The common law rule against perpetuities provides that every interest in property created through the exercise of a limited power of appointment shall be deemed to have been created at the time of the creation of the power. Delaware enacted a statute which states that every interest in property created through the exercise of a power of appointment, whether a limited power or a general power, is deemed to have been created at the time of the exercise of the power of appointment, rather than at the time of the creation of the power. Thus, in Delaware, the beginning date for measuring the perpetuities period of a property interest subject to a power of appointment is not the date of the instrument creating the first power of appointment, but rather the date of exercise of the power of appointment. As a result, in Delaware it is possible to use successive special powers of appointment to continuously extend the perpetuities period.

In the 1950's, Congress responded by enacting I.R.C. §2514(d) and §2041(a)(3). These statutes provide that a gift or estate taxable event will occur if a power of appointment is exercised so as to create "another power of appointment which under the applicable local law can be validly exercised so as to postpone the vesting of any estate or interest in such property, or suspend the absolute ownership or power of alienation of such property, for a period ascertainable without regard to the date of the creation of the first power."

A serious disadvantage would exist if trusts created under a state's method of elimination of the rule against perpetuities made such trusts susceptible to the Delaware Tax Trap. These trusts could not use special powers of appointment which could create successive special powers. As a result, future generations would be denied the dispositive flexibility which such special powers provide.

In 1997, Alaska eliminated the rule against perpetuities with regard to most trusts by a statutory provision that stated that "the rule would not apply if the interest is in a trust and all or part of the income or principal of the trust may be distributed, in the discretion of the trustee, to a person who is living when the trust is created." Recent concerns about the Delaware Tax Trap have led Alaska to re-evaluate its method of abolishing the rule against perpetuities. As a result, a refined approach for elimination of the Rule was enacted this legislative session.

Initially, the new legislation expressly states that the common law rule against perpetuities does not apply in Alaska. Then Alaska enacted a two-pronged approach to avoid the Delaware Tax Trap. The purpose of the "first prong" is to re-establish a RAP for Alaska in the limited circumstance of property interests subject to a special power of appointment which is exercised to create a new special power of appointment. All such property interests are invalid unless within 1,000 years from the time of creation of the original instrument or conveyance creating the original special power of appointment the property interests vest or terminate. This provision applies to a trust instrument or conveyance executed on or after April 2, 1997, if the instrument or conveyance creates a non-vested property interest subject to the exercise of a power of appointment that creates a new or successive power of appointment. The goal of this provision is to cure the Delaware Tax Trap problem for all trusts created under Alaska Law after the initial abolition of the rule against perpetuities in 1997.

The second prong of the new legislation enacts a rule against suspension of the power of alienation. With respect to trusts, the statute provides that the power of alienation can not be suspended for a period longer than 30 years after the death of an individual alive at the time of the creation of the trust. A trust created by a successive special power of appointment relates back to the date of the instrument creating the original power of appointment, and the power of alienation can not be suspended for a period longer than 30 years after the death of an individual alive at the time of the creation of the trust. However, the statute expressly states that a suspension of the power of alienation can be avoided if the trustee of a trust has the express or implied power to sell the trust property.

This second prong of Alaska's approach to avoid the Delaware Tax Trap is based upon the Tax Court decision in Estate of Murphy vs. Commissioner, 71 T.C. 671(1979). In that case, the Tax Court held that the Delaware Tax Trap was not violated in Wisconsin which had a perpetuities statute stated in terms of a rule against suspension of the power of alienation (rather than a rule based upon remoteness in vesting). The Internal Revenue Service has acquiesced in the Murphy decision.

The above-described provisions are contained in Alaska Senate Bill 162, which repealed the prior Alaska rule against perpetuities, and enacted AS 34.27.051, .053, .070, .075, and .100. The effective date of the legislation is April 22, 2000. The primary draftsman of the above legislation is Stephen E. Greer, who may be reached at greer@micronet.net.