August 1998 - Recent Estate Planning Developments First Half of 1998

Perpetual Trusts
Estate Planning for IRA and Pension Accounts
New Federal Legislation
New Alaska Legislation - Including Alaska Community Property
David G. Shaftel 1998.
All rights reserved.
A Summary Provided by the: Law Offices of David G. Shaftel, PC


Several types of estate planning have become "hot topics" in the estate planning area. Perpetual trusts are now allowed in Alaska and several other states. These trusts provide substantial inheritance tax savings, creditor protection, probate avoidance, and management benefits. The estate planning field is now emphasizing planning for distributions from IRAs and qualified plans, which often form a substantial part of our clients' assets. These developing topics are explained below.

New Federal tax legislation was just enacted. Several of these provisions have significant estate planning relevance.

The 1998 Alaska legislature was very active in the trust and estates area. A number of these provisions strengthen the administration of trusts and estates in Alaska. Other provisions provide additional support for the Alaska Perpetual Trusts and Asset Protection Trusts which were enacted in 1997. The legislature again proved that it was willing to operate on the "edge of the envelope" and enacted the Alaska Community Property Act, an elective form of community property only available in Alaska. Its goal is to provide a significant income tax benefit which is available to persons living in community property states, but not those living in separate property states like Alaska. This new act has also spawned a new type of Alaska trust: the Alaska Community Property Trust.

In this newsletter we will describe, in general terms, the above-described estate planning and legislative developments. Our purpose is to provide you with general information about the changes which are occurring. We will not try to go into the specifics of these subjects.

As always, it is important for you to periodically review your own estate planning situation. You should consider not only the changes in the law, but also your personal financial and family situation. Our office, your accountants, and your other financial advisors are always available to review the specifics of these changes with you, as they apply to your personal estate planning.

Now, let's review these important estate planning developments and legislative changes which have recently occurred:


Most states have statutes or case law which restrict the lifetime of a trust. However, in 1997 the Alaska legislature amended our law to eliminate this restriction. Therefore, Alaska trusts may now be perpetual. This means that the trust will be available to provide benefits to your descendants and their families for as long as the trust continues to have assets.

Usually a Perpetual Trust is divided into shares, one for each of your children. Then the income and principal of the child's trust will be used for the benefit of the child (the primary beneficiary) and your child's descendants. Often the trustee is given complete discretion to make distributions to them for any purpose, after taking into consideration their income and other resources, and the effect that any of these distributions will have upon them. In addition, the trustee may provide your beneficiaries with valuable benefits, such as use of a trust-owned residence, without actually distributing income or principal to them. After each child's death, that child's trust is divided among his or her children, and each of them becomes a primary beneficiary of a separate trust. These trusts will be administered and distributed pursuant to the same type of directions as those which apply to your child's trust. As each primary beneficiary dies, new trusts will be created for that deceased primary beneficiary's descendants. This plan will continue from generation to generation until the trusts run out of assets. Some clients desire to also include their children's and descendants' spouses in the above-described dispositive plan.

Perpetual Trusts provide the following benefits:

1. The trust assets are protected from your descendants' creditors. These creditors can include judgment creditors from a commercial transaction, professional negligence, or a personal injury situation. Further, the assets will be protected from a property division upon divorce. Your Perpetual Trust also provides protection against improper influences that may result from a descendant's inability, immaturity, inexperience, or possible incapacity to manage assets.

2. Probate is avoided.

3. The Perpetual Trust provides an "estate plan" for your descendants which is already in place.

4. Each descendant is given considerable flexibility to modify the trust's dispositive plan. A primary beneficiary is given both a lifetime and a testamentary special power of appointment. This allows the primary beneficiary to gift trust assets during the beneficiary's lifetime and to change the estate plan at the primary beneficiary's death.

5. Potential for enormous inheritance tax savings

The inheritance taxes which we are concerned with are the Federal Gift Tax, the Federal Estate Tax and the Federal Generation Skipping Transfer ("GST") Tax. The Federal Estate Tax applies when a person transfers assets at death. It has a graduated rate scale and reaches a maximum rate of 55% when you have transferred $3,000,000 of assets. If you design a trust which continues for multiple generations, then the Federal Estate Tax will apply to the first transfer to the trust. Generally, the estate tax will not apply when an older generation ceases to be the beneficiaries and a younger generation becomes the new beneficiaries. In 1986, Congress enacted the Federal Generation Skipping Transfer Tax. This tax is designed to apply to the transfers from generation to generation, when the Federal Estate Tax does not apply. The GST tax is always at a 55% rate. However, Congress provided each spouse with the ability to protect $1,000,000 from application of the GST tax. This protection is accomplished by allocation of the $1,000,000 exemption to gifts you make or to trusts which you create.

