Full Transcript

Matthew Blattmachr: Hey, we’re excited to be joined by Beth Chapman and Jonathan Blattmachr. Beth is an attorney with Faulkner Banfield, has well over 30 years of experience in the areas of estate planning, probate, trust law, and business law. She’s also an elected fellow and former state chair of the American College of Trust and Estates Council.

Matthew Blattmachr: Jonathan Blattmachr, Peak’s Director of Estate Planning, brings over 35 years of experience in trust and estate law. He is recognized as one of the country’s most creative trust and estate lawyers. He writes and lectures extensively on estate and trust taxation, charitable giving, has authored and co-authored six books and over 500 articles on these topics.

Matthew Blattmachr: Thank you both for joining us today. A question that we get a lot is: What is special about Alaska for estate planning? And Beth maybe we’ll let you kick this off. Why do you think Alaska is consistently ranked as a good trust planning jurisdiction?

Beth Chapman: Well, thanks, Matt. You know, I think over the years we have developed very flexible trust laws that have allowed clients to use Alaska law regardless of where they’re located for asset protection, for the ability to modify trusts, to provide for flexibility, and notice to beneficiaries, and also for insurance trusts, which I know Jonathan can talk quite a bit about, is our lower insurance premium tax.

Beth Chapman: We get contacted quite a bit by attorneys and clients outside of Alaska who either already have an Alaska trust with Peak or possibly another trustee and who may want to move a trust to Alaska. Mostly, we’re seeing quite a bit of use of our decanting provisions, the ability to modify terms of a trust to either change distribution standards, potentially grant powers of attorney, modify administrative provisions. I would say of the work that I have done over the last year for clients and attorneys who are not Alaskans has been through decanting.

Matthew Blattmachr: That’s, interesting. And it lines up with a lot of the questions that we get at the trust company. You know, clients, either in Alaska or outside of Alaska, looking to you know, find out how they can change a provision in a document that’s no longer valid or effective and decanting is a conversation we have multiple times every week.

Jonathan Blattmachr: Matt, let me add something about that. Alaska was the first state to have a provision that would allow a non-Alaska trust to be able to use Alaska decanting provisions, which were the second ones adopted in the United States. And you can do that by appointing an Alaska co-trustee. And in fact, the trustees can vote to have all of the laws of Alaska apply to every aspect of the trust. So it’s not just the decanting rules, but several other rules that are unique or special in Alaska that you can use. Alaska law, and this is similar to the law in the Florida, permits the trustee to send information to the beneficiary and to provide that the beneficiary has six months to object to that information or anything reasonably inferred therefrom. So it means that the trustee doesn’t have to wait a tremendously long time for the trustee’s liability to run out. You can rely on Peak to send out its statement. In fact, my family and I, who happen to be customers of Peak, get those statements every month, and there is a warning on it saying we have six months to object. And that does two things. The good news for the beneficiaries is that you have six months, and so you better look at it now and make sure you have no objections. On the other hand, if time goes by and the six months expires without objection, the trustee essentially is off the hook in most cases. So it’s important to think about that, that you can have Alaska law apply even to a trust which isn’t currently an Alaska trust, and you can get the Alaska law also for decanting and certain other beneficial rules that Alaska law provides by appointing an Alaska co-trustee. And having the trustees take a vote that they want Alaska law to fully apply to the trust.

Matthew Blattmachr: Jonathan, I appreciate you bringing up the kind of how do you get the ability to get access to these? That’s a question that we get asked quite often is, you know, if someone has an understanding of a benefit of Alaska law, then one of the next questions is “How can I get access to it, particularly if the trust is not currently in Alaska or jurisdiction that offers this?” Beth, anything that you want to add or clarify to that component?

