Wyoming Dynasty Trust Seminar Outline

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Dynasty Trusts
Estate Planning for Successive Generations

By:

Carol H. Gonnella & M. Jason Majors
GONNELLA & MAJORS, pc
575 South Willow Street
P.O. Box 1226
Jackson, WY 83001
(307) 733-5890 voice
(307) 734-0544 facsimile

Copyright 2008 © Carol H. Gonnella

Dynasty Trusts
Estate Planning for Successive Generations
Table of Contents
Section

Description

Page

Disclaimer

3

One

Introduction

4

Two

Generation Skipping Transfer

4

Tax Basis
Three

Advantages of a Dynasty Trust

8

Four

The Creation of a Dynasty

11

Trust
Five

How Long Can a Dynasty

13

Trust Last
Six

Making the Dynasty Trust

14

Withstand the Test of Time
Seven

Alaska Trusts

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Estate Planning for Successive Generations
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15

Disclaimer
The materials contained in this outline and presented by Carol H. Gonnella and/or Gonnella &
Majors, PC are intended to provide the readers and participants with guidance in dynasty trust
planning and administration. The materials prepared by, and comments of any of the above, do
not constitute, and should not be treated as, legal advice regarding the use of dynasty trusts or the
tax consequences associated with the use of dynasty trusts. Although all of the above have made
every effort to assure the accuracy of these materials and the accompanying presentation, none of
the above, do not assume responsibility for any individual’s reliance on these printed materials or
the related presentations. Any individual interested in dynasty trusts should independently
research and verify the effectiveness, tax consequences, advantages, disadvantages, and other
aspects of a dynasty trust.

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Estate Planning for Successive Generations
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Section One.

Introduction

Most clients come to an estate planner with the following issues:





how do we keep control of our wealth during life;
how do we plan to obtain the maximum creditor protection available;
how do we minimize the estate taxes upon our deaths;
how do we provide for our children, our children’s children, and successive
generations;
how do we leave a legacy for our families and our community;
how do we provide the best creditor and failed marriage protection for our
children, our children’s children, and successive generations;
how do we minimize the estate taxes upon the deaths of our children, our
grandchildren, and that of successive generations; and
how do we accomplish these goals most efficiently and cost effectively.






Traditionally, these objectives were accomplished through a variation of different estate planning
strategies such as revocable living trusts, family limited partnerships, limited liability companies,
irrevocable life insurance trusts, charitable giving, and a host of other alternatives. However,
most of these planning strategies transferred wealth to children directly, thus subjecting the assets
to taxation upon the children’s deaths, and further subjecting them to taxation upon the deaths of
future generations. However, when clients are educated about the benefits of planning multigenerationally, many view this type of planning as a golden opportunity to give their inheritance
to their beneficiaries with the following protections:






effective control by the beneficiary over the assets for their use;
creditor protection;
failed marriage protection;
philosophy and incentive language for productivity;
elimination or reduction of federal estate taxation for future generations.

Section 2.

Generation Skipping Transfer Tax Basics

Historically, affluent families established trusts for the benefit of their children and successive
generations with sufficient “strings” attached so the assets in the trust were not subject to estate
taxation for many future generations. To stop persons from what was perceived as
circumventing the federal estate tax with these strategies, Congress in 1976 adopted Chapter 13
of the IRC, imposing a tax of each transfer of wealth to successive generations that escaped
taxation in the prior generation’s estate. The Tax Reform Act of 1986, as amended, repealed this
first version and restated Chapter 13, imposing a tax on transfers of property that are made to
“skip persons”, either during life or upon death. This tax is known as the generation-skipping
transfer tax (GSTT) and is the top marginal gift and estate tax rate at the time of transfer
(presently 55%). The GSTT is in addition to any gift or estate tax applied to the transfer, and
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there is no unified credit against the GSTT and no lower brackets for the first $675,000 to
$3,000,000 in transfers.
The good news is that Congress has allowed certain transfers to be excluded from this onerous
tax, which now allows all clients to take advantage of generation skipping. These exclusions are:




The GSTT annual exclusion under Section 2642(c);
Tuition and medical expense exclusion under Section 2503(d);
The lifetime GSTT exemption, historically $1 million, and now, as amended with the
Tax Relief Act of 1997, increased annually by the federal inflationary index. As of
year 2000, this exemption is $1,030,000. This increase can only be made in
increments of $10,000, rounded down to the nearest $10,000.