You may decide to transfer assets to your Perpetual Trust during your lifetime. These assets will be accounted for under the Federal Gift Tax. At present, you can transfer $625,000 gift tax-free, using your applicable credit (which will increase to $1,000,000 by the year 2006). Alternatively, or in addition, your estate planning may direct that certain assets be transferred to your Perpetual Trust at the death of the first spouse, or at the death of the surviving spouse. These transfers will be accounted for under the Federal Estate Tax. Finally, other irrevocable trusts which you have created may direct that some or all of their assets be transferred to your Perpetual Trust. These transfers have probably already been accounted for under the Federal Gift Tax. When these transfers are made to your Perpetual Trust, the trustee is directed to divide the assets into GST exempt trusts and GST non-exempt trusts. As discussed above, the GST exempt trusts are those that are protected by allocation of your and your spouse's $1,000,000 exemptions from the GST tax. If assets are allocated to the Perpetual Trust in excess of your available GST exemption amounts, then the excess assets will be allocated to "non-exempt" trusts.

The GST exempt trusts will only be subject to transfer taxes once, as described above. Thereafter, these assets may be used for the benefit of your children, grandchildren, great-grandchildren, and so on, without any further inheritance taxes. This is an extremely valuable benefit of the Perpetual Trust. The compounding growth of the Perpetual Trust's assets is far superior to the growth of assets subject to the inheritance taxes at each generation.

Consider the following example. Assume that $1,000,000 is contributed to a Perpetual Trust, and it grows at 8% per year (that is, a growth rate of 12% per year, less 33% income taxes). Assume that every 30 years one generation dies and a new generation is born. At the end of 30 years, the assets in the Perpetual Trust would be $10,062,657. If these assets had instead been subject to a 55% estate tax at the end of 30 years, the remaining assets would be $5,031,328. The tax savings grow enormously during the next generation. At the end of 60 years, the assets in the Perpetual Trust would be $101,257,064. Compare this with the $25,314,266 of assets which would be remaining after payment of a 55% estate tax at the first and second generations' deaths.

Comments: Our clients are now using Perpetual Trusts in a variety of ways.

1. Some clients are gifting part or all of their applicable credit amounts to the Perpetual Trust each year, and allocating GST exemption to these contributions.

2. Other clients are designing their estate plan so that the above-described contributions to the Perpetual Trust are made at the clients' deaths.

3. Some clients are planning to distribute most or all of their assets to a Perpetual Trust.

Our office can provide you with additional memoranda concerning Perpetual Trusts. Alternatively, call for an appointment to discuss this popular new trust.


Many of our clients have developed substantial accounts in profit sharing plans, money purchase pension plans, §401(k) plans, other qualified plans, and IRAs. As a result of the stock market boom in the last decade, these qualified plans and IRA accounts have become very substantial assets. These assets are different from many of your other assets in that they are governed by plan documents drafted by your employer or brokerage firm, and are subject to special federal income tax rules. From an estate planning perspective, it is very important to analyze and fit these assets into your overall estate planning. The goals are usually to choose an appropriate beneficiary, maximize tax-free growth, and minimize income and estate taxes.

Let's consider possible beneficiaries:

1. Your spouse. Often the first choice of beneficiary is the client's spouse. The marital deduction will usually avoid any estate tax. The spouse can roll over the account to his or her own IRA. Thereafter, the spouse can receive distributions after age 59, and can name his or her own beneficiary.

2. The marital trust. In many second marriage situations, the client may want to retain control of the remaining plan assets after the death of the surviving spouse. Alternatively, a client may conclude that professional management is necessary for the funds in the account. A marital trust will again provide an estate tax marital deduction. The income will be paid to the surviving spouse, annually. However, the principal portion of the account will be preserved for discretionary payments to the surviving spouse, or for other beneficiaries after the spouse's death. 3.

The bypass trust. Sometimes a client will not have sufficient non-pension assets to fully fund a bypass trust at the client's death. Remember, the purpose of a bypass trust is to be able to take advantage of the deceased client's unified credit amount (presently $625,000). Naming the bypass trust as a beneficiary of a qualified plan or IRA account allows these funds to be used for full funding of that trust. Various methods can be used to accomplish this funding. A special formula beneficiary designation can be used so that the bypass trust is fully funded, and the excess of the account goes to another beneficiary. Alternatively, a special beneficiary designation can be used which first names the spouse as the beneficiary, but if the spouse disclaims a portion of the account, then it will go to the bypass trust.