Beth Chapman: Well, I think Jonathan, just to focus on the accounting provision, which is very, very useful. It’s the notice that we provide is for six month’s notice for the objection period. And also have the ability to shorten that time period by providing by filing it with the court system and giving a lot less of, of a notice and having the court approve it. So we even can go shorter than the six months. Also, it’s important that under that same statute, that if we do not provide the six month notice, we do have a three year limitation period. Which is applicable to any report to bar claims that have been would be based on anything that has been disclosed in a report or an accounting that has been provided to the beneficiary. And I think that’s extremely useful.

Beth Chapman: Along the same lines Jonathan and Matt, one of the things that we use quite a bit when we are moving trust to Alaska or using any of the Alaska provisions is the virtual representation statute, which also is very useful in limiting who we have to provide notice to. So under the virtual representation statute, there’s a variety of ways that we can provide notice to one beneficiary and bind other beneficiaries. That same provision can allow for a trust to have a designated representative to, who in fact could represent any and all beneficiaries that the settlor decides that they want to have represented.

Beth Chapman: So with those provisions, we have found it very easy to move trust from another jurisdiction. I just did one from a jurisdiction where they did not have a decanting statute, did not have decanting language. We appointed Peak as an administrative trustee, well, in that case, as the sole trustee, and we were then able to move the trust to Alaska, have Alaska law governed and update the trust as needed to comply with the Alaska law on the changes that we wanted to make, and it was relatively simple.

Jonathan Blattmachr: Let me let me mention that this provision to allow you to basically shorten the period of time and the number of people who need to get notice and who can object. That was put into Alaska law to allow the Alaska trust community to have reduced fees. There were other provisions that also allow it to reduce it. One is that the settler of a trust, the grantor of a trust can waive almost all liability of the fiduciaries. In some states like New York, where I principally practiced, it was very hard, if not impossible to waive any liability. In two ways. One, you couldn’t say, well, you’re only going to be liable if you’re grossly negligent. There were cases which said, no, you have to remain liable even for simple negligence. In Alaska, you could say the trustee or other fiduciary will not be liable unless the trustee has committed gross negligence or possibly even to say that the trustee has been wanton in its actions. In addition, Alaska law allows different people to hold different trustee positions, and it provides that there’s no cross liability. So very often Peak acts as the administrative trustee, and you’ll have someone else be the investment trustee and perhaps a third person or group of people who will be the trustees who control distributions. And as a consequence, if you are the distribution trustee or you are the administrative trustee, you won’t be liable for any mistakes that the investment trustee makes. And that’s very important to an awful lot of people because it lowers their liability. And that allows trust companies to charge lower fees in Alaska that might otherwise apply in another state. For example, in New York, you can’t waive cross liability, even if you’re in the trust only for certain limited purposes. Maybe, for example, you’re in only to control, for example, copyrights, which sometimes happens with people who are artists. And as a consequence, you put in, well, I want this particular person who holds a lot of expertise with respect to art, which I have to be involved with the disposition of my art and getting copyrights on and so forth. Well, you can provide that. But that trustee is also going to be liable for actions taken by other trustees as well. Very, very harsh in New York. And as I said, New York will not allow the creator of the trust to lower the standard and reduce the potential liability. And that means that certain people who would otherwise want to act won’t. For example, I will not act as a trustee under any trust, unless it allows the liability to be weakened and for me not to be liable for cross liability of another fiduciary.

Beth Chapman: Yeah. And Jonathan, along the same lines for trust that hold life insurance policies, we do have a provision that allows the settlor to limit the obligations of the investment trustee to review and monitor those life insurance policies, which is very useful for using Peak or, you know, as the trustee and keeping costs down. I think that that’s a very useful provision that we include in all of our life insurance trusts.

Jonathan Blattmachr: Beth, do you get many questions about the Alaska asset protection trust legislation, which was the first such legislation enacted in the United States?

Beth Chapman: We do. We work with lawyers usually, not directly with clients, but mostly with lawyers from around the country who clients may want to have asset protection trusts and look to use Alaska law. We find that they really like the flexibility of all of the other Alaska provisions when drafting these trusts, and they particularly like the strength of our asset protection provisions that we have enacted, and it is used. I would say it’s used quite a bit.