These exclusions offer some wonderful planning opportunities. However, to utilize these
benefits, the planner must be aware of some of the basic GSTT rules.
Identifying the Parties
Before calculation of the tax, the identification of the “Transferor” must be determined, and the
Transferee must be a “Skip Person” rather than a “Non-skip” Person (Code Section 2613(a)).
Under Chapter 13, the Transferor is the individual with respect to whom property was most
recently subject to federal estate or gift taxation. (Code Section 2652(a)). Whether or not a tax
liability was actually incurred is irrelevant.
Transferees who are either in a prior generation, the same generation, or only one generation
younger than the transferor are called “non-skip” persons. The GSTT does not apply when
wealth is transferred to them.
Transferees who are at least two generations younger then the transferor are called “skip”
persons. Transfers to skip persons trigger the tax.
Persons unrelated to the transferor’s grandparents are assigned to generations based upon their
age relative to the transferor’s.
1.
2.
3.
4.

Persons on more than 12 ½ years younger than the transferor are assigned
to the same generation as the transferor. They are non-skip persons.
Persons 12 ½ to 37 ½ years younger than the transferor are assigned to the
next generation younger than the transferor. They are non-skip persons.
Persons 37 ½ to 62 ½ younger than the transferor are assigned to the
generation two generations younger than the transferor. They are the first
generation of skip persons.
For every 25 year age difference thereafter, a person is assigned to a
successor generation. Any person two or more generations younger than
the transferor is a skip person.
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Charities and tax-exempt organization are always non-skip persons. Estates, partnerships,
corporations and other entities are classified by the status of the persons who hold the beneficial
interests. (IRC Section 2651(e)(2)).
Classifying the Transfer
Chapter 13 applies comprehensively in every conceivable way to transfer wealth to a skip
person. It does so by taxing three types of transfers—direct skips, taxable terminations, and
taxable distributions.
a.

Direct Skip.

A direct skip transaction is one whereby a transferor, during the transferor’s
lifetime, conveys property to a “skip person” transferee, (a) who is two or more
generations removed from the transferor, or (b) to a trust in which all beneficiaries
are two or more generations removed from the transferor.


Example of Taxes on a Direct Skip During Lifetime

Grandfather gifts $1,000,000.00 to a grandchild during life
(assuming 55% GSTT rate and 55% gift tax rate)
Federal Gift Tax on Gift
GSTT Tax on Gift
Federal Gift Tax on GSTT
Total Tax Paid
Net Gift to Grandchild


$229,000.00
$229,000.00
$126,000.00
$584,000.00
$416,000.00

Example of Taxes on a Direct Skip After Death

Grandfather’s estate distributes $1,000,000.00 to a grandchild
(assuming 55% GSTT rate and 55% gift tax rate)
Federal Estate Tax on Devise
GSTT Tax on Death
Federal Gift Tax on GSTT
Total Tax Paid
Net Gift to Grandchild
b.

$550,000.00
$229,000.00
$126,000.00
$710,000.00
$290,000.00

Taxable Termination.

A termination of a trust due to the death of a beneficiary under the trust, resulting
in the assets of the trust being transferred to one or more “skip person”
beneficiaries (a) who are two or more generations removed from the transferor, or
(b) to a trust in which all beneficiaries are two or more generations removed from
the transferor.
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Example of Taxes on a Taxable Termination

Trust distributed $1,000,000.00 to a grandchild of the trustmaker
(assuming 55% GSTT rate and 55% gift tax rate)
Federal Estate on Transfer
GSTT Tax on Transfer
Total Tax Paid
Net Distribution to Grandchild
c.

$550,000.00
$248,000.00
$798,000.00
$203,000.00

Taxable Distribution.

Any distribution of trust assets from a trust to a “skip person” beneficiary (a) who
are two or more generations removed from the transferor, or (b) to a trust in which
all beneficiaries are two or more generations removed from the transferor.


