Alaska Trust Company’s
Gift & Estate Tax Analysis of
Alaska Self-Settled Spendthrift Trusts
It seems relatively certain that an Alaska Irrevocable Trust should not be
included in the estate of the grantor who is merely eligible, but not entitled to,
receive distributions from the trust unless (1) creditors of the grantor can attach the
trust assets under the laws where the trust is located, or (2) the IRS shows there was
an understanding with the trustee that property would be returned to the grantor.
Here is our analysis:
The best starting point, we think, is Herzog v. Commissioner, 116 F.2d 591
(2d Cir. 1941), which was decided by one of America’s great judicial panels (Judge
Learned Hand, Judge Augustus Hand, and Judge Chase). The case stands, in our
view, for the proposition that if property transferred to a so-called "self-settled" trust
(i.e., one from which the trustee, other than the grantor, may, but is not required, to
make distributions to the grantor) and is not subject under the law governing the trust
to claims of the grantor's creditors, the transfer is complete in its entirety for Federal
gift tax purposes.
The next development to consider, we think, is Rev. Rul 54-538, 1954-2 CB
316 (modified by Rev. Rul. 62-13, 1962-1 CB 180, clarified by Rev. Rul. 77-378,
1977-2 CB 347). In Rev. Rul 54-538, the Service ruled that where the interest
(which interest appears to have been the possibility that the trustee could distribute
trust assets to the grantor) retained by the grantor is not capable of valuation, the
interest retained cannot be subtracted from the value of property transferred as a
gift to the trust—i.e., the whole value transferred to the trust is subject to gift tax.
However, as noted, Rev. Rul. 62-13 modified Rev. Rul. 54-538 and held that where
the power of invasion of the trust for the grantor is so great that there is no
assurance that anything of value will ever be paid to a beneficiary other than the
grantor, no part of the transfer to the trust is a completed gift.
The Federal Court