Published in Estate Planning magazine, October 2002; Published in the North Carolina Bar Association Estate & Planning Fiduciary Law Section Newsletter in two parts in the May and June 2002 issues; Published in the Estate Planning Section Newsletters in the State of Washington and State of California.

Five years ago, Alaska approved the creation of self-settled discretionary spendthrift trusts. This article examines how these trusts have been used in Alaska, and analyzes planning for these trusts in light of existing authority.

In 1997, Alaska was the first state to enact a usable statute authorizing self-settled discretionary spendthrift trusts (“SSDS Trusts”).¹ In addition, Alaska made its first attempt to abolish the rule against perpetuities, so as to allow the formation of Alaska perpetual trusts.² Five years have elapsed. Many non-Alaska practitioners have inquired about Alaska's experience with SSDS Trusts. For the period from 1997 to the present, the following experience has been reported.³

Alaska trustees report that approximately 870 trusts have been formed under Alaska law by nonresidents of Alaska.⁴ Of these, approximately 310 are SSDS Trusts, and the balance are perpetual trusts. Most of the SSDS Trusts also used a perpetual trust plan. Approximately 110 attorneys provided the legal services for the creation of these trusts.

Alaska estate planning attorneys report that approximately 125 SSDS Trusts have been formed for Alaska residents. In addition, 200 to 300 perpetual trusts have been created for Alaskans. Several lawyers report that their standard “default plan” for medium and large estates now is based on a perpetual trust dispositive plan. Approximately 60% of both the resident and nonresident SSDS Trusts have involved contributions of assets which were completed gifts for federal gift tax purposes.

When the Alaska Legislature enacted statutes authorizing the creation of SSDS Trusts in 1997, the initial focus was on asset protection. Gifts to such pure asset protection trusts would often be structured to be “incomplete” for gift tax purposes.⁵ This would allow substantial funding without the payment of gift tax. Advocates of foreign trusts correctly pointed out that persons seeking maximum asset protection should look offshore.⁶ As a result, in the five years since passage of the Alaska statutes, the primary focus of Alaska SSDS Trusts has changed from asset protection to transfer tax reduction. The use of SSDS trusts for such tax reduction is also the focus of this article.

The following example of a “planning dilemma” illustrates the use of SSDS Trusts for transfer tax reduction planning. The balance of this article discusses (1) how such trusts have been structured and implemented in Alaska, (2) the use of SSDS Trusts by nonresidents of Alaska, (3) how an SSDS Trust could fail, and (4) planning analysis in view of the existing authority. Tax and asset protection issues are identified, and their merit is discussed.

The planning dilemma: Early gift giving vs. future possible needs.

Consider this planning situation: your clients are a couple in their 50s. One or both is a small business owner, executive, or professional. Their net worth is in the range of $3 million to $10 million. Substantial estate taxes could be saved if your clients made annual exclusion and applicable credit gifts to irrevocable trusts for their children and/or grandchildren. These gifts will not render the clients insolvent, nor will they be transfers made with an intent to evade existing creditors. The gifts could be structured so that they qualify for valuation discounts, and the growth of the gift assets would be excluded from your clients' estates.⁷Based on your clients' net worth and their anticipated future earnings, it appears that these gifted amounts would not be needed by them. Nevertheless, your clients are reluctant to give away significant assets at this point in their lives. They tell you that they might need these assets in the future if they have an unexpected financial reversal.

Your clients ask if they can be added as discretionary beneficiaries of the trust. Then, the trustee can make distributions to them if needed. You respond that if they were added as discretionary beneficiaries, the IRS could successfully argue that the trust assets should be included in their gross estates at death and be taxed under the federal estate tax.

The reason is that your state has a statutory or case law policy that provides that if the settlors are discretionary beneficiaries of the trust, the settlors' creditors can reach the maximum amount that the trustee could distribute to the settlors and, in many instances, this would be all the assets in the trust.⁸ Therefore, the settlors could “run up” debts and the settlors' creditors could reach the trust assets to satisfy these obligations. Another way of looking at the situation is that the settlors, indirectly, have retained the ability to reach the trust assets through incurring debts.

his indirect retention of the use of the trust assets prevents the settlors' transfers to the trust from being completed gifts for gift tax purposes.⁹ Moreover, such indirect retention would result in the trust assets being included in the settlors' gross estates under Sections 2036 and 2038.¹⁰

Alaska's statutory change provides a solution. In 1997, the Alaska Legislature changed Alaska law to authorize the use of SSDS Trusts. The new legislation provided, in effect, that under Alaska law a settlor may create an irrevocable trust, transfer assets to it, be a discretionary beneficiary of such trust, and yet, the settlor's creditors cannot reach the assets in such a trust.¹¹

