You may have heard about offshore "asset protection" trusts which safeguard the treasure trove of the super rich. Or "dynasty" trusts which, if set up just right, can pass fortunes from generation to generation without ever coughing up a nickel in estate taxes.
Strategies like these are beyond the ken of most people, even most professional advisors. They are the special domain of the very aggressive and the very well heeled.
But now, the most prudent of planners are turning their attention away from the Cayman Islands and Liechtenstein and toward Juneau. To the surprise of virtually everyone, Alaska may now become the most hospitable estate planning jurisdiction in the United States.
The new gold rush results from a new law, the Alaska Trust Act, which clearly and cleanly responds to two of the toughest of financial planning challenges.
The first dilemma planners frequently face is how best to insulate one's assets from the claims of future creditors - and shield them from eventual estate taxes - without giving them up altogether. The general rules require transferring an asset - and forgoing all its income, use and enjoyment - or subjecting it to the claims of creditors and to taxability in the taxpayer's eventual estate. Most of us simply aren't prepared to give our assets away for fear we may need them to maintain our lifestyles down the road. So, a U.S. trust we set up to protect assets and fend off creditors isn't a particularly attractive bargain.
The new Alaskan law seems to change all of that. Depositing assets into an irrevocable trust there - even while holding on to all kinds of rights over them - will now protect those assets against creditors as long as the asset transfers aren't accomplished to hinder an existing creditor or made more than thirty days after a child support payment was due.
Trusts usually suffer from another restriction, too. The ancient common-law "rule against perpetuities" limits just how long a trust can stay alive. Eventually, trust assets must be distributed and transfer taxes paid.
But Alaska has now opted out of the Uniform Statutory Rule Against Perpetuities and Alaskan trusts can live forever. So, a taxpayer can claim a "generation-skipping" tax exemption to avoid transfer taxes indefinitely - as long as assets aren't distributed to trust beneficiaries.
How do you qualify for all these benefits? Fortunately, neither you nor your intended beneficiaries need to live in Alaska, but there are a few requirements.
First, at least one trustee must live in Alaska or, more likely, be a bank or trust company whose primary office is there. Second, the Alaskan trustee must see to it that the trust files its income tax returns. Third, some trust assets, even a checking account, must be held in Alaska. And, fourth, some minimal portion of the trust's administration must be performed there.
The new Alaskan trust may represent a viable option for wealthy people to keep assets in their families for generations while tapping income and even principal without triggering any estate tax. Yet, trust planning can be more treacherous than the Iditarod and consultation with knowledgeable counsel is imperative.
The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.