The Alaska statute provides that for trusts qualifying for the statute=s protections, Alaska courts will have exclusive jurisdiction over and will apply Alaska law in proceedings regarding the internal affairs of trusts.
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protections, no action can be brought to attach or otherwise reach trust property, and that Delaware will not enforce other state=s judgments on such actions. I. Transfer Tax Issues.
(1) Completed Gift: Whether a settlor makes a completed gift in
funding a trust of which the settlor is a beneficiary depends upon: (i) the extent of the settlor=s retained interest in the trust; and (ii) the extent to which the settlor=s creditors can reach the trust property. Purely discretionary interest in trust. If the settlor=s only interest or power under a trust is to receive purely discretionary distributions of income or principal from a third party trustee, then the settlor=s gift to the trust will be complete. Treas. Reg. '25.2511-2(b).
Creditor access to trust. To the extent the settlor=s creditors can reach the trust assets because of the settlor=s retained interest, then the gift will be incomplete.
Where A...the [settlor] cannot require that the trust=s assets be distributed to the [settlor] nor can the creditors of the [settlor] reach any of the trust=s assets...@ the settlor has parted with dominion and control sufficient to have made a completed gift of the assets transferred to the trust.@ Rev. Rul. 77-378, 1977-2 C.B.347.
AIf and when the [settlor=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 [settlor=s] creditors cannot reach the trust=s assets, then the gift is complete for federal gift tax purposes under the rules set forth in '25.2511-2 of the Regulations.@ Rev. Rul. 76-103, 1976-1 C.B.293.
Because under the common law rule of many states, as restated in the Restatement (Second) of Trusts '156(2), a settlor=s creditors can reach trust property to the maximum extent that the trustees may distribute the property to the settlor, a settlor in those states will be deemed to have rights to the property within the meaning of I.R.C. '2511. See Outwin v. Commissioner, 76 T.C. 153(1981) and Paolozzi v. Commissioner, 23 T.C. 182(1954). This would be the result in Virginia by virtue of the law cited above.
131 (2) Removal of Assets from Estate.
(a) Avenues for Estate Inclusion.
1. I.R.C. '2036. I.R.C. '2036(a)(1) provides that a transferor=s gross estate includes the value of any transferred property over which the transferor retained the right to possession, enjoyment or income for life or for a period not ascertainable without reference to the
transferor=s death. Does the discretionary power of a trustee to distribute income to the grantor create a potential rationale for the IRS to argue for including the assets of a Delaware or Alaska Trust in the grantor=s taxable
estate? Professor Jeffrey Pennell argues maybe yes. (Pennell, 2 Estate Planning, ''7.3.4.2 and 7.345 (Aspen 2003)) Mal Moore, on the other hand, argues that Athe proponents of non-inclusion have the better part of the argument.@ (AComments on Alaska/Delaware Trusts,@ Malcolm A. Moore, ALI-ABA Video Law Program, May 20, 1998.) Dick Covey is reported to agree with Mal Moore=s position.
2. I.R.C.'2038. I.R.C. '2038(a)(1) provides that a transferor=s gross estate includes the value of any transferred property over which the transferor, at the time of his death, had a power (in any capacity) to change the
enjoyment, through a power to alter, amend, revoke or terminate.
(b) Cases and Rulings. A number of cases and rulings have been cited for the proposition that the transferred assets may be removed from the estate for estate tax purposes. See, e.g., Estate of German v. United States, 85-1 U.S.T.C. (CCH) &13,610 (Ct.Cl. 1985); Estate of Paxton v. Commissioner, 86 T.C. 785 (1986); Estate of Wells v. Commissioner, 42 T.C.M. (CCH) 1305 (1981); Estate of Skinner v. United States, 316 F.2d 517 (3d Cir. 1963); Estate of Uhl v. Commissioner, 241 F.2d 867 (7th Cir. 1957);
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Private Letter Ruling 9332006; Private Letter Ruling
8829030; Technical Advice Memorandum 8213004; Private Letter Ruling 8037116; Private Letter Ruling 7833062. (c) Facts and Circumstances. Many of the above cited cases
are clear in outcome if not always in reasoning. The courts looked at all facts and circumstances surrounding the creation and administration of the trusts. Facts and circumstances helpful to the desired estate tax result (exclusion of the trust assets from the estate) include: the absence of any pre-arrangement that all trust income be paid to the settlor; the absence in fact of payment of all trust income to settlor; the failure of the settlor to place all of his or her assets in the trust; and the reporting of the creation of the trust as a gift for gift tax purposes.
(d) Delaware Statute. The Delaware statute in its original form had a fatal transfer tax defect. Because Section 3572(b) originally allowed the transferor to make the transferred property subject to the claims of the transferor=s creditors by means of an express written statement to that effect, this would appear to have prevented a completed gift and triggered includability under I.R.C. '2038(a)(1), as it would amount to a retained right to indirectly terminate the trust by giving creditors recourse to it for payment of claims. This problematic section has been repealed retroactive to the effective date of the Act.
David Shaftel in the article cited above in the ACTEC Journal has a helpful analysis of the transfer tax issues.
J. The Enforceability of Foreign Judgments.