Jonathan Blattmachr: Let me mention a couple of other things about protection for a trust under Alaska law. Alaska probably has the strongest law for a third-party trust. So if someone has created a trust for your benefit you might think, well, I’m now completely protected. I didn’t create the trust, so even if someone from a state that says creditors can get at a self settled trust, well, this isn’t a self settled trust, it was created by someone else. But especially with respect to the federal government, the federal government is a super creditor and it can go after even so called spendthrift trusts. But Alaska has provision, and this was discussed in detail in an article that Beth, Dave Shaftel, who’s also an Alaska attorney, and Mitchell Gans, who’s a professor at Hofstra Law School and NYU Law School, and I wrote a few years ago in a Estate Planning Magazine, which showed that if you really want to protect the interests of the beneficiary, so the creditors can’t get a charging order against their payment of income and the trustee will not be liable for buying assets for the use of the beneficiary. I mean, you can imagine you’re in a situation where you’ve got a creditor breathing down your neck. You need your rent to be paid. You need your car payments to be made. You need to have food and so on and so forth, well, in other states, the creditor may be able to go to court and get an order directing the trustee not to pay anything to or for the beneficiary, but instead to pay it to that creditor. Can’t be done under Alaska law, even with respect to the federal government, it seems. So again, if you want the maximum protection for your beneficiaries, Alaska probably is the principal place to look.

Beth Chapman: Also, Jonathan and, and correct me if I’m wrong, but I believe when the asset protection statute also gives specific protections for qualified personal residence trusts and grantor retained annuity trusts so that those mandatory payments were still going to receive the asset protection for those trusts, even though there’s a mandatory distribution or use by the settlor.

Jonathan Blattmachr: That is correct, Beth. Everyone should keep in mind that this rule about being able to attach interest in a trust that you have created or settled for yourself, a so called self-settled trust is merely a law, and it can be changed. In fact, people often say, well, this comes from English law. Well, it really doesn’t. In England, you can create a trust for yourself, and it can be protected from the claims of your creditors. And Alaska enacted in 1997, the first asset protection law in the United States for trusts. And now we have about 19 states in the United States that have tried to catch up with what Alaska did. Now, there are distinctions from one state to another. For example, in Alaska, to create a self-settled trust and have it protected, you have to fill out an affidavit of solvency in which you have to disclose to the trust company to whom you are indebted in order to determine whether or not you’re really trying to hinder, delay, or defraud a creditor. Because if you are trying to hinder, delay, or defraud a creditor, it’s not going to work. It’s not going to work under Alaska law, or Nevada law or South Dakota law or any place else. And also there is a law under the United States Bankruptcy Code, Section 548 E, which says if you create a self-settled trust or similar device, and you were trying to hinder, delay, or defraud a creditor, then, if you go bankrupt within 10 years, the assets in the trust are going to be paid to your creditors. This way, you’ll do an affidavit. It means that the attorney, the trust company, and those involved can be confident that the person isn’t trying to hinder, delay, or defraud someone. And even if you go to a state where that kind of affidavit, a solvency affidavit is not required, I would nonetheless urge you to get one for your own sake. And if the client refuses to sign one, wow, you better be very careful about representing that person because there are cases in the United States where attorneys have been held liable for aiding and abetting in a fraudulent transfer. And in fact, in one very unhappy case, a lawyer was nearly disbarred. Although the court did find that he didn’t know the client was trying to defraud anyone. And as a consequence, they did not remove him from the roles of the bar.

Beth Chapman: So Jonathan we also have a provision on the Alaska statutes with regards to general powers of appointment and asset protection for those, which I think is quite unique in that if we have a trust that might have a general power of appointment, we can still get asset protection so long as the power of appointment has not been exercised in favor of a creditor. So, I don’t know if you have anything more to add on that, but I find that to be an extremely useful provision for the times when I may need to include a general power of appointment in a trust.