Example of Taxes on a Taxable Distribution

Trust distributed $1,000,000.00 to a grandchild of the trustmaker
(assuming 55% GSTT rate and 55% gift tax rate)
Federal Estate on Transfer
GSTT Tax on Transfer
Total Tax Paid
Net Distribution to Grandchild

$550,000.00
$248,000.00
$798,000.00
$203,000.00

Who is Liable for the Generation-Skipping Tax
The transferor is liable for GSTT on all outright direct skips. Code Section 2603(a) (1).
Assuming the transferor has already used up his available unified credit, the combined gift/estate
tax and GSTT are calculated as follows:
(All examples apply 55% GSTT and 55% estate and gift tax rate for simplicity of illustration.)
Lifetime Direct Skip to a Grandchild:
Net gift to grandchild
Grandparent’s Assets
Federal Gift Tax on Gift
Generation Skipping Transfer Tax on Gift
Federal Gift Tax on GSTT
Total Tax

$416,000
$1,000.000
$229,000
$229,000
$126,000
$584,000

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After Death Direct Skip to a Grandchild:
Net gift to grandchild
Amount Devised to Grandchild
Federal Estate Tax on Devise
Generation Skipping Transfer Tax on Gift
GSTT on Devise
Total Tax

$290,000
$1,000,000
$550,000
$229,000
$160,000
$710,000

In the case of a taxable distribution, the GSTT is based on the amount received by the transferee
and the transferee is liable for the tax. Code Section 2603 (a) (1). In the event that the trustee
pays the tax on the taxable distribution from other trust property, then such payment is
considered an additional taxable distribution. Treasury Regulation 26.2612-1 (c).
The calculation of the tax on a taxable distribution in which the grandparent devises assets to a
trust for a child for life then to a grandchild is as follows:
Amount Devised to Trust
Federal Estate Tax on Transfer to Trust
Net to Child
GSTT
Amount distributed to Grandchild
Total Tax

$1,000,000
$550,000
$450,000
$248,000
$203,000
$797,000

On a taxable termination the trustee is liable for the tax and the amount of tax is based on the
property with respect to which there is a termination.
The calculation of the tax on a taxable termination is the same as the calculation for the tax
liability with respect to a taxable distribution.

Section Three.

The Advantages of a Dynasty Trust.

The following is a non-exhaustive list of advantages that may be realized from the creation of a
dynasty trust.
a.

Reduction or elimination of Estate Taxes.

The ability to transfer the assets to successive generations without diminishing the
size of the estate from federal estate taxes is an incredible advantage. Since in a
dynasty trust the assets are held within the trust and are not transferred at the
death of each beneficiary, but rather remain in the trust for the benefit of
successive generations of beneficiaries, there are no transfers of wealth between
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familial generations. Without the transfer of wealth between family members,
there are no estate taxes, no GSTT taxes, and no gift taxes. With a dynasty trust,
those same assets will only be taxed when, if ever, they are transferred out of the
trust. With proper planning, once the trustmaker transfers the assets and
designates them as exempt under the GSTT exemption, the assets plus all income
and appreciation attributable to them are not taxed to successive generations.
Below is a graph with a beginning balance of $1,000,000 evidencing three
generations (defined as every twenty-five (25) years), one subject to estate
taxation and one dynasty probated, and thus not subject to estate taxation:

Starting Balance

Year
0

GSTT Trust
$1,000,000.00

Without GSTT Trust
$1,000,000.00

Growth at 7%
Accumulated Interest & Principal
Estate Taxes at Child's Death
Remaining Balance

25
25
25
25

$4,725,418.00
$5,725,418.00
0
$5,725,418.00

$4,725,418.00
$5,725,418.00
$3,148,979.90
$2,576,438.10

Growth at 7%
Accumulated Interest & Principal
Estate Taxes at Grandchild's
Death
Remaining Balance

50
50
50

$27,054,995.00
$32,780,414.00
0

$12,174,747.54
$14,751,185.64
$8,113,152.10

50

$32,780,414.00

$6,638,033.54

Growth at 7%
Accumulated Interest & Principal
Estate Taxes at Great
Grandchild's Death
Remaining Balance

75
75
75

$154,901,164.00
$187,681,577.00
0

$31,367,484.56
$38,005,518.10
$20,903,034.96

75

$187,681,577.00

$17,102,483.14

Net Advantage of GSTT Tax
Planning

$170,579,093.86

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b.

Income Taxes.

