Article: 10
  Volume 18, May 15, 2000.
David G. Shaftel, 2000 © All Rights Reserved.

All too frequently, estate planning documents fail to contain all of the provisions necessary to maximize available federal gift, estate and generation-skipping transfer tax benefits. The documents may have been drafted long ago, and not appropriately updated. Alternatively, the drafter may have omitted necessary tax provisions. To partially cure this problem, Alaska has enacted a "Safety Net" bill. This legislation is designed to supplement wills and trusts, so that various transfer tax benefits may be maximized.

1. Marital Deduction Trusts. In order to make sure that a trust qualifies for the federal gift and estate tax marital deductions, the new law provides that an investment in or retention of unproductive property as an asset of a trust is subject to the power of the spouse to require that, within a reasonable time, the trust assets produce income or be converted to assets that produce income. A trustee is authorized to divide marital trusts into two or more separate trusts if the terms of the resulting trusts are substantially identical to the terms of the trust before the division. Such a division may be important for the division of a marital trust when an election is made to only qualify part of the trust for the federal estate tax marital deduction. Similarly, such a division may be administratively desirable in order to divide a single marital trust into a GST exempt marital trust and a non-GST exempt marital trust. A trustee who makes an election to qualify part of all of the marital trust for the marital deduction or who makes an allocation of GST exemption may benefit personally from the election or allocation and is not required to reimburse other interested parties or make an equitable adjustment.

2. Funding. A wide variety of funding approaches is expressly authorized. These include distribution partially or fully in kind, in divided or undivided interests, and pro rata or non-pro rata among distributees. In addition, distributions may be made without regard to the income tax basis or the special tax attributes of the assets. Finally, the new provision states that a distribution may be made in whatever manner the personal representative finds to be the most practicable and in the best interest of the distributees.

3. Family-Owned Business Deduction. The relatively new federal family-owned business deduction was enacted by I.R.C. §2057. It is effective for decedents dying after December 31, 1997. Many wills and revocable trusts may not have been appropriately amended to take advantage of this deduction. The new Alaska legislation states that if a will, trust, or beneficiary designation is designed to reduce federal estate tax liability to zero, by describing a portion or an amount measured by reference to the unified credit, applicable exclusion amount, or exemption equivalent, then, unless specifically stated otherwise, the reference to such amounts shall be considered to include a reference to the family-owned business deduction.

4. Restriction of Powers of Trustee-Beneficiary. New provisions were enacted to protect against the inclusion of some or all of the trust assets in the gross estate of a trustee who is also a beneficiary of the trust. These provisions provide that a trustee who is not an independent trustee may not exercise a power to make a discretionary distribution to such trustee nor to any person holding a power to remove and replace the trustee, except to the extent that the power is governed by an ascertainable standard. A non-independent trustee may not exercise a power to satisfy a legal obligation owed by the trustee or by any person holding a power to remove the trustee. A non-independent trustee may not exercise a power to make a distribution if such distribution would constitute a taxable gift by the trustee or by a person holding a power to remove the trustee. If a trustee is prohibited by the above provisions from exercising a power, then either other trustees may exercise the power, or if none, the court may appoint an independent trustee. Finally, the prohibitions described above do not apply to a trustee if the trust property would be included, for a reason other than the exercise of the prohibited power, in the gross estate of the trustee.

5. Interest Rate for Pecuniary Devise. The interest provisions for general pecuniary devises have been changed. Unless a contrary intent is indicated by the governing instrument, such devises will not bear interest until two years after the decedent's death. The rate used will be the discount rate charged member banks for advances by the 12th Federal Reserve District. The statute provides that a marital pecuniary devise shares ratably with the residue of the estate in the income earned by the estate during the period of administration, unless a contrary intention is expressed by the governing instrument. One purpose of these provisions is to provide a state law definition of "appropriate interest." The allocation of such interest between pecuniary and residuary shares satisfies one of the requirements necessary for completely exempting from Federal Generation-Skipping Transfer Tax a residuary transfer which follows a pecuniary payment (See reg. §26.2642-2).

6. Revocable Trusts. The new trust funding provisions and the interest rate provisions described above are contained in probate code provisions which normally would only apply to the administration of estates. A provision has been added to broaden their application to include the administration of revocable trusts.

7. Conveyances of Real Property To and From Trusts. The legislation also includes a non-tax provision relating to title problems resulting from the conveyances of real property to and from trusts. In the past, a number of such conveyances have been in the name of the trust rather than the name of the trustee of the trust. A new provision has been added which states that a person, including a trustee, may convey real property to a trust whether or not a trustee of the trust is named as a grantee in the instrument of conveyance. Similarly, a trustee of a trust may convey real property from a trust whether or not a trustee of a trust is named as a grantor in the instrument of conveyance.

The above-described provisions are contained in Alaska House Bill 275, which enacts amendments to AS 13.12.720, 13.16.550, .560, 13.36.153, .169, .335, and 34.25.055. House Bill 275 was passed by the legislature on April 17, 2000, and sent to the Governor. His signature is expected.