Article: 19
David G. Shaftel
Law Offices of David G. Shaftel, PC, Anchorage, Alaska
© 2003. All rights reserved.

The Alaska Legislature has adopted a number of provisions which clarify and improve the Alaska Trust Act. This Act was enacted in 1997 and has served as a conceptual basis for four other states which have enacted self-settled discretionary spendthrift trust acts. A number of collateral implementing provisions have been enacted in Alaska during the last five years. However, this legislative session, the Alaska Legislature has accomplished a significant re-write of key provisions of the Act.

Perhaps the most novel new provisions relate to the statute of limitations for fraudulent conveyances. All of the five states' self-settled discretionary spendthrift trust acts provide that a fraudulent conveyance to a self-settled discretionary spendthrift trust (SSDS Trust) will not be effective. However, existing statutes and case law from other states have created a great deal of uncertainty concerning whether a conveyance will be considered fraudulent, and when the statute of limitations runs with respect to such claims. Alaska's first narrow change is to its trust fraudulent conveyance statute by deleting the language “... was intended in whole or in part to hinder, delay, or defraud creditors or other persons ...,” and replacing it with “... was made with the intent to defraud [a creditor of the settlor] ....” The terms “hinder, delay” were considered too ambiguous to allow for consistent application.

Then, the Legislature clarified the distinction between an existing and a future creditor. This distinction is important because an existing creditor can assert a fraudulent conveyance claim within the later of four years after transfer to the trust is made, or one year after the transfer is or reasonably could have been discovered by the creditor. A future creditor may only bring a fraudulent conveyance claim within four years after transfer to the trust is made. The new Act limits the definition of an existing creditor to a creditor who: “(1) can demonstrate, by a preponderance of the evidence, that the creditor asserted a specific claim against the settlor before the transfer; or (2) files another action, other than [a fraudulent conveyance action], against the settlor that asserts a claim based on an act or omission of the settlor that occurred before the transfer, and the action described in this sub-subparagraph is filed within four years after the transfer.” These new fraudulent conveyance provisions should provide much greater certainty concerning the fraudulent conveyance exception, and a settlor should know within four years of a transfer whether a creditor can attempt to challenge a transfer as fraudulent.

In a related improvement, the Alaska Legislature decided to strengthen the Act so as to minimize and hopefully eliminate the use of these provisions for fraudulent transfers. Therefore, the Legislature enacted a provision which states that a settlor who creates a SSDS Trust must sign a sworn affidavit before the settlor transfers assets to the trust. The affidavit must state that: “(1) the settlor has full right, title, and authority to transfer the assets to the trust; (2) the transfer of the assets to the trust will not render the settlor insolvent; (3) the settlor does not intend to defraud a creditor by transferring the assets to the trust; (4) the settlor does not have any pending or threatened court actions against the settlor, except for those court actions identified by the settlor on an attachment to the affidavit; (5) the settlor is not involved in any administrative proceedings, except for those administrative proceedings identified on an attachment to the affidavit; (6) at the time of the transfer of the assets to the trust, the settlor is not currently in default of a child support obligation by more than thirty (30) days; (7) the settlor does not contemplate filing for relief under the provisions of 11 U.S.C. (Bankruptcy Code); and (8) the assets being transferred to the trust were not derived from unlawful activities.” This new provision should protect both settlors and their professional advisors.

An existing provision under the 1997 Alaska Trust Act provided that the spendthrift trust protection for a SSDS Trust would not apply if the trust requires that all or part of the trust's income or principal, or both, must be distributed to the settlor. The new provisions clarify that this exception does not apply to a charitable remainder annuity trust, charitable remainder unitrust, or a unitrust interest in general. Therefore, a settlor's creditor will not be able to reach such annuity or unitrust interests until the amounts are actually paid back to the settlor. The new provisions also clarify that the spendthrift trust protection of an SSDS Trust applies even though a beneficiary (including the settlor) may use or occupy real property or tangible personal property owned by the trust, if such use or occupancy is in accordance with the trustee's discretionary authority.

Two trust positions are now expressly authorized by the new statutory provisions: trust protectors and trustee advisors. The new statute defines a trust protector as a disinterested third party whose powers may include: the power to remove and appoint a trustee; the power to modify or amend the trust instrument to achieve favorable tax results; the power to increase or decrease the interests of a beneficiary; and the power to modify the terms of a power of appointment. A trustee advisor will not be liable for the advice provided the trustee and will not be considered a fiduciary. The trustee is not required to follow the advice of such an advisor. The Act expressly states that the spendthrift protection of an SSDS Trust applies to a settlor even though the settlor serves as a co-trustee or as an advisor to the trustee, as long as the settlor does not have a trustee power over discretionary distributions. Also, such protection applies even though the settlor has the power to appoint a trust protector or a trustee advisor. Similarly, such spendthrift protection applies to a beneficiary who is not the settlor, even though such beneficiary serves as a sole trustee, co-trustee, or a trustee advisor.

A significant concern when designing a SSDS Trust is whether the use of a non-corporate trustee will endanger the status of the trust. The concern is that a court may find that there is an agreement between the settlor and such individual that the trustee will exercise authority in a manner desired by the settlor. A new statute has added a provision stating that “an agreement or understanding, express or implied, between the settlor and the trustee that attempts to grant or permit the retention of greater rights or authority than is stated in the trust instrument is void.”

In a related matter, the new provisions expressly state that property subject to a power of appointment is not subject to the claims of the creditors of the donee of the power, except to the extent that the power is a general power and the donee has effectively exercised the general power in favor of the donee, the creditors of the donee, the donee's estate, or the creditors of the donee's estate.

Alaska House Bill 212 was passed by the Legislature on May 6, 2003, and sent to the governor for signature. It is anticipated that Governor Murkowski will sign this legislation. These new provisions apply to a trust regardless of whether the trust was created before, on, or after the effective date of these new provisions. However, trusts existing prior to the date of this legislation will not need to be supported by the settlor's sworn affidavit, as described above.