Jonathan Blattmachr: Well, that’s true, Beth. And in fact, although and we can discuss that another time, although you can actually require assets to be includable in your estate if you hold a limited power of appointment, which normally doesn’t give rise to some sort of a estate tax or gift tax liability, there is a provision in the Internal Revenue Code which says if you exercise a limited power in a certain way, generally cause triggering the Delaware Tax Trap, although it could happen anywhere in the United States, those assets are now includable in your estate. However, it’s generally much easier if the beneficiary simply has a general power of appointment. That will cause the assets to be includable in your estate under Section 2041 of the Internal Revenue Code. And unfortunately, under the law of the majority of states, if someone holds a general power of appointment, her creditors can attach the assets. Now that happened in New York where a wife created a trust for her husband, he had a power to withdraw property for his health, education, maintenance, support. His creditors came to the court and said, we want the assets in that trust, and the husband’s lawyer said: “No, no, this is under an ascertainable standard. Take a look at section 2041 of the code. It says that if you have a power to withdraw for health, education, maintenance, and support, a so called HEMS standard, it’s not a general power.” And the judge in New York, surrogate Rattigan of Nassau County, where I live, said: “You know, I know that’s the tax rule, but that’s not the rule in New York.” In New York, if you hold a general power, it is attachable by your creditors. Mitch Gans and I, by the way, wrote legislation, which has been enacted in New York to change that rule. So if a beneficiary of the New York Trust has a power to withdraw only for health, education, maintenance and support, it will not be subject to the claims of her creditors. But then again, it won’t be in her estate. And you may want it in her tax estate, for example, to get a tax-free step up in basis, which of course is critical. In Alaska, you can grant someone a general power of appointment. And again, as Beth said, unless they exercise it in their own favor, it’s not subject to the claims of their creditors. And yet it will cause the assets to be in their estate, so you could get that step up in basis. In fact, you could be very clever in tweaking it. And for example, you could have the trustee grant that power but provide that it’s only applicable with respect to assets that are appreciated. So you can bring those into the estate and get the stepped up basis and maybe you’ll pay a little bit of estate tax. But on the other hand, it won’t apply to assets which haven’t appreciated, and you don’t want basis to change because the change basis may actually be lower than what the basis is inside the trust. So this is a very, very important provision which very few states have. So that’s another reason to consider creating your trust in Alaska.

Beth Chapman: So Jonathan, while we’re talking about basis, maybe we can we can touch upon probably my favorite law in Alaska, particularly for my Alaska clients, which is the elective community property statute of which you were the, the drafter so I would love to hear your comments about the Alaska community property provisions, and then I will step in on how I actually use it for my clients.