From a transfer tax standpoint, because the settlor's creditors cannot reach the assets in the trust, the settlor's ability to incur debt does not give the settlor “dominion and control” over the trust assets. Accordingly, the settlor's transfers to an SSDS Trust are completed gifts. The IRS has agreed.¹² In addition, proponents of SSDS Trusts contend that none of the inclusion provisions of the federal estate tax apply to the assets in an Alaska SSDS Trust. The proponents’ position is that the settlor has not retained the enjoyment or income from the assets (Section 2036), nor does the settlor possess at death the power to alter, amend, revoke, or terminate the transfer (Section 2038). Hence, the trust assets should be excluded from the settlor's gross estate.¹³

As a result, the clients in our example (above) may create an Alaska SSDS Trust, make annual exclusion and applicable exclusion amount gifts to the trust,¹⁴ and be included in the class of discretionary beneficiaries to whom an independent trustee may make distributions. A strong position exists that such assets will not be included in the clients’ gross estates at their deaths. If the clients need funds in the future, due to an unexpected financial downturn, the trust assets are available.

How an SSDS Trust is structured and funded.

Often, settlors first form a family limited partnership (FLP) or family limited liability company (FLLC).¹⁵ These entities are funded with investment assets such as interests in closely held businesses, real estate, and marketable securities. The clients may desire that they, or family members, be the general partners or managers. Then, the clients give to the SSDS Trust the limited partnership or non-managerial LLC interests. In this way, the clients--or their family members--retain the ability to manage the assets and to decide when distributions will be made to the trust. Giving gifts of the non-managerial interests qualifies for valuation discounts.

A “rule of thumb” has developed concerning the portion of a client's assets which should be transferred to an SSDS Trust. This “rule” limits such assets to no more than one-third (conservative) to one-half (aggressive) of the client's net worth. The rationale for this “rule” is that a settlor would not give away assets that the settlor knew with some certainty that he or she would need in the future, unless the settlor also knew that he or she could get the assets back. Thus, the transfer of too large a proportion of the settlor's assets to an SSDS Trust invites a court finding that an agreement exists between the settlor and the trustee.¹⁶

Trust-owned life insurance. SSDS Trusts have also become a vehicle for the ownership of insurance on the settlors' lives. For example, suppose the clients wish to purchase a second-to-die life insurance policy that will develop substantial cash value and will benefit from income tax-free inside buildup. However, the clients may want the ability to reach the value of the policy if they have a financial reversal.

If the policy is owned by an SSDS Trust, the independent trustee may borrow from the insurance company, or even cash in the policy, in order to make discretionary distributions that are needed by the settlors. The fact that the settlors are discretionary beneficiaries of the trust does not appear to be enough to conclude that they have retained “incidents of ownership” in the policy.¹⁷ Nevertheless, careful choices of trustees and drafting are necessary to ensure that incidents of ownership are not attributable to the clients.

The dispositive plan. A typical SSDS Trust will provide that the independent trustee has absolute discretion to make distributions to a class of beneficiaries that includes the settlors and their descendants. This absolute discretion is provided to avoid an exception to the Alaska spendthrift rule for any portion of a trust's income or principal which must be distributed to the settlor.¹⁸ Further, absolute discretion avoids contentions that a beneficiary (or the beneficiary's creditors) can force a trustee to make distributions pursuant to an ascertainable standard stated in the trust instrument.¹⁹ For instance, a creditor could argue that maintenance or support includes the payment of the beneficiary's creditors. Alternatively, a creditor could argue that a trustee is required, pursuant to the ascertainable standard, to distribute assets to an insolvent beneficiary. Then, the creditor could attempt to attach the distributions.

Often, an SSDS Trust will contain a perpetual trust dispositive plan to be implemented after the deaths of the settlors.²⁰ A perpetual trust dispositive plan is designed to provide the following advantages for the non-settlor beneficiaries: (1) asset protection for descendants; (2) elimination of transfer tax upon the portion of the assets held in a generation-skipping transfer (GST) tax-exempt trust; (3) management; (4) an “estate plan” that is already in place; and (5) probate avoidance.²¹

Choice of trustees. At least one trustee of an SSDS Trust should be an independent trustee. This independent trustee has all trust distribution powers under the absolute discretion standard. In order to preserve the independence of the trustee, there must not be any agreement between the independent trustee and the settlor regarding distributions.

The existence of such an agreement would allow the settlor's creditors to reach the trust assets because the settlor would have a right to the distribution of the assets.²²The result would be inclusion of the assets in the settlor's gross estate.²³ Such an agreement could be written, verbal, or implied through a pattern of distributions.²⁴ It would be more likely that a court might imply an agreement between the trustee and settlor if the independent trustee had a relationship with the settlor. Such relationships would include being a close relative, close friend, or employee. Because the transfer tax advantages depend on the premise that the settlor's creditors cannot reach the assets in the trust, it is very important to choose a trustee who will minimize the risk that an implied agreement will be found.

