, rather than letting probate occur afterwards. The law also allows them to get a trust declared valid prior to death. Further, the law allows for non-residents to take advantage of this opportunity to pre-settle their estate. Using no contest clauses instead averts some attacks, but has drawbacks. First, the potential contestant generally must be given something in exchange for keeping quiet. And such clauses are not enforceable in some states. Also, in some states such no-contest clauses have no effect if the contestant shows a reasonable argument for claiming the will/trust invalid. The ante-mortem process offers more certainty.
Solution for multiple client situations, such as:
Clients that want to intentionally disinherit a child/grandchild
Clients with significant value in a family business with some children involved in the business and others not.
Clients who intend to leave unequal distributions to children.
Clients with dysfunctional children/grandchildren.
Families already involved (or threatened to be involved) in legal action
Alaska Trust Decanting:
Alaska has friendly trust decanting statutes permitting a trustee to move assets from one trust into a new or existing trust that better meets the needs of the beneficiaries or better meets the intent of the trustor.
Change outdated irrevocable trusts with outdated terms:
No longer meets the needs of the beneficiary
Does not meet the intent of the trustor
Situs does not offer adequate asset protection
Paying taxes in states where beneficiaries no longer live
Revising who may serve as trustee
Correcting drafting errors or unclear terms of original trust
Combining trusts
Converting a trust with a set termination date into an extended term trust
Making adjustments in a trust to protect a special needs beneficiary
Modify appointment powers
Convert a single trust into multiple trusts
Other Opportunities to Consider:
Laws Against Perpetuities: Under Alaska law trusts can run 1000 years
Creditor Protection Laws extend to IRAs and Retirement Accounts: Trusteed IRAs