Jonathan Blattmachr: One of the things that as a New York practitioner, I’ve been very jealous of, is section 1014 B6 of the internal revenue code because it provides that if one spouse dies, not only her half of a community property asset, which is basically a kind of ownership, like a tenancy in common between a husband and wife, that not just would the deceased spouse’s half of those assets get a stepped up basis, as any property jointly owned by spouses would, but the survivor’s half of the community property would get a stepped up – a tremendously valuable thing. And I’ve spent six pilgrimages going up to Albany, New York, urging the legislature to adopt community property in New York, or at least allowing couples to elect into community property. In all the other states in the United States, which have community property, which basically runs from Louisiana all the way over to top of California, then jump over Oregon, go to Washington, then go to Idaho and then jump all the way over to Wisconsin, which adopted community property by statute. All those states have community property. So when a husband dies in, say, Washington state, the assets which he owns with his wife, his community property, they get to step up on the whole deal. It’s a very, very good thing and very, very powerful one. And I’ve gone up to Albany and the New York legislators who are mostly males, of course, used to say to me, Jonathan, I know this is all part of the worldwide plot to have us give assets to our wives. Well, they didn’t do it. But Alaska was bright enough in 1998 to adopt community property by an elect-in system, which is what they have in Germany. So people in Alaska, if you’re married, why not make everything community property? It’s probably going to be divided. Or you can say these assets are going to be communities, these others aren’t. And then you’ll get that double tax-free step up in basis when the first house dies. Now, you also, and this is very important for folks who are not in Alaska, you can even use that if your clients live in a non-community property state outside of Alaska, like New York, like Florida, like Oklahoma, like, you know, other places. Alaska allows people from out of Alaska to create Alaska community property by creating an Alaska community property trust. It is a great thing, and I just can’t imagine why it is not used more prevalently. Tennessee and Kentucky have passed somewhat similar laws. South Dakota has a law which, at least the last time I looked at it, I just don’t think it cuts the mustard on that score. But Alaska, it’s been around now for more than 20 years. Virtually all of my married clients used it. And I realize that, you know, non-community property lawyers may be a little frightened of it, but we have lots of articles and can provide lots of help in getting you to create community property, which basically goes into a joint revocable trust by the spouses. In fact, it might even be an irrevocable trust that’s being clarified by a bill that’s in the legislature now, so they get the double step up in basis when the first spouse dies. And if you have clients who have real estate and therefore their bases have been greatly reduced through depreciation or otherwise, or they were just great stock pickers and they bought, you know, Microsoft at two, or they bought Amazon at one, or they bought Facebook at zero or whatever it happens to be, now, when the first spouse dies, you can get that double step up in basis. It’s a really great deal. And I’m just surprised that we don’t see more of it throughout the United States.

Beth Chapman: And Jonathan, we, you know, easily more than 95, maybe even 99 percent of my married couples have, who are Alaskans, have elective community property. It is now routinely done, and I can say with certainty that that is the case from almost all of the estate planners in Alaska that their clients are electing in. We have not had any audits on income tax returns. We had one question on an estate tax return from the IRS, but nothing came of it. So we’ve been using it really routinely and I can’t even stress how important this law is. I represent a lot of fish and fishing industries, people in the fishing industry and many of those assets, particularly IFQs, quota shares from the federal government, have zero basis because they were given to them an initial allocations and they can only be held in the in one person’s name who is eligible to fish. But we’ve been converting those to community property. And if the non-owning spouse is the one who predeceases, the owning spouse has been getting a full step up in basis and then has been able to potentially leave the fishing industry and pass it on without having to pay a lot of paying the capital gains. It’s absolutely been a brilliant law, so I will thank you for it and my clients thank you for it. As do all of the accountants who love it and recommend it as well. For non-residents, we’re not seeing quite a few, we’re not seeing very many people asking us about creating community property trust for non-residents. I do have one or two that are done. But I’m surprised we’re not seeing either more people using the elective laws, from Alaska, which is easy to do, or trying to encourage their legislatures to pass some sort of elective community property system. So, it’s an absolute benefit that is easy to use easy to relatively easy to explain to the clients, and we have a lot of flexibility and how we write our community property agreement. So we can address any issues that we might want to address in those, whether it’s management of the assets, whether it’s gifting of the assets, or how the assets will be disposed upon debt.

Jonathan Blattmachr: Matt or Barbara, let’s hand it back to you since we’re about out of time.

Matthew Blattmachr: Well, Jonathan and Beth, I really appreciate all of your commentary. A big theme that I think, Beth, you touched on in the beginning and I see throughout this entire conversation is that Alaska really has flexible laws. And I think we can all attest to that’s really, you know, the Alaska Trust Act was in a lot of ways based around that pillar of flexibility. Giving clients the opportunities to plan the way they want, but kind of have their cake and eat it too, so to speak. And one thing that I maybe want to just follow up on and, and wrap up with is, we’ve talked a lot about all these great laws that Alaska has, the flexibility you can attain. Could Beth, maybe you touch on real quickly, if someone comes to you and says, I’ve got a trust from, you know, Mississippi or, you know, a non-Alaskan jurisdiction, what pillars or what safe harbors do they need to check in order for that trust to become an Alaska trust so that they can get access to these laws? And I know every state’s a little bit different, but maybe from the Alaska perspective, can you talk to us a little bit about that?

