PERPETUAL TRUSTS—A POPULAR NEW DISPOSITIVE APPROACHMost states have statutes or case law which restrict the lifetime of a trust. However, in 1997 the Alaska legislature amended our law to eliminate this restriction.1 Therefore, Alaska trusts may now be perpetual. This means that a trust formed by you (during life or after your death) will be available to provide benefits to your descendants and their families for as long as the trust continues to have assets. Usually a perpetual trust is divided into shares, one for each of your children. Then the income and principal of the child's trust will be used for the benefit of the child (the primary beneficiary) and your child's descendants. Often the trustee is given complete discretion to make distributions to them for any purpose, after taking into consideration their income and other resources, and the effect that any of these distributions will have upon them. In addition, the trustee may provide your beneficiaries with valuable benefits, such as use of a trust-owned residence, without actually distributing income or principal to them. After each child's death, that child's trust is divided among his or her children, and each of them becomes a primary beneficiary of a separate trust. These trusts will be administered and distributed pursuant to the same type of directions as those which apply to your child's trust. As each primary beneficiary dies, new trusts will be created for that deceased primary beneficiary's descendants. This plan will continue from generation to generation until the trusts run out of assets. Some clients desire to also include the spouses of their descendants in the above-described dispositive plan. Perpetual Trusts provide the following benefits:
- The trust assets are protected from your descendants' creditors. These creditors can include judgment creditors from commercial transactions, professional negligence, or personal injury claims. Further, the assets can be protected from a property division upon divorce. Your Perpetual Trust also provides protection against improper influences that may result from a descendant's inability, immaturity, inexperience, or incapacity to manage assets.
- Probate is avoided for assets held in the trust.
- The Perpetual Trust provides an "estate plan" for your descendants which is already in place.
- Each descendant may be given considerable flexibility to modify the trust's dispositive plan. A primary beneficiary is often given both a lifetime and a testamentary special power of appointment. This allows the primary beneficiary to gift trust assets during the beneficiary's lifetime and to change the estate plan at the primary beneficiary's death.
- Potential for enormous inheritance tax savings.
You may decide to transfer assets to your perpetual trust during your lifetime. These assets will be accounted for under the federal gift tax. At present, you can transfer $5,340,000 gift tax-free, using your applicable credit. Alternatively, or in addition, your estate planning may direct that certain assets be transferred to your perpetual trust at the death of the first spouse, or at the death of the surviving spouse. These transfers will be accounted for under the federal estate tax. Finally, other irrevocable trusts which you have created may direct that some or all of their assets be transferred to your perpetual trust. These transfers have probably already been accounted for under the federal gift tax.
When the above-described transfers are made to your perpetual trust, the trustee is directed to divide the assets into GST exempt trusts and GST non-exempt trusts. As discussed above, the GST exempt trusts are those that are protected by allocation of you and your spouse's exemptions from the GST tax exemptions from the GST tax. If assets are allocated to the perpetual trust in excess of your available GST exemption amounts, then the excess assets will be allocated to "non-exempt" trusts.
The GST exempt trusts will only be subject to transfer taxes once, as described above. Thereafter, these assets may be used for the benefit of your children, grandchildren, great grandchildren, and so on, without any further transfer taxes. This is an extremely valuable benefit of the perpetual trust. The compounding growth of the perpetual trust's assets is far superior to the growth of assets subject to transfer taxes at each generation. To illustrate this benefit, compare the compounded growth of a perpetual trust funded with $1,000,000, not subject to further inheritance taxes, to family assets of $1,000,000 which are taxed at each generation (assume thirty years per generation). Assume a six percent growth rate (that is, growth of nine percent per year, less 33 percent income taxes).
In this example, after 30 years the perpetual trust has twice the assets as compared to a family which did not create such a trust. After sixty years (two generations), the perpetual trust has three times as many assets!
Nonresidents of Alaska Are Using Perpetual Trusts.
Nonresidents of Alaska may choose to form an Alaska perpetual trust in order to take advantage of Alaska's law. In order to establish adequate contacts with Alaska, the Alaska statutes provide for an Alaska Qualified Trustee. Such a trustee must be an individual domiciled in Alaska or an Alaska trust company or bank. Other co-trustees may be nonresidents. The Alaska trustee's powers must include maintaining records for the trust on an exclusive or non-exclusive basis, and preparing and arranging for the preparation of any income tax returns that must be filed by the trust, again on an exclusive or non exclusive basis. It is recommended that an Alaska perpetual trust have an Alaska qualified trustee, and that some of the trust assets be located in Alaska.
Our office can provide you with additional memoranda concerning perpetual trusts. Alternatively, call for an appointment to discuss this popular trust.
1 Alaska's abolition of the rule against perpetuities was refined in 2000, to avoid the "Delaware Tax Trap." Alaska Statute 34.27.051.
If you have any questions about an Alaska perpetual trust,
you may contact us by using the information set out below:
SHAFTEL LAW OFFICES, P.C.
1029 West Third Avenue, Suite 600
Anchorage, Alaska 99501
FAX: (907) 278‐6015