Asset protection and dynasty trusts

If and when the grantor's dominion and control of the trust assets ceases, such as by the trustee's decision to move the situs of the trust to a State where the grantor's creditors cannot reach the trust assets, then the gift is complete for Federal gift tax purposes under the rules set forth in section 25.2511-2 of the regulations."

A further consequence of a creditor's ability to reach the settlor's interest in a self-settled trust is that the assets in the trust will continue to be part of the settlor's gross estate for federal estate tax purposes under one or both of Code sections 2036 and 2038.

C. Alaska Trusts

2. Creditor Protection

The Alaska Act allows a person to set up a self-settled spendthrift trust that is immunized from most claims of the settlor's creditors. The Alaska Act provides that, outside of some specific situations discussed below, the assets of a trust governed by the Act are not subject to the claims of the settlor's creditors.95 This protection applies even if the settlor is the only person to whom the trustee may distribute trust assets and income.96 If the trust has beneficiaries in addition to the settlor, this protection from creditors' claims applies even if the settlor retains the right to veto distributions to other trust beneficiaries or the right to direct where trust property passes at the settlor's death.9'

3. Limitations

The Alaska Act has limitations. A creditor under section 34.40.110, as amended by the Alaska Act, is able to reach the trust assets to the extent necessary to pay the creditor's claim if:

(1) [the] transfer was intended in whole or in part to hinder, delay, or defraud creditors or other persons under AS 34.40.010;98

(2) [the] trust provides that the settlor may revoke or terminate all or part of the trust without the consent of a person who has a substantial beneficial interest in the trust and the interest would be adversely affected by the exercise of the power held by the settlor to revoke or terminate all or part of the trust;

(4) at the time of transfer, the settlor is in default by [thirty] or more days of making a payment due under a child support judgment or order."

4. Applicability of Alaska Act

To qualify a trust under the Alaska Act, some or all of the trust assets must be deposited in Alaska," part or all of the trust administration must take place in Alaska,'O' and the settlor must use an Alaska resident or an Alaska-headquartered bank or trust company as trustee or cotrustee. "' The Alaskan trustee must have certain duties, including selecting the trust tax return preparer and maintaining certain trust records.'O'

D. Delaware Trusts

Delaware, long known as a trust-friendly jurisdiction based on a variety of other tax and legal rules, quickly responded to the Alaska legislation. On July 9, 1997, Delaware Governor Career signed into law the Qualified Dispositions in Trust Act (the "Delaware Act"). The Delaware Act provides creditor protection and estate planning opportunities similar to those in the Alaska statute described above."