If the trustmaker creates the trust as a Grantor Trust, also known as an
“Intentionally Defective Irrevocable Trust (IDIT), the trustmaker, rather than the
trust, pays any income tax on income generated by the trust. This payment of
taxes by the trustmaker in effect, is an additional free gift to the trust as the trust is
not required to pay the taxes.
c.

Creditor Protection.

No family member wants to see his or her hard-earned money accessed by the
creditors of a beneficiary. Once a dynasty trust becomes an irrevocable trust or
“spendthrift trust”, creditors of the beneficiary have an extremely difficult, if not
impossible time, attaching trust assets. If the trust acquires assets desired by the
beneficiaries, instead of giving the beneficiaries the funds to buy these assets
outright, the additional assets will receive the same creditor protection as the
existing assets in the trust.
d.

Failed Marriage Protection.

Along the lines of the creditor protection, the dynasty trust also protects trust
assets from a beneficiary’s failed marriage, or put another way, gives the
beneficiaries “predator protection”. Since the trust owns the trust assets and the
decision as to whether or not a beneficiary receives distributions from the trust is
discretionary, a divorcing spouse of a beneficiary is unable to attach the trust
assets and they are not subject to division by a divorce court..
e.

Beneficiary Guidance.

A dynasty trust also allows a trustmaker to give guidance to the trustee as to how
a beneficiary utilizes the benefit of the trust. If a trustmaker is worried about a
beneficiary’s ability to handle finances in a responsible or effective manner, the
trustmaker may place detailed strings in the trust agreement setting forth how
assets are to be distributed from the trust. In essence, a trustmaker can pass along
his or her fiscal and living philosophies to successive generations of beneficiaries.
f.

Continuity of Estate Planning.

A dynasty trust enables a family to have one comprehensive scheme of estate
planning running for consecutive generations. Clients need no longer worry that
their children will not properly plan the inheritance they have provided for them.
For those clients who wish to keep their property within their bloodlines, dynasty
planning is very effective.

Section Four.

The Creation of a Dynasty Trust
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A dynasty trust may be created during the life of the trustmaker as an irrevocable trust or as part
of a revocable trust or will, to become effective upon the death of the trustmaker.
For lifetime transfers, the allocation of the GSTT exemption is generally made by an election on
the federal gift tax return for the year in which the gift is made. With respect to transfers made
effective upon death, the allocation is made on the federal estate tax return. There is an
automatic allocation to direct skips made during life and direct testamentary skips. However, for
all other transfers, if the allocation is not made, it is lost. The general rule is as follows:
When in doubt=Allocate
a.

The Lifetime Irrevocable Trust

A trustmaker may create an irrevocable trust during life by giving a gift to the
trust and applying the annual gift tax exemption or the lifetime applicable credit
amount to the trust. (Caution: care must be used to follow the 5 and 5 rule of
Section 2514(e)). A trustmaker who creates the trust as a “Grantor Trust (or IDIT)
may make additional nontaxable gifts to the trust in the form of the income taxes
paid by the trustmaker on the income generated by the trust. The gift, the incometax paid, plus all appreciation of the assets within the trust are now out of the
trustmaker’s estate.
The GSTT exemption may be greatly leveraged by the purchase of life insurance
in a dynasty life insurance trust. If properly planned, only the premium gifts to
the trust must be allocated to the GSTT exemption, not the life insurance death
proceeds. The allocation date becomes crucial, as disastrous consequences can
occur if the allocation is not timely made on the gift tax return, rather than waiting
until the automatic allocation upon death. By way of example:
Sam creates a dynasty ILIT naming his CPA as trustee. Sam transfers $400,00 to
the trust bank account and the trustee purchases a $5 million life insurance policy.
Sam does not file a gift tax return to allocate his GSTT exemption before his
untimely death. The insurance company pays to the trustee the $5 million death
proceeds. Sam’s executor files an estate tax return allocating Sam’s $1 million
exemption to the now $5 million in the trust. Had a timely gift tax return been
filed, only $400,000 of Sam’s exemption would have been used to shelter the
entire $5 million, giving the entire amount dynasty protection. Sam would have
$600,000 remaining of his GSTT exemption to use for other assets. However, due
to the late filing, only one-fifth of the property in the ILIT is now GSTT exempt,
subjecting $4 million to the onerous GSTT tax.

b.

