THE ALASKA TRUST ACT How to Protect Assets from Lawsuits and Estate Taxes Arthur J. Pauly, Jr....

THE ALASKA TRUST ACTHow to Protect Assets from Lawsuits and Estate Taxes

THE ALASKA TRUST ACTHow to Protect Assets from Lawsuits and Estate Taxes

Arthur J. Pauly, Jr.Arthur J. Pauly, Jr.1-800-655-31131-800-655-3113

Estate Planning DefinitionEstate Planning Definition

I want to control my property while I am alive,I want to control my property while I am alive, take care of myself and my loved ones if I become take care of myself and my loved ones if I become

disabled,disabled, and give what I have to whom I want, the way I and give what I have to whom I want, the way I

want, and when I want;want, and when I want; and, if I can, I want to save every last tax dollar, and, if I can, I want to save every last tax dollar,

professional fee, and court cost possibleprofessional fee, and court cost possible..

© The Jackson Group, LLC© The Jackson Group, LLC

The Planning Pyramid

ME / USME / US

FAMILYFAMILY

WEALTHWEALTHPRESERVATIONPRESERVATION

WEALTHWEALTHEXPANSIONEXPANSION

SAVESAVETAXESTAXES


©Stan Miller 1998

Abolition of the Rule Against Perpetuities

Major Changes of the Law in Alaska

if all or part of the income of principal of the trust may be distributed when the trust is created.

©Stan Miller 1998

Allows the trusts’ creator to direct that a beneficiary’s interest can’t

be attached by creditors.

Major Changes of the Law in Alaska

©Stan Miller 1998

Applies even if the grantor is a beneficiary!!

Major Changes of the Law

©Stan Miller 1998

1. To extent grantor retains power to revoke or terminate trust.

2. To extent income or principal must be distributed to grantor.

3. To extent grantor is 30 days or more in default on child support payments.

4. To extent transfer was intended to hinder, delay, or defraud creditors.

4 Exceptions to Spendthrift Protection:

©Stan Miller 1998

However, action claiming that a transfer was fraudulent may not be commenced unless:

1) if claimant was a creditor when trust was created, suit must be brought within 4 years after transfer or one year after trust is or should have been discovered, the later of; or

2) if claimant became creditor after creation of trust, within 4 years of transfer

Fraudulent Conveyance

©Stan Miller 1998

1. Some trust asset is “deposited” in Alaska.

Deposited in Alaska means holding some asset in a checking account, time deposit, CD, brokerage account, trust company fiduciary account or other similar account.

An “Alaskan” Trust if:

©Stan Miller 1998

2. The trust assets deposited in Alaska must be administered by a “qualified person” which is an Alaskan domiciliary or an Alaska trust company or bank.


©Stan Miller 1998

3. Alaskan Trustee’s duties must at least include an obligation to maintain records for the trust and an obligation to prepare or arrange for the preparation of the trust’s income tax returns.


©Stan Miller 1998

4. Part of the administration must occur in Alaska.


©Stan Miller 1998

In the United States, a transfer in trust for the benefit of the transferor is void as against his or her creditors, regardless of whether their claims arise before or after the transfer.

As a General Rule

©Stan Miller 1998

Some states have provided statutory exemptions for interests, such as in IRA or other “pension” arrangements.

Exceptions to the Rule

©Stan Miller 1998

A few cases have indicated that a grantor’s interest, at least if it is discretionary, cannot be attached by his or her creditors if it is a spendthrift trust.

See:Estate of Uhl, 241 F.2d 867 (7th Cir. 1957)(Indiana law); Herzog v. CIR, 116 F.2d 591 (2d Cir. 1941)(New York law); Estate of German, 85-1 USTC 13,610 (Maryland law)

Exceptions to the Rule

©Stan Miller 1998

Estate tax reduction and protection of assets from creditors are usually complementary goals.

Estate Planning and Alaska Trusts

©Stan Miller 1998

Life Transfers are usually more effective than transfers made at death.

Some life transfers include:•Annual exclusion gifts•Early use of Unified Credit•Early use of GSTT Exemption•GRATs, GRUTs, GRITs•CLTs•Other leveraged gifts


©Stan Miller 1998

Gifts are complete, as a general rule, only when not subject to claims of the donor’s creditors.


©Stan Miller 1998

Gifts are complete, as a general rule, only when not subject to claims of the donor’s creditors.

If grantor’s creditors can reach trust assets, then the transfer is not a completed gift and the assets are includable in the grantor’s estate.


©Stan Miller 1998

But, “[i]f and when the grantor’s dominion and control of the trust assets ceases, such as by the Trustee’s decision to move the situs of the trust to a state where the grantor’s creditors cannot reach the trust assets, then the gift is complete for Federal gift tax purposes . . . “

-Rev. Rul. 76-103

This should now be true for Alaska trusts, except where transfer was fraudulent.


