Overview of Settlement Trust After 2017 Tax Act

Recently passed legislation paves the way for ANCs to generate tax-exempt distributions and other benefits

Section 13821 of the 2017 Tax Act allows ANCs to transfer cash and/or assets to their settlement trusts on a pre-tax basis, while at the same time allowing for tax-free distributions to be paid to the shareholder-beneficiaries of the trust.

The Alaska Native Claims Settlement Act (ANCSA) Amendments of 1987 permit Alaska Native corporations (ANCs) to establish settlement trusts, which were designed as a mechanism for replacing or supplementing corporate dividends. In 2003, CIRI shareholders passed a resolution calling for the establishment of an irrevocable trust to benefit CIRI Elders, and the CIRI’s Elders’ Settlement Trust was established shortly thereafter. However, due to certain prohibitions posed by the Internal Revenue Service tax code, few ANCs, including CIRI, have established settlement trusts to deliver broad-based benefits to their shareholders.

This is starting to change. Thanks to the 2017 Tax Cuts Jobs Act (Tax Act), ANCs may now place assets in a settlement trust on an effectively pre-tax basis. The resulting tax savings could help to finance trust benefits, which can include shareholder distributions, including Elders’ distributions and other initiatives promoting the health, education and welfare of trust beneficiaries.

‘An Extraordinary Achievement’

CIRI shareholder and former CIRI president and CEO Carl Marrs, who now serves as CEO of Old Harbor Native Corp., hails the Alaska Native provisions of the Tax Act as “an extraordinary achievement that will provide maximum benefit to the shareholders of Alaska Native corporations.”

The Tax Act – signed into law in December 2017 – made several significant changes to the IRS tax code, including a reduction in the tax rates applicable to corporations.

Prior to its passage, Marrs and others had advocated to include an amendment allowing ANCs to transfer cash and/or assets to their settlement trusts on a pre-tax basis, while at the same time allowing for tax-free distributions to be paid to the shareholder-beneficiaries of the trust.

“We went through both sides of the House, Democrat and Republican, and our message was simple: Alaska Natives are among the poorest of the poor in the nation. How do we get maximum benefit to all our shareholders, and not just those born before 1971?” Marrs said.

To receive benefits under ANCSA, a person had to be alive on Dec. 18, 1971 (the date ANCSA was signed into law), at least one-quarter Alaska Native and an American citizen. Each eligible applicant became an original shareholder in his or her respective regional corporation, receiving 100 shares of stock. All Alaska Natives born after 1971 were ineligible for inclusion in the settlement.

“Providing distributions and other benefits through a settlement trust, rather than the ANC, is a far superior approach in most cases,” Marrs added.

How the Provisions Work

Section 13821 of the Tax Act allows ANCs to claim a tax deduction for transfers of assets to a settlement trust, thereby allowing such transfers to occur on a pre-tax basis rather than the after-tax basis that was the rule prior to the new legislation.

“Under the new provisions, the settlement trust pays 10 percent tax on its ordinary income and no tax on capital gains and dividends received. The beneficiaries (shareholders) have no tax on settlement trust income that is distributed, versus approximately 7.5 percent if paid directly from the ANC,” said Christopher Slottee, vice president/ general counsel for Old Harbor Native Corp.

Established and registered under state law, settlement trusts can benefit shareholders, descendants and/or Alaska Native people at large. The money can be used to provide dividends, educational grants and scholarships, funeral benefits, programs for youth and Elders and/or any combination. “It was left up to the ANCs who they want to benefit,” Slottee said.

Breaking it Down

Benefits provided through a settlement trust are provided on a pre-tax basis, so in effect, tax savings help fund the benefits. The charts below illustrate the benefits of settlement trusts to both the ANC and and beneficiaries.

Settlement Trust Benefit Breakdown

What an ANC must earn to provide approximately $1 million in net benefits:

What recipients actually keep from $1 million in corporate earnings distributed by an ANC versus a settlement trust:

Looking Ahead

“CIRI is excited about the possibilities Section 13821 opens up, and we are currently evaluating the best options to take advantage of the new rules to benefit our shareholders, including, of course, CIRI Elders,” CIRI Chief Financial Officer Stig Colberg said.

“The legislation is new and there are still details to iron out, but we’re optimistic,” Colberg added. “The new law brings significant advantages to both ANCs and ANC shareholders, and it’s a great step toward enhancing the economic benefits intended for Alaska Native people under ANCSA.”

As CIRI continues to explore options for a potential new settlement trust, details will be made available in the Raven’s Circle and through other means of communication.