4. Your children, or trusts for their benefit. No marital deduction will be available to avoid estate tax here. As a result, both estate and income taxes will be incurred by these accounts. However, if sufficient other funds are available to pay these taxes, then some clients desire to take advantage of the tax-free build-up benefit of a qualified plan or IRA account. The goal then is to design the beneficiary designations so as to spread the payments to the children over a period which is usually the lifetime of the oldest child.5.

Charities. A 100% estate tax charitable deduction is available. Payments received by the charity will not be subject to income tax. A charity can be named outright as a beneficiary. Alternatively, the use of a donor- advised fund provides the client and his or her family with the ability to direct the choice of charities and charitable purposes.

Comments: Review your qualified plan and IRA planning to make sure it is properly implemented. Estate planning for qualified plan and IRA accounts is complex. The plan or IRA documents must be reviewed. Specific beneficiary designations may need to be drafted. Some accounts require a consent of the surviving spouse if another beneficiary is chosen. Sometimes it is advantageous to roll the accounts into several IRAs, which then can be used for different beneficiaries. Much of the planning should be done prior to the client reaching the age of 70 years.

Like all of your estate planning, there should be a periodic review of your planning for your qualified plan and IRA accounts. Your estate planning attorney should be consulted not only about your choice of beneficiaries, but also about the adequacy of your implementation of these choices..


On July 22, 1998, the President signed the Internal Revenue Service Restructuring and Reform Act of 1998. This Act contains provisions relating to all tax areas. In addition, a technical corrections portion clarifies various provisions of last year's tax act. Most of these provisions are too technical for this newsletter. However, several are particularly important for estate planning and for procedure before the IRS:

1. One-year capital gains holding period. For individuals, estates, and trusts, assets will only need to be held for twelve months to qualify for long-term capital gains

2. Gift tax statute of limitations. The new Act clarifies that once the three-year gift tax statute of limitations has expired, the value of such gifts will be finally determined, even if no gift tax was paid on the gift.

3. Burden of proof. In Tax Court and federal court proceedings involving income, estate, gift, and generation-skipping transfer taxes, the burden of proof shifts to the government provided that the taxpayer introduces credible evidence, complies with any substantiation requirements, maintains required records, and cooperates with the IRS.

4. Attorney-client privilege. This privilege is now extended to communications between a taxpayer and any "federally authorized tax practitioner" with respect to "tax advice." Therefore, the privilege will include attorneys, certified public accountants, enrolled agents and enrolled actuaries.

Comments: Some experts anticipate that the shifting of the burden of proof to the government will motivate the IRS to be much more demanding at audit. Extension of privileged communications to accountants should assist us in comfortably including CPAs in our estate planning process. Their contributions are often invaluable.


1. Alaska, like all separate property states, has suffered from the lack of equality between separate property and community property states.

After the death of the first spouse, residents of community property states have a distinct income tax advantage over residents of separate property states. Assume a couple's property is owned approximately equally between them. In a separate property state like Alaska, this ownership could consist of joint ownership in the form of tenancy in common, joint tenancy with right of survivorship, or tenancy by the entirety. At the death of the first spouse to die, the basis of decedant's assets (but not the decedant's spouse's assets) is adjusted to the fair market value of such assets at death. In a generally growing economy, this adjustment is usually upward, and therefore the term "stepped-up basis," at death.

Contrast the above basis result to the adjustment provided in community property states. At the death of the first spouse, both the decedant's one-half share of the community property and the decedant's spouse's one-half share of such community property are adjusted as described above. Therefore, basis is increased to the fair market value of the entire property, rather than just one half.

This lack of equality can produce significant income tax differences if the surviving spouse sells the assets during the period between the first spouse's death and the surviving spouse's death. In a separate property state, one half of the assets sold will produce capital gain which would have been completely avoided if the couple had instead lived in a community property state. Furthermore, the sale of assets during this period of the surviving spouse's lifetime is likely. The family business may need to be sold due to the decedant's lack of participation, or pursuant to an existing buy-sell agreement. Real property may be considered burdensome to manage. Market conditions may dictate the sale of assets before an expected downturn.

2. A remedy for this unfairness: Alaska's "elect-in" community property system. The goal of the Alaska legislature is to allow taxpayers to obtain the above-described community property full "step-up" in basis, to the extent they so desire. A married couple may elect to treat all their property as community property. Alternatively, they can elect that only certain assets be treated as community property, leaving the balance of their assets as separate property. If both spouses are domiciled in Alaska, the election occurs through the execution of a community property agreement or community property trust. If one or both spouses are not domiciled in Alaska, then this election can be made by the spouses transferring property to a community property trust.