A Dynasty Trust in Revocable Trust Planning
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A client’s revocable trust can provide that, upon death, an amount equal to the
available unused GSTT exemption is to be segregated into a dynasty trust for the
benefit of his/her descendants. It is often created as separate shares for each child,
called “exempt shares”. The portion of the estate in excess of the available
exemption will be transferred to beneficiaries using traditional estate planning
methods. This amount is often held in separate shares for each child, called
“nonexempt shares”.
The trustee may be directed to use the property in each child’s exempt share for
the benefit of the child whenever the assets in the nonexempt share are not
sufficient to adequately provide for the child. Generally, the ascertainable
standards of health, education, maintenance and support are used for guidance in
determining when distributions may be made. For clients wishing the child to
have maximum control, the child may be named a trustee of the trust.

c.

Revocable Trust Dynasty Planning for Spouses

It is imperative to plan carefully for married couples to fully enjoy the benefits of
both of their GSTT exemptions. Properly planned in year 2000 valuations, a
husband and wife may dynasty protect $2,060,000 in assets. However, as stated
earlier, a person must be deemed the ‘transferor” of property to qualify for the
GSTT exemption. This may pose a problem with the typical estate plan created
by a married couple. Such a plan generally allocates the applicable exclusion
amount ($675,000 in 2000) to a credit shelter trust, with the remaining balance to
a marital deduction trust. The property in the credit shelter trust is deemed that of
the decedent, and the decedent qualifies as the “transferor” for GSTT purposes.
However, the assets in the marital deduction trust are deemed those of the
surviving spouse, so the decedent is no longer the “transferor”. Thus the
decedent’s remaining GSTT exemption may be lost.
To fully utilize both exemptions, a special election may be made as to part of the
marital trust. The remaining balance of the decedent’s exemption of $355,000
($1,030,000-$675,000 in year 2000 valuations) is placed in its own separate
marital deduction trust called a reverse QTIP. The property in this reverse QTIP
is treated as belonging to the decedent rather than the surviving spouse for GSTT
tax purposes but as belonging to the surviving spouse for estate tax purposes.
Thus, the decedent remains the transferor of the property for GSTT purposes and,
by making the proper allocations, can utilize the decedent’s entire GSTT
exemption. CAUTION: The reverse QTIP election must be made on the
decedent’s estate tax return. Upon the death of the surviving spouse, his/her
estate shall be entitled to use all of the surviving spouse’s GSTT exemption.

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Section Five.

How Long Can a Dynasty Trust Last.

A dynasty trust is a trust that passes “life interests” in property for as long as the state law allows.
State statutes generally provide that a transfer of a property interest in trust will not be valid
unless it vests within the time of a life or lives in being plus 21 years. This is the classic rule
against perpetuities, and is the rule in the State of Wyoming. With this rule, trusts can last
between 100 to120 years, depending on the lives named in the trust document. Some states (ie:
California) have a statutory 90 year rule as the amount of time a trust can last. The trend
presently is for states to abolish and relax the rule against perpetuities. States having abolished
or relaxed the rule are Idaho, North Dakota, Alaska, Wisconsin, Delaware, and Illinois.
Legislation is presently pending in Nevada and New York, but has not been passed.
a.

Deciding Where to Site the Dynasty Trust.

For many clients, establishing a dynasty trust lasting approximately 100 years is
adequate for their needs and goals. However, for the clients wishing a trust to last
in perpetuity, the trust may be established or “sited” in a jurisdiction state having
abolished the rule against perpetuities. The trustmakers must form their trust
according to the laws of that state, and then comply with the laws of that state.
Usually the trust agreement will set forth that its validity, construction, and
administration will be governed by the laws of the particular state chosen.
b.

Establishing Significant Contacts With the State Where Sited.

The next issue is to ensure that the trust has sufficient or significant contacts with
the chosen state. Oftentimes the trustmakers will chose an independent trustee
located in the chosen state, will conduct meetings of the trustees and beneficiaries
in the chosen state, will open a trust account in the chosen state, will make
investments in the chosen state, or will do some other act creating a relationship
between the trust and the chosen state.
c.

Complying With the Laws of the State Where Sited.

