Alaska's 2006 Amendments to its
Trust and Estate Statutes

Article: 26
David G. Shaftel
Law Offices of David G. Shaftel, PC, Anchorage, Alaska
© 2006. All rights reserved.

Published in State Tax Notes , 2006

The 2006 Alaska Legislature, which ended its session on May 9, 2006, enacted significant changes to its trust and estate statutes. A summary of these changes is as follows:

1. Divorce: Protection of Beneficiary's Interest in Trust.

Many estate planners have assumed that a beneficiary's interest in a third-party created spendthrift trust would be protected from the beneficiary's creditors, including a divorcing spouse. However, recent court decisions interpreting various state statutes and commentators' analyses have raised questions about this assumption. One commentator describes certain cases and theories both in states that have equitable distribution statutes and in community property states. Pursuant to these cases and theories, a beneficiary's interest in a trust has been or may be invaded or considered when the divorce court divides up the couple's property. [1] Often the theories of the courts are based upon an interpretation of the applicable state statutes' concept of "property" which may be divided or considered upon divorce.

Alaska's equitable division statute provides the court with authority to divide the parties' property, whether joint or separate, acquired during marriage, or acquired before marriage when the balancing of the equities between the parties requires it. If Alaska courts were in the future to determine that "property" included a spouse's interest as a beneficiary in a third-party trust, or as a beneficiary in a self-settled discretionary spendthrift trust created before marriage, then that interest could either be invaded or at least considered by the divorce court when equitably dividing the couple's property. Such an invasion or consideration of the beneficiary's interest will likely frustrate the intent of the settlor of the trust.

For example, consider the situation where the senior generation creates a trust for the benefit of their child or grandchild. Most often the settlers would want the trust assets to be used for the benefit of the designated child or grandchild and not invaded and distributed to the beneficiary's ex-spouse, or considered by the court in a way that allows the ex-spouse to obtain more of the beneficiary's other property.

This is an area that is driven by state law. The Alaska Legislature decided to expressly protect beneficial interests in trusts from invasion or consideration in a beneficiary's divorce property division. This protection applies whether the trust is a third-party trust or a self-settled discretionary spendthrift trust created prior to marriage. This new subsection (m) of Alaska Statute 34.40.110 provides:

(m) If a trust has a transfer restriction allowed under (a) of this section, in the event of the divorce or dissolution of the marriage of a beneficiary of the trust, the beneficiary's interest in the trust is not considered property subject to division under AS 25.24.160 or 25.24.230 or a part of a property division under AS 25.24.160 or 25.24.230. Unless otherwise agreed to in writing by the parties to the marriage, this subsection does not apply to a settlor's interest in a self-settled trust with respect to assets transferred to the trust

(1) after the settlor's marriage; or

(2) within 30 days before the settlor's marriage unless the settlor gives written notice to the other party to the marriage of the transfer.

Alaska may be the first state to directly address this subject, and to expressly prohibit the divorce court's invasion or consideration of trust interests in divorce property divisions.

2. Revocable Trusts: Adoption of UPC Claims Procedure.

If a decedent has used a will as the primary vehicle for his or her estate planning, then the Uniform Probate Code provides an expedient claims procedure during the probate process. If the personal representative has provided notice to creditors, either by personal service on known creditors or by publication, then creditors must file a claim within four months of the date of the first publication or their claims will be barred.

However, in many states, including Alaska, revocable trusts are often used as the central vehicle for estate planning. There may be no need to open a probate and appoint a personal representative. If the fiduciary desires to cut off creditors claims as quickly as possible, often a probate is opened and the claims procedure followed. Then the question arises whether this claims procedure only applies to assets in the probate estate (often minimal) or also to the assets of the revocable trust.

In an effort to solve the above-described procedural problem, Alaska has enacted Alaska Statutes 13.36.368 and 13.16.530 which are patterned after a provision that was proposed in Connecticut several years ago. [2] In summary, these new provisions state that if a probate is opened and a personal representative appointed, and if the personal representative follows the claims procedure, then claims that are allowed or barred against the decedent's estate shall also be allowed or barred against the assets of the revocable trust. If a probate is not opened, or if the personal representative fails to follow the claims procedures, then the trustee of the revocable trust may file a petition with the court for a determination of claims and follow the general claims procedure of the Uniform Probate Code. Then claims against the revocable trust and against the decedent's estate shall be allowed or barred under those procedures.

3. IRAs: Nonresidents May Form Alaska IRA Trusts for Asset Protection.

ERISA provides asset protection for qualified plans, but not for IRAs. Many states have statutorily provided asset protection for IRAs. Alaska is one of these states. However, some states provide little or no asset protection for assets in IRAs.