In addition to an independent trustee, some clients wish to appoint a family trustee who will have some or all of the administrative responsibilities for the trust. These are not tax-sensitive duties,²⁵ and should not affect the creditor protection of the trust. However, if the trust owns insurance policies on the life of a family trustee, the managerial duties relating to such policies must be reserved for the independent trustee to avoid inclusion of the insurance proceeds in the family trustee's gross estate.

The state where a potential trustee resides must be considered. A creditor can obtain jurisdiction over the trust in that state. Then, that state’s courts will first decide conflict of laws issues, and a judgment from such state's courts will be entitled to full faith and credit in Alaska. Moreover, if the trustee resides in a state that has an income tax, that state may assert its tax against the trust.²⁶

Future amendments. The newness of SSDS Trusts and the ambiguous state of the law has encouraged drafters to build flexibility into the trust instrument. The independent trustee, or an independent trust protector, is often given the authority to amend the trust instrument in order to adjust for future changes in the tax law.²⁷A trust protector may be given the power to eliminate the settlor as a discretionary beneficiary of the trust,²⁸ and to change the choices of trustees. The goal of such provisions is to allow future adjustments so that the trust assets will not be included in the settlor's gross estate if the tax law is interpreted or changed in a manner indicating that such inclusion is likely.

Use of SSDS Trusts by nonresidents of Alaska.

The framers of the Alaska SSDS and perpetual statutory trust provisions considered that persons located outside Alaska might well be interested in using such trusts. Consequently, they enacted statutory provisions which the framers thought would establish a sufficient Alaska nexus so that Alaska law would apply to nonresident trusts.

These provisions require that some or all of the trust assets be deposited in Alaska and administered by a “qualified person,” who is either an individual who is an Alaska resident, or an Alaska trust company or bank.²⁹ The powers of the Alaska trustee include, or are limited to, maintaining records for the trust on an exclusive or nonexclusive basis, and preparing or arranging for the preparation of, on an exclusive or nonexclusive basis, an income tax return that must be filed by the trust. Part or all of the trust administration is to occur in Alaska, including physically maintaining trust records in this state.³⁰

In order for nonresidents to achieve the transfer tax benefits of an SSDS Trust, they must qualify for the underlying asset protection provided by the Alaska statute. Additional issues have been raised questioning such qualification. These issues are discussed below in the section entitled, “How could an SSDS Trust fail?.”

Subsequent Alaska legislation facilitating SSDS Trusts.

In addition to the 1997 legislation which reversed the general rule concerning SSDS Trusts and abolished the rule against perpetuities, the Alaska Legislature subsequently enacted a number of other provisions that facilitate the use of these trusts and trust administration in the state.³¹

How could an SSDS Trust fail?

As discussed above, this type of transfer tax planning first depends on the asset protection foundation. Once an adequate asset protection foundation exists, the inquiry shifts to analysis of two federal estate tax provisions (Sections 2036 and 2038) and the contention regarding the Contract Clause.

Residents of states that have enacted SSDS statutes have a strong position concerning the asset protection foundation.³² Nonresidents who establish SSDS trusts have additional issues relating to whether they have an adequate asset protection foundation: the Full Faith and Credit Clause and the bankruptcy court scenarios.

If the transfer tax issue is contested, the asset protection foundation will be hypothetical. There will not be a creditor trying to reach the assets of the trust. The court will need to decide if an “adequate” asset protection foundation exists for the settlor in question. Such a foundation may well not need to be perfect and without any theoretical weaknesses.

Application of Sections 2036 and 2038. With the above analytical approach in mind, first consider the provisions of the estate tax. If applicable state law prevents the settlor's creditors from reaching the trust assets, Section 2038 does not apply because, as of the date of the settlor's death, the settlor does not have the power to revoke the trust by relegating creditors to the trust assets. The remaining estate tax issue is whether, pursuant to Section 2036(a)(1), the settlor has retained enjoyment of, or the right to income from, the trust assets. Initially, the plain language of Section 2036(a)(1), which requires “retention” does not seem to apply to a settlor-beneficiary, who may receive distributions only pursuant to the absolute discretion of an independent trustee.

There are a number of authorities that support the conclusion that “retention” within the meaning of Section 2036(a)(1) does not exist with respect to the rights of a discretionary settlor-beneficiary.³³ One critical analyst of these authorities, Professor Pennell, finds some to be indirect or not on point, but concedes there is supporting authority for the conclusion that the trust assets will not be included in the settlor's gross estate.³⁴ Another analyst, Professor Dodge, states, “[t]he better rationale for the exclusionary rule here is that the grantor has not 'retained' the income from the transferred property.”³⁵

Finding “retention” under the existing language of Section 2036, based only on the settlor's status as a discretionary beneficiary, is a significant stretch. In a similar situation involving questionable coverage by Section 2036 of joint purchases of property, the Treasury Department found the need for a statutory change.³⁶ One analyst concluded, “[i]t was sufficiently unclear whether § 2036(a)(1) would apply to such a case that § 2702(c)(2) specifically addresses this form of transaction.”³⁷

If Section 2036 is amended to expressly include SSDS Trusts, and if such amendment is stated to be a change in the law, then its effect should be prospective. Existing SSDS Trusts should be grandfathered. If the amendment is stated to be only a clarification of the law, this issue of statutory interpretation will continue for existing SSDS Trusts. Nevertheless, as a practical matter, the Service may take a much less aggressive position in regard to trusts formed prior to the amendment.

