The Alaska Legislature again demonstrated its resolve to support the enactment of very favorable trust and estate provisions which can be used by both residents and nonresidents of Alaska. The Legislature has passed bills improving the Alaska trust and estate statutes in 1997, 1998, 2000, 2001, 2003, and now in 2004. The newly enacted 2004 provisions cover the following trust and estate subjects. 

DOMESTIC ASSET PROTECTION TRUST PROVISIONS 

QPRTs and GRATs 

GRATs are used as an estate freeze and asset transfer technique. They have become very popular after the Walton decision, which allows zeroed-out GRATs. A settlor will transfer certain assets to the GRAT, often closely held corporate stock, or FLP or FLLC interests, in exchange for a retained annuity interest of equal value. The new 2004 legislation makes it clear that a creditor of the settlor may not reach the settlor's retained interest in an Alaska GRAT. However, once a payment is made to the settlor, a creditor could attempt to reach it.

Protection for Professionals 

When domestic asset protection trusts (DAPTs) were first enacted in 1997, there was concern among professionals (attorneys, accountants, trust officers, and trustees) that if they participated in the preparation and funding of the trust they might be sued for conspiracy to commit fraudulent conveyance, aiding and abetting a fraudulent conveyance, or similar theories. Alaska Statute 34.40.110(e) was enacted to protect professionals from such claims. Delaware enacted a similar provision. However, over the years clients and their advisors have often decided to fund DAPTs with interests in limited partnerships or limited liability companies. Professionals have become concerned about whether they could be sued under the above types of causes of action with respect to the professionals' participation in the preparation and funding of such LPs or LLCs. The new 2004 legislation makes it clear that the protection provided to professionals with respect to DAPTs also applies to the preparation and funding of a limited partnership or a limited liability company if interests in such entities are subsequently transferred to the DAPT.

Statute of Limitations 

Almost all DAPT statutes contain an exception for fraudulent transfers. Most DAPT statutes set a four-year statute of limitations within which a fraudulent transfer claim can be pursued. However, each statute has a “discovery exception” which allows a creditor to assert a fraudulent transfer attack more than four years after the transfer. This discovery exception provides for attacks “within one year after the transfer was or could reasonably have been discovered by the claimant.”

Under Alaska law prior to the 2003 amendment, only existing creditors could assert the discovery exception, but the definition of “existing creditors” was uncertain. As a result, a client who has no existing claims pending will not have certainty that after the four-year period has expired the assets of the DAPT will be safe from attack.

In 2003, the Alaska Legislature attempted to resolve this ambiguity by clarifying the distinction between an existing and future creditor. The 2003 Alaska amendment 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 subparagraph is filed within four years after the transfer.” Under these 2003 Alaska fraudulent transfer statute of limitations provisions, a settlor should know within four years of a transfer whether a creditor can attempt to challenge a transfer as fraudulent.

The new 2004 legislation further clarifies and strengthens these new statute of limitations provisions. A new provision was added to make it clear that all causes of action for fraudulent transfers must comply with the new statute of limitations provisions. Further, a new provision states that a creditor seeking to reach the property of an Alaska DAPT must bring the action in an Alaska court, and the action must be brought pursuant to Alaska fraudulent conveyance law and comply with Alaska's limitations period. This new provision was designed to state the Alaska Legislature's intention with respect to choice of both substantive and statute of limitations law in regard to fraudulent transfers.

An example will illustrate the importance of this provision. Assume a court in a settlor's state of residence (outside of Alaska) obtains jurisdiction over the trustee of an Alaska DAPT and entertains a cause of action alleging a fraudulent transfer. That court will first need to decide which state's fraudulent transfer law will apply. The above-described new Alaska provision may influence the other state's court with respect to which state's substantive fraudulent transfer law should apply. Regardless of which state's substantive fraudulent transfer law is applied, the creditor will need to bring the judgment to Alaska in order to enforce it against the trust's assets. The Alaska court then has the freedom to decide whether Alaska's limitation period will be applied. (Restatement (Second) Conflict of Laws § 142 and comment d to § 143; Wells v. Simonds Abrasive Co. , 345 U.S. 514 (1953).) The 2004 newly enacted provision directs the Alaska court to apply the Alaska statute of limitations provision rather than what may be a less restrictive provision of the settlor's state of residence. Rhode Island has a similar provision relating to choice of law but does not have Alaska's type of limitations period. . 

Bankruptcy Court

Alaska has also enacted a new 2004 provision, which also exists in Delaware, establishing the Alaska Legislature's intention that a spendthrift restriction under Alaska law “... is considered to be a restriction that is a restriction on the transfer of the transferor's beneficial interest in the trust and that is enforceable under applicable non-bankruptcy law within the meaning of 11 U.S.C. § 541(c)(2) (Bankruptcy Code).” Such provisions are designed to weaken an argument which may be made in federal bankruptcy court that DAPT provisions should not come under the bankruptcy exception for spendthrift trusts.