Beth Chapman: Yeah, sure. So when we have a client contact us about moving a trust to Alaska, the first thing we’re going to do is advise them that they do need to have a qualified trustee in Alaska. And as Jonathan said, we can have trustees for different roles with limited liability. So many times that may be just appointing Peak as an administrative trustee so that we are now getting the jurisdictional connection. We’ll look at the trust and we’ll see if there is the authority to move the situs of the trust. And if there isn’t, then we will look at whether we fall within one of the provisions under Alaska law where we can move the place of administration to Alaska by having the qualified trustee sign off on it. And so many times we do it that simply. Once we want to move it to Alaska, it’s very simple. They contact Peak, set up an account. Peak has some requirements for having some assets on deposit in Alaska which is a requirement under the statute. And Peak has to have the minimal duties of ensuring that tax reports tax returns and other reports are prepared either on an exclusive or non-exclusive basis. So we can leave a lot of the trustee powers with the individuals who are already currently serving as trustee, but still move the trust to Alaska. Once it’s here, our only requirement under Alaska law is to register the trust with the court. The trust is not filed with the court. It’s a simple registration $50 fee, so it’s not an expensive proposition. And then that will be the case that any proceedings that might need to be filed under the trust would be filed under. Just also want to point out that for trust that can’t be moved here very, because of maybe language in the trust or some other provision, we have used the trust modification provisions that we have under Alaska law, as well as the decanting provisions. Our courts are very accessible. We have the ability to file and get hearings on a pretty quick turnaround time. And that has been very helpful in being able to do some modifications under Alaska law for non Alaska trust.

Matthew Blattmachr: Right. And Beth, one last question. Are there any requirements under Alaska law for assets that have to be in the state or an, an amount that you recommend.

Beth Chapman: There isn’t a specific amount. It says some assets need to be on deposit in the state. And I know that what we typically do is recommend that the clients deposit make a cash deposit with you know, Peak Trust Company. Usually that’s anywhere between $25,000 to $50,000. Sometimes it’s $10,000. I think it does depend on the trust and what is appropriate. If we’re going to have a real property in that trust, they’re typically can be held in LLCs. Many of those LLCs are going to be prepared under Alaska law so that we have that connection as well.

Jonathan Blattmachr: I’ve always felt that if you have a life insurance policy, just have the policy held by a trustee in Alaska. If it’s not, I think, you know maybe I should be criticized because I didn’t put in how much it would be, but I feel very confident no matter what the size, if you open up a $10,000 bank account and one of the Alaska banks or a brokerage account with a broker in Alaska, you’re good to go, you do have an asset in the state. In addition, Alaska law requires that the Alaska trustee must have certain minimal duties. For example, you have to have that the trustee hold a copy of the records of the trust. So you want to do that. So that’s a good thing to do. And if you’re trying to avoid state income tax, and this of course became very, very prominent from a June 2019 case in the Supreme Court called North Carolina versus Kaestner, having your trustee in a state other than one that has an income tax is an extremely important thing to do. So one of the things I recommend is that you have say a trustee in Alaska or Nevada or some other state which doesn’t have an income tax, do your administration there. And if you even have, say, but I want my home in North Carolina or New York to be part of this trust. How do I avoid that connection back to, say, New York state? Well, what you do, you put it in a non disregarded LLC, a real LLC that’s treated, say, as a partnership, and that will help you go very far in avoiding state income tax.

Matthew Blattmachr: Jonathan, Beth, thank you again so much for your time today. It’s genuinely appreciated by our team and our listeners. For anyone listening, there are more resources on Peak Trust Company’s website, www.PeakTrust.com. Also, you might find some on Faulkner Banfield’s website. And if you have any questions comments or feedback, feel free to email us at experts@peaktrust.com and we can either follow up with a particular question or we appreciate all feedback you might have. Thank you again, Jonathan and Beth, and thank you all for listening.