Interestingly, if there were a statutory change in Section 2036 with regard to SSDS Trusts, there is no certainty that the change would be designed to produce inclusion of the trust assets in the settlor's gross estate. Congress' recent legislative changes in the transfer tax area have gone in the other direction.³⁸ A reasonable argument can be made that Section 2036 should be amended to expressly allow a settlor to create an SSDS Trust in any jurisdiction in order to solve the “planning dilemma” described earlier. Such an accommodation might help alleviate the tension between complete repeal of the estate tax and “sunset,” which exists under the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act).

Alternatively, faulty implementation of the trust could result in estate tax inclusion. The specific choices of trustees, documentation, and pattern of distributions may justify a court finding that an agreement existed between the settlor and the trustee to make certain distributions.³⁹ This would constitute the retention of an income interest, and Section 2036 would apply. The result would be inclusion of trust assets in the settlor's gross estate.⁴⁰

The Contract Clause. Next, consider the Contract Clause⁴¹ contention, which applies to both residents and nonresidents of SSDS states. To violate the Contract Clause, an SSDS statute must substantially impair the obligations of parties to existing contracts or make them unreasonably difficult to enforce.⁴² The violation of the Contract Clause occurs because of the retroactive effect of the statute upon contracts that exist on the date of enactment of the statute.⁴³ Creative arguments have been made in support of a Contract Clause violation by the new SSDS statutes.⁴⁴ The settlor's response would be that a contract creditor still has adequate remedies under the state's fraudulent conveyance statute. The contract creditor would then contend that if the transfer does not constitute a fraudulent conveyance, the settlor has successfully protected assets which the contract creditor could otherwise have reached.⁴⁵

The relevance of this Contract Clause contention to transfer tax planning involves the completed gift issue.⁴⁶ If a settlor has existing contract creditors when the SSDS statute was passed (1997), the settlor could refuse to pay these creditors. They could then attack the transfer pursuant to the Contract Clause theory. If the contract creditors are successful, the settlor will arguably have relegated creditors to the trust's assets. The tax issue is whether in such a scenario the settlor has retained such “dominion and control” as to prevent the gift from being completed. Because this Contract Clause contention applies only to contract creditors who existed on the date of enactment of the statute (1997), as time expires this argument will become factually irrelevant to settlors forming new SSDS Trusts.⁴⁷

The full faith and credit scenario. Now consider the full faith and credit scenario involving a nonresident settlor. Assume that a hypothetical creditor sues the settlor in the settlor's domiciliary state and obtains a judgment. Next, assume that as part of that suit, or in a separate action in the domiciliary state, the creditor proceeds against the trustee of the SSDS Trust in order to enforce the judgment against the trust's assets.

The first issue is one of choice of law. Which state's spendthrift trust rules apply--Alaska's or the rules of the settlor's state of domicile? A sub-issue is whether this question is one of administration or validity of the trust.⁴⁸ Depending on how this sub-issue is resolved, ultimate resolution of this conflict of laws issue may be factually dependent.⁴⁹ The public policy of the domiciliary state may need to be determined.⁵⁰

Assume that the domiciliary court chooses its spendthrift trust rules and enters a judgment against the trustee. The hypothetical creditor then proceeds to Alaska and asks the Alaska court to enforce the judgment against the trustee based on the Full Faith and Credit Clause.⁵¹ A basic requirement for full faith and credit is that the judgment be valid.⁵² One requisite for validity is that the forum court possessed jurisdiction.⁵³ Assume that the Alaska trustee did not participate in the domiciliary court action and had few, if any, contacts with that state.⁵⁴ Then, the domiciliary state's jurisdiction over the Alaska trustee and the assets such trustee holds will be highly questionable.⁵⁵ Consequently, full faith and credit may well be denied.⁵⁶

The bankruptcy court scenario. The bankruptcy court scenario must also be considered when analyzing the asset protection foundation of a nonresident settlor. This scenario includes both statutory interpretation and choice of law issues. First, assume that a creditor has forced the settlor into involuntary bankruptcy. However, section 541(c)(2) of the Bankruptcy Code expressly exempts spendthrift trusts. Therefore, in order to include the trust’s assets in the bankruptcy estate, the creditor must persuade the court to narrowly construe this provision to exclude the recent Alaska, Delaware, Nevada, and Rhode Island SSDS Trust statutes.⁵⁷ Only with such a narrow construction would the Supremacy Clause⁵⁸ give Bankruptcy Code section 541(c)(2) precedence over conflicting state SSDS provisions. Then, the trust assets would be included in the bankruptcy estate.⁵⁹