The only problem can be that sometimes the laws of a particular state will control
the status of real property within that state. What this means is that real property
located in a state containing the rule against perpetuities will be governed by the
laws of that state, and cannot be placed indefinitely in a dynasty trust. In these
situations, the real property should either not be placed into the trust, or the trust
agreement should contain a perpetuities saving clause, applicable only to real
property. Another solution may be to place the real estate into an entity such as a
LLC, and then place the LLC units into the dynasty trust.

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Section Six.
Time.

Making the Dynasty Trust Withstand the Test of

While the primary benefit of a dynasty trust is its longevity, this can also be a disadvantage in
certain circumstances. When the trustmakers create a dynasty trust they are looking at the
current status of the economy and our society based on past experiences. Obviously no
trustmaker or advisor can foretell what the future will bring. There may become a time when it
is undesirable to have a dynast trust. When and if this ever happens, the trust needs to be
sufficiently adaptable to handle these changes. There are several ways to build this adaptability
into a dynasty trust.
a.

Naming an Ultimate Beneficiary of the Dynasty Trust.

The trustmakers should name an ultimate beneficiary in the event that the
trustmakers lineal descendants reach an end. When the trustmaker names an
ultimate beneficiary, it is most often a charitable institution.
b.

Beneficiaries Limited Power of Appointment.

The trustmakers can give each successive generation a limited power of
appointment; that is the ability to pass their trust share outright to named
individuals upon their death, including further trusts. By using a limited power of
appointment the beneficiary is able to pass that beneficiary’s trust share at death
without having the trust share included within that beneficiary’s gross estate,
thereby eliminating estate taxes on that share. Furthermore, this power gives the
beneficiaries and successor trustees the ability to best deal with the trust assets
based on changed circumstances.
c.
Naming Trust Protectors with Specific Powers Under the Trust
Agreement.
Another approach is to name independent trust protectors with specific powers
under the trust agreement, including the powers to terminate or amend the trust
agreement in the event that its perpetual nature is no longer appropriate based on
changed circumstances. Moreover, the trustmakers can use definitive language to
set forth the circumstances when the trust protectors can exercise the powers to
amend or modify the trust.

Section Seven.

Alaska Trusts.

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No discussion about dynasty trusts may be had without addressing the issue of “Alaska Trusts.”
The State of Alaska was one of the first states to address the rule against perpetuities and enable
trusts sited within Alaska to have perpetual existence. This legislation was passed in April of
1997.
The Alaska statues are trend setting not only because of the abolishment of the rule against
perpetuities, but also because of the creditor protection afforded the Alaska trusts. Historically, a
trustmaker could not create a trust within the United States wherein he/she was named a
discretionary beneficiary and receive any type of creditor protection. Prior to April 1997, assets
in a trust created under the laws of any state were subject to the claims of the trustmaker’s
creditors to the maximum extent the trustmaker was eligible to receive distributions in the
discretion of a trustee. This was so even if the transfer to the trust was not in defraud of
creditors. Clients wishing to create such a trust, known as a “self-settled” trust, created their
trusts off shore, in foreign jurisdictions. These trusts are called foreign asset protection trusts or
FAPTs.
Many offshore jurisdictions, including Nevis, Cook Islands and Belize, have
specifically enacted legislation to protect self-settled trusts from the reach of a trustmaker’s
creditors.
An Alaska Trust can be an effective perpetuity dynasty trust when a client wishes to make a gift
to the trust, dynasty protect the gift and yet, if the proverbial sky falls in, be allowed, in the
trustee’s sole discretion, access to the trust assets for his/her benefit.
a.

Creation of an Alaska Trust.

