Undoubtedly, you’ve worked hard for a long time to amass your current wealth. It would be a shame if creditors or litigious individuals attack your family fortune.
Strategy: Set up an Alaska trust to protect your assets. This is the name commonly given to a “self-settled trust” where the grantor and the beneficiary are the same person. The trust receives the type of protection from creditors normally afforded to other types of trusts while you can continue to maintain control.
This financial planning concept is based on several favorable provisions available under Alaska state law.
Here’s the whole story: In the usual arrangement, a grantor funds a trust with cash and/or property. Funds are then distributed over time or upon the happening of a specified event to the beneficiary (or beneficiaries) designated in the trust document. The grantor names an independent third party as the trustee and is responsible for carrying out the trust’s terms.
Affluent individuals often create “spendthrift trusts” to limit access to trust funds by financially irresponsible beneficiaries. If the grantor thought the beneficiary might squander the money or that creditors could invade the trust corpus, this protected the assets. But this advantage for spendthrift trusts is generally not available for self-settled trusts.
Key exceptions: The laws in eight states—Alaska, Delaware, Missouri, Nevada, Oklahoma, Rhode Island, South Dakota and Utah—allow asset protection for self-settled trusts. In particular, the legislators in Alaska and Delaware created a friendly environment. An Alaska trust is generally preferable to a Delaware trust because of a few technical differences. In addition, Alaska recently amended its laws to protect assets from ex-spouses (see box below).
Generally, creditors in other jurisdictions can reach trust assets if the grantor can receive distributions from the trust. Under Alaska law, trust assets are not subject to creditor claims unless the original transfer intended to defraud known creditors or cause the grantor to become bankrupt. Furthermore, an Alaska trust can continue for several generations, thereby reducing estate taxes.
Tax bonus: Alaska does not impose any state income tax, so state income tax is avoided on income retained by the trust. However, income earned by an Alaska trust may be subject to state income tax in the state where you reside.
The powers that be
Normally, you might be reluctant to give up control over assets through a trust. But asset protection under Alaska law is available even if you’re the only person who is able to distribute assets and income.
For instance, you might have the right to direct trust asset distribution upon death through a testamentary special power of appointment. Also, if you name multiple beneficiaries, you can retain the right to veto distributions to other beneficiaries.
In this case, there’s no gift tax due on transfers to the trust, but the assets are included in your taxable estate. If the trustee must distribute assets to the grantor, asset protection isn’t available.
On the other hand, if you don’t retain either the testamentary distribution or veto powers, the transfer is treated as a completed gift. Thus, you might even receive benefits from assets that have been removed from your taxable estate!
Note that certain legal requirements for Alaska trusts exist. For example, the trust assets in Alaska must be administered by a “qualified person” under Alaska law. The trustee’s responsibilities should include record maintenance and tax return preparation.
Tip: This is not a do-it-yourself proposition. Consult with an estate planning pro.
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