Moving Trusts to Alaska

Existing Alaska law allows the situs of a trust created in another state or country to be moved to Alaska if some or all of the trust assets are deposited in Alaska and administered by a trustee who is a qualified person, the trustee has the powers to maintain records for the trust, prepare or arrange for the preparation of an income tax return for the trust, and part of the trust administration occurs in Alaska. Commentators in Delaware, which has a similar provision, have opined that the Alaska language also requires that the trust instrument expressly state that Alaska law was to apply to the trust. This was not the intent of the Alaska Legislature, and the statute has been clarified to remove such an interpretation.

Further discussion of the above domestic asset protection trust provisions and issues may be found in Shaftel, “Everything You Always Wanted to Know About Domestic Asset Protection Trusts But Could Never Find Out,” Special Session Materials, 38 th U. of Miami Heckerling Inst. on Est. Plan. (2004), and in Shaftel, “Domestic Asset Protection Trusts: Key Issues and Answers,” ACTEC Journal (Summer 2004).

LIMITATIONS ON PROCEEDINGS AGAINST TRUSTEES

Existing Alaska law contains Uniform Probate Code section 7-307 relating to this subject. Local trustees have criticized this provision because it does not expressly provide for limitations periods when interim reports or accountings are provided. This is especially important for dynasty or perpetual trusts which are designed to continue for very long periods. In addition, the UPC provision does not provide a procedure for court approval of a report or accounting which approval would then bar future claims.

As a result, the new 2004 legislation provides three different methods for a trustee to issue reports or accountings and have future claims barred.

First Method.

The first method follows the UPC and states that, notwithstanding lack of adequate disclosure, all claims against a trustee who has issued a final report received by the beneficiary and who has informed the beneficiary of the location and availability of records for examination are barred unless a proceeding to assert the claims is commenced within three years.

Second Method.

The trustee may petition a court for an order approving a report or accounting that adequately discloses the existence of a potential claim, if the trustee has served the report on all beneficiaries to be bound by the report, and gives such beneficiaries at least ninety days' notice of the proceeding. Then, all claims of the beneficiaries against the trustee will be barred unless the claims are served on the trustee and filed with the court within sixty days after the beneficiaries receive the report.

Third Method.

A trustee may serve a report or accounting on a beneficiary that adequately discloses the existence of a potential claim against the trustee and informs the beneficiary that a proceeding to assert any claim against the trustee must be commenced by the beneficiary within twenty-four months after receipt of the report if it is an interim report, or within six months after receipt of the report if it is a final report. Claims not asserted within such periods will be barred.

Therefore, trustees of trusts created under Alaska law or moved to Alaska will have three different methods to have their interim or final administrations approved and future claims barred.

VIRTUAL REPRESENTATION

The doctrine of “virtual representation” allows representation by one person, who has a substantially identical interest with respect to a particular issue, to bind another person. Representation is not permitted if there is a conflict of interest. Existing Alaska law contains Uniform Probate Code section 1-403, which provides when parties will be bound by notice to others.

The 2004 Alaska legislation expands the UPC provision both in the types of proceedings in which notice to one person may bind another and the circumstances under which notice may be given. The scope of proceedings are expanded to included non-judicial proceedings and settlements. Not only unborn or unascertained persons can be bound but also “a minor, an incapacitated person, or a person whose identity or location is unknown or not recently ascertainable.” Provisions have been added expressly covering various circumstances when virtual representation will apply. These expanded virtual representation provisions will provide a reasonable method to give notice and to bind existing and future beneficiaries with respect to not only trustee reports and accountings but also in regard to often needed trust construction and modification proceedings.

VOTING TRUSTS

Existing Alaska law provides for voting trusts and voting agreements. Both of these approaches are used in closely held family situations for control of the business for a period of time. A voting trust involves the transfer of stock to a trust which provides the trustees with the right to vote the stock. A voting agreement is a contract among shareholders that certain persons are given the right to vote the stock or that the shareholders will vote their stock in a certain manner. Under existing Alaska law, voting trusts are limited to a duration of ten years. Voting agreements do not have a durational limit. There does not appear to be a reason for this inconsistency. The 2004 Alaska legislation eliminates the ten-year durational limit for voting trusts.

SAVINGS CLAUSE FOR MARITAL DEDUCTION AND CERTAIN TECHNICAL AMENDMENTS

In 2003, Alaska enacted a version of the Uniform Principal and Income Act (1997). This version contained a savings clause for trusts designed to qualify for the federal estate or gift tax marital deduction. Specifically, this savings provision provides that the spouse may require the trustee to make property productive of income. The 2004 legislation adds another specific provision requiring that income be paid at least annually, and a further general savings provision for such marital deductions. In addition, technical corrections were made to the 2003 act.

Senate Bill 344 was passed by both houses of the legislature on May 5, 2004. The bill will be sent to the governor and is expected to be signed. The provisions relating to domestic asset protection trusts apply to a trust created before, on, or after the effective date of the new 2004 act. The virtual representation provisions apply to a proceeding begun on or after the effective date of the act, which will be when the governor signs the legislation. That date will also be the effective date of the remaining provisions of this bill.