The Alaska State Legislature has set forth the requirements for forming an Alaska
trust. In order for a trust to constitute an Alaska Trust, the following must be
satisfied:
 Some of the trust assets must be deposited in the State of Alaska and
held and administered by a qualified person. “Deposited” means that trust
assets are held in a checking account, time deposit, certificate of deposit,
brokerage account, trust company fiduciary account or other similar
account located in Alaska. “Qualified person” means an Alaskan
domiciliary or Alaskan trust company or bank;
 The qualified person’s duties must at least include an obligation to
maintain records for the trust, either individually or together with other
advisors within or outside Alaska, and the qualified person must have an
obligation to prepare or arrange for the preparation of tax returns that must
be filed by the trust, either individually or together with other advisors
within or outside Alaska;
 Part of the administration of the trust must occur within the State of
Alaska;
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 The validity, construction, and administration of the trust are
determined by the laws of the State of Alaska; and
 The trustee of the trust must register the trust in the court in the place
where the principal administration of the trust takes place. The effect of
the registration is that the trust and trustee are submitted to the personal
jurisdiction of the courts of the State of Alaska.
An advantage to Alaska’s legislation is that it gives clearer guidance to a
trustmaker as to what acts are necessary to make the trust sitis “Alaskan”.
Presently, neither Delaware, South Dakota, Idaho nor Wisconsin give such
detailed guidance to estate planners. The primary advantage of this guidance is
that it gives a clear indication of what is necessary to establish a sufficient nexus
with the State of Alaska. In other states, the estate planner is merely trying to
cover his or her basis and do as much as possible to establish a sufficient nexus
with that state. The problem is that in states other than Alaska, the estate planner
will not know if a sufficient nexus is established until the trust comes before a
court of law.
Another benefit to an Alaska trust is that the legislation allows a foreign trust, or a
trust created in another state, to move its situs to the State of Alaska. The only
requirements for a foreign trust to “move” to Alaska are that the trust comply with
the statutes governing the creation of an Alaska Trust and as generally discussed
herein. This gives estate planners great flexibility in moving a trust to Alaska,
should they decide to do so after watching the performance of Alaska Trusts
during the next several years. Of course, it must be acknowledged that the trusts
will most likely need to be amended in certain respects before they are moved to
the State of Alaska, in order for the trusts to fully comply with the Alaska statutes.
b.

Creditor Protection.

The Alaska legislation sets forth in no uncertain terms that property in a written
and irrevocable Alaska Trust, and in which the trustmaker conveys property which
the trustmaker cannot voluntarily or involuntarily transfer before it is delivered to
the trust, and under which the trustmaker is a discretionary beneficiary, is not
subject to the claims of the trustmaker’s creditors unless one of four exceptions is
met. The four exceptions defeating creditor protection are as follows:
 if the trustmaker retains the right to revoke or terminate all or part of
the trust without the consent of a person with an adverse interest, such as a
beneficiary or a creditor;
 if the income and/or principal from the trust must mandatorily be paid
to the trustmaker;

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Estate Planning for Successive Generations
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 if the trustmaker created the trust at a time when the trustmaker was in
default by 30 days or more under a child support judgment or order;
 if the trustmaker created the trust with the intent to hinder, delay or
defraud creditors under the Alaska fraudulent transfer law.
Again the legislation gives clear guidance as to what are considered permissible
transactions under the law. These statutes give the estate planner a very plain
roadmap to follow when creating the Alaska Trust, and do so in such a way that
very little is left for interpretation.
Another benefit to the Alaska Trust is that in all likelihood the courts will look
with favor upon trusts created under the Alaska statutes. Part of this favorable
treatment most likely stems from the “anti-FAPT” reporting provisions of the
Internal Revenue Code will not apply to the Alaska Trusts due to Alaska’s rule
against fraudulent transfers, Alaska’s long statute of limitations, and the fact that
assets in an Alaska Trust would be subject to the jurisdiction of US courts were
there an inappropriate Alaska Trust.
c.

Duration of an Alaska Trust

While an Alaska Trust stretches out the time that trust assets can be held in trust,
there is even a limit on the duration of an Alaska Trust. The Alaska State
Legislature limits the life of a trust to one of the following:
 no later than 21 years after the death of an individual identified in the
trust (traditional rule against perpetuities);

d.



within ninety (90) years after the creation of the trust; or



after the death of the last person identified in the trust,.
Problems with an Alaska Trust.

The primary problem with an Alaska Trust is that it is relatively untried. While it
is true that the Alaska Trust Act has been in effect since 1997, there have been
relatively few attempts to test the effectiveness of an Alaska Trust. Therefore, the
careful planner recommending an Alaska Trust at this time needs to also make his
clients aware of the relatively new nature of the Alaska Trusts.
However, estate planning practitioners can expect to see the first few legal
attempts to defeat an Alaska Trust widely publicized. By virtue of the fact that
these trusts are quite new may compete somewhat with FAPT vehicles, it can be
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expected that the FAPT practitioners will bring attention to any tests of an Alaska
Trust. In the mean time, however, the rest of us will have to wait and watch to see
if Alaska Trusts will truly withstand the test of time.

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