If the creditor fails to convince the bankruptcy court to so construe the code, then alternatively the creditor can argue the choice of law issue. This issue assumes that the creditor forces the settlor into involuntary bankruptcy in the settlor's state of domicile. The bankruptcy court will have personal jurisdiction over the Alaska trustee based on the court's national jurisdiction. The court will need to resolve the choice of law issue.⁶⁰If (1) the bankruptcy court applies the domiciliary state's choice of law rules, (2) those rules follow the Restatement of Conflict of Laws,⁶¹ and (3) the court determines the issue is one of validity of the trust, then the bankruptcy court may determine that the Alaska SSDS statute violates a strong public policy of the domiciliary state.⁶² As a result, the trust assets will be included in the bankruptcy estate.

This choice of law bankruptcy scenario involves a number of obstacles. First, all the legal assumptions described above must fall into place. Next, it assumes the creditor is successful in forcing the settlor into involuntary bankruptcy.⁶³ More importantly, if the settlor anticipates this scenario, the settlor may voluntarily declare bankruptcy in Alaska. This may lead the bankruptcy court to apply Alaska's SSDS rules.⁶⁴

Summary for nonresidents.

First, it is important to consider the difference between pure asset protection cases and transfer tax litigation. The highly publicized recent asset protection cases involved extreme facts and equities that would influence most courts to sympathize with the plaintiff-creditor.⁶⁵ The situation is quite different when the asset protection issue is hypothetical, and needs resolution only so that the transfer tax issue may be determined.

The above analysis establishes that the asset protection foundation for a nonresident settlor using an Alaska SSDS Trust is not absolute. The interesting question is whether such a foundation needs to be perfect for transfer tax purposes. The above analysis describes theoretical approaches for a creditor to reach the SSDS Trust assets, if the facts are right and if a court follows a specific decision-tree. Are these approaches certain enough to undermine the asset protection foundation, for transfer tax purposes, of a carefully implemented Alaska SSDS Trust created by a nonresident? This is the crucial issue for nonresident settlors.

Why don't we have more authority?

Five years have elapsed since the enactment of Alaska's SSDS Trust statutes. However, authority and review remain sparse. The IRS has refused to rule further on such trusts.⁶⁶ Despite the formation of numerous SSDS Trusts, practitioners in Alaska and Delaware report that as yet there is no audit experience. Consequently, there has been no administrative or judicial review of such trusts.

With respect to residents of states that have enacted SSDS statutes, the Service's estate tax statutory position appears weak. The Contract Clause contention becomes factually irrelevant as time expires. Therefore, a challenge may occur only if there is faulty implementation of the trust. Resolution of such a fact-dependent case will not be helpful for the resolution of other cases involving properly implemented trusts.

With respect to nonresidents, the additional issues revolve around whether the asset protection foundation exists. The discussion of the full faith and credit and bankruptcy court scenarios demonstrates that most of these issues are both highly fact-specific and depend on unpredictable decisions of domiciliary, Alaska, and bankruptcy courts. When cases are decided in the future, the decisions may be narrow and limited to the specific situation involved.⁶⁷

A legislative resolution of the effectiveness of transfer tax planning with SSDS Trusts is also unpredictable. At some point before 2010, Congress will likely “rethink” the transfer tax changes enacted by the 2001 Tax Act. Section 2036 could be amended to resolve this area. But which way?

In view of the above-described limited arguments available to the Service with respect to residents of an SSDS state, and the fact-specific character of the issues involving nonresident settlors, there may continue to be a lack of significant judicial authority in this area.⁶⁸ If the tax question does arise, the Service and the estate's representative often may find a negotiable resolution.

What should planners do? Evaluate your clients' tolerance for ambiguity, and the downside.

Clients considering the use of an SSDS Trust for transfer tax reduction purposes should be fully advised of the present lack of significant authority. Planners and their clients need to be aware that such authority in this area may continue to be slow in coming. Those uncomfortable with such ambiguity should not use an SSDS Trust. For clients who are still interested, an analysis should be made of the downside risk.

If the SSDS Trust approach were to fail because of one of the issues discussed above, the following transfer tax consequences would occur. The trust assets and their appreciation will be included in the settlor's gross estate and be subject to estate tax.⁶⁹Further, the settlor has lost the benefit of the annual exclusion gifting that was made to the trust. The settlor's estate retains the use of the applicable credit amount that was originally allocated to the completed gift to the trust.⁷⁰The settlor has lost the cost of creating and maintaining the trust.

What if the settlor made attempted completed gifts that were larger than the settlor's annual exclusion and applicable credit amounts and, as a result, paid out-of-pocket gift tax? In addition to the above consequences, the settlor would have lost the use of the out-of-pocket tax amount during the settlor's lifetime. Moreover, if the federal estate tax is permanently repealed, the payment of the gift tax would have been unnecessary.