The community property agreement and community property trust have many similar characteristics. They are written instruments, signed by both spouses. Within an agreement or trust, the spouses may agree on (i) the rights and obligations in the property; (ii) management and control; (iii) the disposition of the property; (iv) choice of law governing the instrument; and (v) any other matter that affects the property and does not violate public policy. If the agreement or trust is silent as to a subject, the Act contains a number of default rules.

A community property trust is designed to be used by couples when one or both spouses are not domiciled in the state of Alaska. In order to provide a nexis with Alaska, a number of additional requirements are added. At least one trustee must be an individual domiciled in Alaska, or an Alaska trust company or bank. Other co-trustees may be non-residents, and may include the spouses. The Alaska trustee's powers must include maintaining records for the trust, on an exclusive or a non-exclusive basis, and preparing or arranging for the preparation of, on an exclusive or a non-exclusive basis, any income tax returns that must be filed by the trust. The trustee must maintain records that identify which property held by the trust is community property.

It is uncertain how the IRS will respond to this new elective community property system. This is the only such elect-in system presently in effect in the United States. Oklahoma had briefly experimented with a similar system from 1939 through 1945. At that time, the IRS challenged the effectiveness of an elect-in community property system which the taxpayers relied upon to split the income from the property between them so that they could report it on separate returns. An additional issue exists for non-residents: will the IRS argue that they should be treated differently than Alaskans with respect to such elective community property? Finally, this new Alaska approach to get a full stepped-up basis may motivate the Internal Revenue Service to seek federal legislation changing the rules for such stepped-up basis.

Comments: If you are interested in treating some or all of your property as community property, we remain available to confer with you and assist you in this process. Both Alaska residents and non-residents will need to carefully evaluate whether "electing-in" to Alaskas community property system is advantageous. An analysis concerning the potential income tax benefits in regard to the couple's specific situation is the first step. However, of equal importance will be the non-tax consequences of partially or fully adopting a community property system. Some couples may be attracted to the equality and other characteristics of Alaska community property. Other couples may conclude that the non-tax consequences of a community property system are not to their liking.


In 1997, the Alaska legislature enacted statutes which provided that an individual could form a trust, be a discretionary beneficiary, and still have all of the trust assets protected from the individual's creditors. This asset protection for the person who is both the creator and a beneficiary of the trust was unique to Alaska. Not only did these new trusts provide for a new type of arguable asset protection, but this reversal of public policy created arguments that an individual could "complete" gifts to such a trust. Similarly, proponents argue that the trust assets will not be included in the settlor's estate at death. This contention is based upon the fact that the independent trustee has absolute discretion concerning whether to make distributions to the settlor. Therefore, it will be difficult to argue that the settlor has made a transfer under which the settlor has retained for his life the enjoyment of the property.

The 1998 Alaska legislature has enacted a number of provisions designed to strengthen the above-described Alaska Asset Protection Trusts, as well as Alaska Perpetual Trusts.

1. Changing an existing trust to an Alaska Perpetual Trust. This statute is designed to allow for the conversion of an existing trust to a trust which takes advantage of the new Alaska laws. This may be necessary if the trust does not contain appropriate perpetual trust provisions. Pursuant to this new statute, such conversion can occur if the trustee has absolute discretion under the terms of the trust document to invade the principal of the trust for the benefit of a beneficiary who is eligible or entitled to the income of the trust.

Comments: You may have an existent irrevocable trust to which you have contributed substantial assets. This may be a trust for the benefit of your spouse, children, and grandchildren. It may be a life insurance trust. You may wish to change the trust's dispositive plan to a Perpetual Trust. If so, we should review its provisions to see if it is capable of conversion under this new statute.

2. Statute of limitations clarified.

3. Trustee may use trust assets to defend against creditor attack.

4. Prohibition against suing trustee and others involved in preparation of the trust for conspiracy to defraud.

5. Non-Alaskans may serve as co-trustees.

6. Change of a trust's situs to Alaska. This provision is designed to facilitate the change of situs to Alaska of a trust which was created in another jurisdiction that does not have law as favorable as Alaska's. Some or all of the trust assets must be deposited in Alaska, at least one trustee must be an Alaska trustee, and the Alaska trustee must register the trust under Alaska law. Once the situs is changed to Alaska, then proponents argue Alaska's creditor protection and perpetual trust provisions will apply.

