Alaskan self-settled trusts.

• Author: Lipoff, Lawrence M.

Today's highly litigious society has led many to consider the potential benefits of asset protection planning. Although many techniques are as simple as properly tiding assets, having money in protected pension plans, purchasing life insurance, etc., more sophisticated methods are increasingly being considered.

The recent past has seen the frequent use of offshore asset protection trusts established in creditor-friendly jurisdictions. These jurisdictions are countries that tend to have bank secrecy laws and no income, gift or estate taxes. Contrary to the laws in most states, these jurisdictions permit self-settled trusts; thus, the person establishing the trust (i.e., the grantor) can be a potential beneficiary. Although the trusts will be grantor trusts during the lifetime of the settlor under Sec. 679, they may become exempt from income tax after the grantor's death. The common law rule against perpetuities (which limits the life of a trust) is often repealed by these jurisdictions. Therefore, after a grantor's death, these trusts have unlimited life without income taxation, until the assets are repatriated to the US.

Potential abuses have brought the attention of Congress. Recent legislation has been designed to control the use of these trusts. Requiring specialized attorneys as drafters and trust companies as fiduciaries, these trusts are expensive to establish and operate. Further, the political and economic stability of countries with these statutes is always a concern.

Effective as of April 2, 1997, Alaska permits self-settled trusts to be free of the reach of creditors. The drafters of the Alaska law intended to provide a vehicle for asset protection and estate planning. (Missouri and Delaware have established similar statutes.) The initial issue of whether Alaskan self-settled trusts can provide similar asset protection features to those provided by offshore trusts has received a basically negative response from the professional community. Many commentators believe, however, that even if the asset protection statutes are ineffective, estate planning advantages can be obtained through the use of Alaskan trusts.

The Alaska law may not pass muster under those portions of the US. Constitution that protect the right to contract, provide for "full faith and credit" (requiring recognition of court judgments of other states) and ensure that a state cannot legislate against Federal law. In addition, conflict-of-laws matters (i.e., which...