The main downside risk would appear to be that the settlor has lost the opportunity to do some different planning with the settlor's annual exclusion gifts and with the portion of the settlor's applicable credit amount used for the SSDS Trust. Would the settlor have done such different planning? How do the risks and rewards of such different planning compare to the SSDS approach? These are the key questions that the estate planner and interested clients need to resolve.

¹Alaska's statute was passed in April 1997. Delaware immediately followed suit and enacted its version in July 1997. In 1999, both Nevada and Rhode Island passed statutes designed to implement SSDS Trusts. In this article, an “SSDS Trust” means an irrevocable trust which authorizes an independent trustee, in such trustee's absolute discretion, to make distributions to a class of beneficiaries which includes the sttlors.

²In this article, a “perpetual trust” means an irrevocable trust created in a jurisdiction that has abolished the rule against perpetuities, and therefore the trust can continue as long as it has assets. Many SSDS Trusts are also designed as perpetual trusts. Alaska perfected its abolition of the rule against perpetuities in 2000. See note 20 infra.

³The general factual information stated above and elsewhere in this article concerning Alaska SSDS and perpetual trusts is based on anecdotal, as opposed to scientific, research by the author. The author surveyed institutions and individuals that had indicated an interest in acting as a trustee for nonresident trusts. Also contacted were Alaska estate planning attorneys likely to be involved in creating SSDS Trusts for Alaska residents or in helping non-Alaska attorneys form such trusts.

⁴The numerical counts stated in this article refer to the number of trust instruments. Each trust instrument may create one or more separate subtrusts.

⁵Alaska Statute 34.40.110(b)(2) allows the settlor to retain a power to veto a distribution from the trust or a testamentary special power of appointment. Either approach makes the gift incomplete.

⁶Giordani and Osborne, “Alaska Asset Protection Trusts: Will They Work?,” included in Osborne and Schurig, “Asset Protection: Domestic and International Law and Tactics,” Special Pamphlet to 1997-4 Supplement (Clark Boardman Callaghan, 1995); Osborne, “Asset Protection and Jurisdiction Selection: Clearing Up Your Situs Headaches,” 33 U. Miami Heckerling Inst. on Est. Plan. (1999); Hogan, “Once More Unto the Breach: Planning for a Conflict of Laws With Alaska and Delaware Self-settled Spendthrift Trusts,” 14 Prob. & Prop. (Mar./Apr. 2000).

⁷For example, assume that your clients give gifts totaling $1 million and that they are both 50 years of age. Further assume that these assets grow at a net rate of 5% per year and that the second to die of your clients lives to age 84. The gift assets will grow to $5,454,648. Subtracting the $1 million initially given to the SSDS Trust leaves growth of $4,454,648. Assume this growth is taxed at a federal estate tax rate of 45%. This would produce taxes of $2,454,592. This is the tax amount that would have occurred 34 years from now if your clients had not given the $1 million to the SSDS Trust. Using the same 5% rate, avoiding this tax produces a present value savings of approximately $449,000.

⁸Prior to 1997, almost all states had such a policy.

⁹Reg. 25.2511-2(b) provides that a gift is complete if the donor “has so parted with dominion and control as to leave in him no power to change its disposition, whether for his own benefit or for the benefit of another . . . .” The above reasoning illustrates that this test is not satisfied by SSDS Trusts in most states.

¹⁰Section 2036 would probably apply because the settlors have retained the enjoyment of, and income from, the property by their ability to incur debt which their creditors may satisfy from trust assets. Section 2038 would apply because the above-described ability to relegate creditors to the trust assets allows the settlors to revoke the transfer of assets to the trust.

¹¹Alaska Statutes 34.40.110; 13.36.310.

¹²Ltr. Rul. 9837007, which involved an Alaska resident; Rev. Rul. 77-378, 1977-2 CB 347.

¹³For a comprehensive discussion of these issues, including the relevant authorities, see Blattmachr and Zaritsky, “North to Alaska--Estate Planning Under the New Alaska Trust Act,” 32 U. Miami Heckerling Inst. on Est. Plan. (1998); Pennell, 2 Estate Planning §7.3.4.2 (Aspen, 6th ed.); Manley, “Estate Planning and Asset Protection Using Self-Settled Alaska Trusts,” 33 U. Miami Heckerling Inst. on Est. Plan. (1999), Spec. Sess.; and Shaftel, “Newest Developments in Alaska Law Encourage Use of Alaska Trusts,” 26 ETPL 51 (Feb. 1999). In the application for Ltr. Rul. 9837007, the Alaska settlor stated her position that the trust not be includable in her estate. In response, the Service declined to rule.

¹⁴Gifts to a fully discretionary trust cannot be “split,” under Section 2513, with a spouse who is a discretionary beneficiary. See Handler and Chen, “Fresh Thinking About Gift-Splitting,” 141 Tr. & Est. 36 (Jan. 2002); Benjamin, “When Should the Option to Split Gifts Be Chosen?,” 22 ETPL 24 (Jan./Feb. 1995).