Comments: You may have accomplished some estate planning while living in a state other than Alaska. Your relatives may live outside of Alaska and have accomplished some estate planning. You or your relatives may desire to have some of Alaska's new favorable trust provisions apply to these trusts. If so, we should review the trust instruments to determine if this can be accomplished by a change of situs of the trust to Alaska.

7. IRS has responded to private ruling request. An Alaska resident created a trust to which she planned to contribute most of her unified credit amount. She asked the IRS to rule that the gift to the trust was complete, and that the trust's assets would not be included in her gross estate at death. The IRS ruled that the contribution to the trust is a completed gift for Federal Gift Tax purposes. However, since the settlor is still alive, the Service declined to rule on the question of whether the trust's assets would be included in the settlor's gross estate at death.

Comments: Asset protection planning will remain a controversial and "gray" area of estate planning. Further, the IRS often declines to rule in areas it considers aggressive. We remain available to discuss these subjects with you, and the various techniques which are available.



1. Non-residents may direct that probate of their wills occur in Alaska. This provision is designed to allow someone living in another state to direct that the probate of his or her will occur in Alaska. The proponents of this provision suggest several benefits to non-resident estates. Alaska does not have a state income tax. Arguably, a non-resident's estate probated in Alaska would not be subject to state income tax here or elsewhere. Second, if Alaska substantive law applies to the will, then arguably a testamentary trust may be perpetual, if allowed under Alaska law. Third, an Alaskan may have been chosen as a personal representative (executor or executrix) under a non-resident relative's will. This new statute allows the Alaskan personal representative to move the probate to Alaska for easier administration. Since Alaska has adopted the Uniform Probate Code, probates under this code are informal, simpler, and less expensive to administer.

Comments: Many of us have relatives who live outside of Alaska. Often they are older, and we may have been designated as the personal representatives under their wills. This provision would allow the Alaskan personal representative to administer the probate here in Alaska.

2. Uniform Trustees Powers Act. Alaska statutes have been silent concerning the powers of a trustee if they are not specified in the trust document. Adoption of a portion of this Uniform Act now provides such powers, which may be limited or added to by the terms of the trust. The Uniform Trustees Powers Act was drafted in 1964, and has been adopted by sixteen other states.

3. Uniform Trusts Act. This Uniform Act was originally drafted in 1937 and has been adopted by six states and one territory. With some changes, Alaska has now adopted this Act. The Act provides a number of rules relating to a trustee's obligations and the extent of the trustee's and trust's liabilities arising out of contract and tort suits.

4. Alaska Uniform Prudent Investor Act. Alaska becomes the seventeenth state to adopt this Uniform Act, which was drafted in 1994. This Act states that its provisions will be default rules, which may be changed by the settlor in the trust instrument. The Act provides that a trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. The trustee shall exercise reasonable care, skill, and caution. The trustee's decisions shall be evaluated not in isolation but in context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust. The Act lists a number of circumstances that a trustee shall consider. Diversification is emphasized. The Act emphasizes that compliance with its guidelines is to be determined in light of the facts and circumstances existing at the time of a trustee's decision or action and not by hindsight.

5. Trust incontestability clauses. Many people desire to put a provision in their will or trust which states that anyone contesting the decedant's or settlor's plan will be disinherited. Existing Alaska law limits the effect of such a provision in a will if the contesting party had "probable cause" for the challenge. The new 1998 statute eliminates this exception for trusts created during lifetime or through a will. Therefore, if a trust has an incontestability clause in it, any challenge will result in the challenging party being disinherited.

Comments: Most of our trust instruments contain such an incontestability provision.

Do you desire any of the above new Alaska legislative changes to apply to your existing trusts? The effective date for the above-described new Alaska statutes (see paragraphs 1 through 5) is September 15, 1998. In general, these provisions will only apply to trusts created after that date. However, these new provisions will apply to both testamentary and lifetime trusts that were created before that date if the trust is re-registered after September 15, 1998, and if the new registration states that the trust will be governed by these new provisions.

Comments: If you desire that any of the above-described provisions apply to your existing trusts, then we need to re-register those trusts and state in the registration that the trusts will be governed by the new law. We will be happy to help you with this process. However, you need to notify us in writing, or at a conference, before we will accomplish this re-registration for you.

We hope the above summary of estate planning "hot topics" and federal and Alaska legislation is helpful to you. If you have any questions, or desire further information about these or other estate planning matters, please contact us for an appointment. We remain available to assist you and your family.