©Stan Miller 1998

Gift Tax Annual Exclusion Trusts (Crummey Trusts) where the grantor is eligible (not entitled) to receive distributions in the Trustee’s discretion.

Examples of Estate Planning Strategies using Alaska Trusts:

©Stan Miller 1998

Annual Exclusion Trusts or other trusts funded with life insurance contracts where the grantor is eligible (not entitled) to receive distributions in the Trustee’s discretion.


©Stan Miller 1998

Gift tax exemption ($625,000) trust where the grantor is eligible (not entitled) to receive distributions in the Trustee’s discretion.


©Stan Miller 1998

GSTT exemption ($1,000,000) trust where the grantor is eligible (not entitled) to receive distributions in the Trustee’s discretion.


©Stan Miller 1998

Remainder of Charitable Lead Trust where the grantor is eligible (not entitled) to receive distributions in the Trustee’s discretion.


©Stan Miller 1998

The Grantor should not expect to get the income from the property at the commencement of the trust and continuously thereafter.

The trust should be used for emergency use only.

Some Additional Thoughts:

©Stan Miller 1998

Funding the trust with interests in a family holding company or family limited partnership which is a pass-through entity for income tax purposes is an excellent strategy.

•Discounts•Continued Control through General Partner•Income tax liability of creditor (Rev. Rul 77-137)

Some Additional Thoughts:

Family Limited Partnerships “FLPs”Family Limited Partnerships “FLPs”

Keep Control of AssetsKeep Control of Assets Make Gifts of Limited Partnership Interests Make Gifts of Limited Partnership Interests

instead of Assetsinstead of Assets Substantially reduce Federal Estate TaxesSubstantially reduce Federal Estate Taxes Spread Income to Lower Bracket family Spread Income to Lower Bracket family

membersmembers Asset Protection from CreditorsAsset Protection from Creditors



Family Limited PartnershipFamily Limited Partnership General PartnerGeneral Partner

HusbandHusband WifeWife Child’s TrustChild’s Trust

99% owner99% owner

1% owner = 1% owner = 100% control100% control



What is a limited partnership interest worth? What is a limited partnership interest worth? Can’t be easily sold or transferredCan’t be easily sold or transferred Can’t be pledgedCan’t be pledged Limited Partners can’t demand distributionsLimited Partners can’t demand distributions Income tax attributed to partners, even if no Income tax attributed to partners, even if no

distributions made (“Phantom Income”) distributions made (“Phantom Income”)

Fair Market Value of Limited Partner share is Fair Market Value of Limited Partner share is substantially less than the value of the assets in substantially less than the value of the assets in the partnership!the partnership!


The Power of DiscountsThe Power of Discounts

Watts v. CommissionerWatts v. Commissioner 87.2919%87.2919%

51 T.C.M. 60 (1985)51 T.C.M. 60 (1985) Estate of Daniel J. Harrison, Jr.Estate of Daniel J. Harrison, Jr. 46.6667%46.6667%

52 T.C.M. CCH Dec. 43,609(M)(1987)52 T.C.M. CCH Dec. 43,609(M)(1987) Estate of Catherine Campbell v.Estate of Catherine Campbell v. 56.8176%56.8176%

Commissioner, 62 T.C.M. 1514 (1991)Commissioner, 62 T.C.M. 1514 (1991) Novak v. United States, Novak v. United States, 39.2597%39.2597%

87-2 USTC 13,728 (1987)87-2 USTC 13,728 (1987) Estate of Bennett v. Commissioner,Estate of Bennett v. Commissioner, 24.8323%24.8323%


The “Charging Order”The “Charging Order”

Creditor does not become a partnerCreditor does not become a partner No right to partnership assetsNo right to partnership assets No right to dissolve partnershipNo right to dissolve partnership Charging order is sole remedyCharging order is sole remedy Creditor must pay income tax, even if no income is Creditor must pay income tax, even if no income is

distributed to limited partners.distributed to limited partners.


©Stan Miller 1998

•Reduce Wealth Transfer Taxes•Reduce income taxes by accumulating income in Alaska Trust•Inhibit the foolish dissipation of wealth•Protect against the claims of the beneficiary’s creditors

•Can go on into perpetuity

Benefits of Alaska Trust:

Your Estate Tax “Coupon”Your Estate Tax “Coupon”

Unified Credit Equivalent AmountUnified Credit Equivalent Amount

$1,500,000$1,500,000Non-Transferrable ; Expires at DeathNon-Transferrable ; Expires at Death

Non-Transferrable ; Expires at DeathNon-Transferrable ; Expires at Death


THE ALASKA TRUST ACT How to Protect Assets from Lawsuits and Estate Taxes Arthur J. Pauly, Jr....

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Transcript of THE ALASKA TRUST ACT How to Protect Assets from Lawsuits and Estate Taxes Arthur J. Pauly, Jr....