Alaska has enacted amendments that will allow nonresidents of Alaska to form an Alaska IRA trust. The trustee or custodian must be a trust company or bank with its principal place of business in Alaska. The purpose of this new IRA trust is to give nonresidents the opportunity to attempt to achieve asset protection for their IRAs. Many of the same issues that apply to domestic asset protection trusts will apply to these new IRA trusts. [3] It should be noted that under the new Bankruptcy Act amendments, IRAs are subject to some limitations with respect to asset protection. Alaska's new IRA trust provisions are created by amendments to Alaska Statute 34.40.110(b) and new subsection, Alaska Statute 34.40.110(l)(2).

4. Trust Decanting: Expansion of Statutory Authority.

Webster tells us that "decanting" is pouring wine from one glass to another. New York enacted a "decanting" statute, which allowed a trustee who has absolute discretion to make distributions of trust assets from one trust to a new trust. Subsequently, Alaska, Delaware, and Tennessee have enacted similar provisions. This decanting authority may be used to achieve a variety of goals, including: dealing with changed circumstances; modifying administrative provisions; altering trusteeship provisions; extending the termination date of trusts (for non-tax reasons); correcting drafting errors; converting a trust to a grantor trust or back; changing the governing law; dividing trust property to create separate trusts; and reducing potential liability. [4]

Alaska's new amendments to Alaska Statute 13.36.157 follow Delaware's lead, which allows decanting not only by a trustee who has absolute discretion but also by a trustee whose authority is limited by an ascertainable standard. However, unlike Delaware, Alaska has required that the ascertainable standard in the new trust be the same as that in the invaded trust. This limitation was added to prevent a trustee-beneficiary from having a general power. For example, consider a surviving spouse who is the sole trustee of the bypass trust created by the deceased spouse's will. If state law allowed the surviving spouse to decant the bypass trust to a new trust, which did not have an ascertainable standard, then arguably the trustee-beneficiary has a general power.

5. Proceedings Against Trustees: Shorter Statutes of Limitations.

Alaska has again amended its statute, which specifies the limitations periods applicable to trustees. Alaska's approach adopts some of the provisions of the Uniform Trust Code but then adds substantial changes. The most significant change shortens the claim period from twenty-four months to six months.

The new amendments to Alaska Statute 13.36.100 give a trustee three different methods to bar claims against the trustee.

a. If the trustee issues a report without adequate disclosure of potential claims, and informs the beneficiary of the location and availability of records for examination by the beneficiary, then all claims against the trustee are barred unless a proceeding to assert a claim is commenced within three years after the beneficiary's receipt of the report.

b. If the trustee serves a report on a beneficiary that adequately discloses the existence of a potential claim and the trustee informs the beneficiary that a proceeding to assert any claim must be commenced by the beneficiary within six months, and the beneficiary fails to so assert a claim against the trustee, then all claims of the beneficiary are barred.

c. If the trustee petitions a court for an order approving a report that adequately discloses the existence of a potential claim, serves the report on the beneficiary, gives the beneficiary at least sixty days notice of the court proceeding, and notifies the beneficiary that a claim must be begun within forty-five days after notice of the court proceeding, then all claims against the trustee will be barred unless the claims are served on the trustee and filed with the court within forty-five days after the beneficiary is served with notice.

The report of a trustee is considered to provide adequate notice to the beneficiary that there is a time limitation for filing claims if the report contains certain language specified by the new statute.

6. Technical Corrections to Asset Protection Statutes.

The new amendments also add language to Alaska Statute 13.36.310, which provides creditor protection for both third-party trusts and self-settled discretionary spendthrift trusts. These provisions either correct statutory references or clarify and bolster the asset protection aspects of the statute.

Senate Bill 298 was passed by both houses of the Alaska Legislature on May 1, 2006. It will be transmitted to the Governor for signature, which is expected to occur. The bill's effective date will be upon the Governor's signature.

[1] Marc Chorney, "Interests in Trusts in Divorce: What the Settlor Giveth, the Divorce Court May Take Away," 40 U. Miami Inst. On Est. Plan. 14 (2006).

[2] As of the date of this article, Connecticut has not yet passed its provision.

[3] For a discussion of these issues see Shaftel and Bundy, Domestic Asset Protection Trusts Created by Nonresident Settlors , 32 Est. Plan . 17 (Apr. 2005).

[4] Halperin, Decanting Discretionary Trusts: State Law and Tax Considerations , 29 Tax Mgmt. Est., Gifts & Tr. J. __ ( Sept. 9, 2004).