¹⁵Alaska's limited partnership and limited liability company statutes have both been amended so as to maximize qualification for valuation discounts. See Alaska Statutes 32.11.110, et seq., and 10.050.010, et seq.

¹⁶The consequences of such an agreement are discussed below in the material on “Choice of trustee.”

¹⁷See Ltr. Rul. 9434028. Reg. 20.2042-1(c).

¹⁸Alaska Statute 34.40.110(b)(3).

¹⁹Restatement (Second) of Trusts §155, comment b (1959); Rothschild, “Protecting the Estate From In-Laws and Other Predators,” 35 U. Miami Heckerling Inst. on Est. Plan., pp. 17-21 through 17-23 (2001).

²⁰In 1997, Alaska took a first step in abolishing its rule against perpetuities. This abolishment was perfected in 2000 by amendments designed to avoid the “Delaware Tax Trap.” Alaska Statute 34.27.051-.100. See Greer, “The Delaware Tax Trap and the Abolition of the Rule Against Perpetuities,” 28 ETPL 68 (Feb. 2001). Alaska is one of only several states that (1) have successfully abolished the rule against perpetuities in a manner that avoids this tax trap, and (2) also do not have a state income tax.

²¹These planning concepts have been thoroughly analyzed and discussed by Frederick R. Keydel and Harvey B. Wallace II in “Trust Drafting for the Unforeseeable,” presented at a workshop and later incorporated by Ronald D. Aucutt into “Structuring Trust Arrangements for Flexibility,” 35 U. Miami Heckerling Inst. on Est. Plan. (2001).

²²Alaska Statute 34.40.110(b)(3).

²³See Reg. 20.2036-1(a) which finds “retention” under Section 2036 if such an agreement exists.

²⁴Cases involving Section 2036 and an implied understanding of grantor access are discussed in Boxx, “Gray's Ghost--A Conversation About the Onshore Trust,” 85 Iowa L. Rev. 1195, at 1244-1251 (2000).

²⁵Pennell, 2 Estate Planning, supra note 13, at §7.3.3, p. 320.

²⁶Coleman, “State Fiduciary Income Tax Issues,” ALI-ABA Advanced Estate Planning Techniques (2002); Gutierrez, “The State Income Taxation of Multi-Jurisdictional Trusts—The New Playing Field,” 36 U. Miami Heckerling Inst. on Est. Plan. (2002).

²⁷Such flexibility and suggested provisions are discussed in McBryde and Keydel, “Back to the Future for the Estate Planner: Building Flexibility in Estate Planning Documents,” 30 U. Miami Heckerling Inst. on Est. Plan. (1996).

²⁸See Dodge, 50-5th T.M. (BNA), Transfers With Retained Interests and Powers, p. A-78.

²⁹Alaska Statute 13.36.390(2).

³⁰Alaska Statute 13.36.035(c).

³¹These changes are discussed in Greer and Shaftel, “Alaska Enacts Additional Estate Planning Legislation,” 27 ETPL 376 (Oct. 2000), and Shaftel, “Newest Developments in Alaska Law Encourage Use of Alaska Trusts,” supra note 13.

³²This article and its hypotheticals assume that a fraudulent transfer has not been made. Both residents and nonresidents will be vulnerable to a creditor challenge if the settlers were found to have transferred assets to the SSDS Trust with an intent to evade existing creditors. Alaska Statute 34.40.110(b)(1). See Osborne, “Asset Protection and Jurisdiction Selection: Clearing Up Your Situs Headaches,” supra note 7, at 13-28.

³³See the authorities cited in the articles listed in note 13 supra.

³⁴Pennell, 2 Estate Planning, supra note 13, at §7.3.4.2. This commentator concludes, “[t]he answer to that question has not adequately been provided by case law or rulings.” Id., p. 7.345.

³⁵Dodge, 50-5th T.M. (BNA), Transfers With Retained Interests and Powers, p. A-23.

³⁶Section 2702(c)(2), enacted in 1990.

³⁷Pennell, 2 Estate Planning, supra note 13, at §7.3.4.1, p. 7.334.

³⁸The best example is the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act or EGTRRA), which has as its ultimate goal the repeal of the estate tax.

³⁹See note 23 supra and the text to which it relates.

⁴⁰If the settlor's interest applied to all the trust's assets, the assets would all be included in the settlor's gross estate. On the other hand, if the settlor desired an interest in only part of the trust's assets, then only the proportion “retained” would be included in the settlor's gross estate. Reg. 20.2036-1(a). See Mahoney, 831 F.2d 641, 60 AFTR2d 87-6152 (CA-6, 1987); Estate of Tomac, 40 TC 134 (1963); Rev. Rul. 79-109, 1979-1 CB 297. This provides a hedge for the more conservative settlor and planner.

⁴¹U.S. Const. art. I, §10, cl. 1.

⁴²Osborne, “Asset Protection and Jurisdiction Selection: Clearing Up Your Situs Headaches,” supra note 6, at 14-26.

⁴³Id.

⁴⁴Id. See also Boxx, “Gray's Ghost,” supra note 24, at 1230.

⁴⁵Osborne, “Asset Protection and Jurisdiction Selection: Clearing Up Your Situs Headaches,” supra note 6, at 14-26. Boxx, “Gray's Ghost,” supra note 24, at 1240.

⁴⁶See section of this article entitled, “The planning dilemma: Early gift giving vs. future possible needs.”

⁴⁷Boxx, “Gray's Ghost,” supra note 24, at 1240, n. 295.

⁴⁸If the question is one of administration, the settlor's choice of law in the trust instrument controls (Restatement (Second) Conflict of Laws §273(b).) If the question is one of validity of the trust, then again, the settlor's choice will prevail, “provided that this state has a substantial relation to the trust and that the application of its law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship under the principles stated in §6 . . . .” Id., §270.

⁴⁹For example, factual determinations may need to be made concerning whether Alaska has a substantial relation to the trust, and which state has the most significant relationship to the trust.

⁵⁰Further analysis of this conflict of laws issue may be found in Blattmachr and Zaritsky, “North to Alaska--Estate Planning Under the New Alaska Trust Act,” supra note 13; Hogan, “Once More Unto the Breach: Planning for a Conflict of Laws With Alaska and Delaware Self-settled Spendthrift Trusts,” supra note 6; and, generally, in Moore, “Choice of Law in Trusts: How Broad Is the Possible Spectrum?,” 36 U. Miami Heckerling Inst. on Est. Plan. (2002).

⁵¹U.S. Const. art. IV, §1.

⁵²18 Moore's Federal Practice §130.04[3] (Matthew Bender, 3d ed.).

⁵³Id. Restatement (Second) of Conflict of Laws §92, comment e.

⁵⁴Jurisdictional issues may be very fact-dependent. For example, there may be arguments that long-arm jurisdiction is appropriate due to a corporate trustee's activities in the domiciliary state, which may include advertising, attendance at conferences, articles in the national press, and website material. See Boxx, “Gray's Ghost,” supra note 24, at 1211-1212.

⁵⁵Id. at 1227

⁵⁶Id. at 1215.

⁵⁷See Osborne, “Asset Protection and Jurisdiction Selection: Clearing Up Your Situs Headaches,” supra note 6, at 14-24, for a full discussion of this statutory interpretation argument.

⁵⁸U.S. Const. art. VI.

⁵⁹An argument can be made that resident settlors could still rely on the Alaska SSDS Trust statute as a state law exemption independent of Bankruptcy Code section 541(c)(2). Nonresident settlors could not because section 522(b)(2) of the Bankruptcy Code limits state law exemptions to those of the debtor's domicile state.

⁶⁰See the choice of law discussion above with respect to the Full Faith and Credit Clause scenario.

⁶¹See note 48 supra.

⁶²This scenario has occurred involving offshore trusts. See Boxx, “Gray's Ghost,” supra note 24, at 1227-1230.

⁶³Id. at 1229.

⁶⁴Id.

^{65 E.g., Federal Trade Comm. v. Affordable Media, LLC, 179 F.3d 1228 (CA-9, 1999); In re Portnoy, 201 B.R. 685 (S.D.N.Y. 1996); and In re Brown, 4 Alaska B.R. 279 (D. Alaska, Mar. 11, 1996).}

^{66 See note 13, supra. Only two private letter rulings exist: Ltr. Rul. 9837007, which concluded that gifts were complete when made to an Alaska SSDS Trust designed for transfer tax reduction, and Ltr. Rul. 200148028, which found that gifts were incomplete when made to a Delaware trust designed only for asset protection, and also ruled that the Delaware trust was not a grantor trust for income tax purposes.}

^{67 In regard to personal jurisdiction issues, Professor Boxx states, “unfortunately, a decision that would expose the trust assets to the judgment in this context would be too fact-specific to have much relevance to future cases, since it would turn on personal jurisdiction of a particular state over a particular trustee. However, depending on the policy analysis done to determine personal jurisdiction, the decision could be a sufficient cautionary tale that would make the trusts less attractive or, at least, affect future litigation strategy.” See Boxx, “Gray's Ghost,” supra note 24, at 1221, n. 149.}

^{68In regard to the Section 2036(a)(1) issue, Professor Pennell concludes, “[t]his issue will take time to resolve, and there may be fits and starts as various courts analyze the question.” See Pennell, 2 Estate Planning, supra note 13, at §7.3.4.2, pp. 7.345-.346.}

^{69 If spouses are co-settlors, conservative drafting will include a provision that states that if trust assets are included in the gross estate of the first settlor to die, then such assets will be distributed to a QTIP trust for the surviving spouse.}

^{70Section 2001(b).}