Legislature(2001 - 2002)
05/02/2001 03:40 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 181-COMMUNITY PROPERTY/OBLIGATIONS OF SPOUSES
CHAIRMAN PHILLIPS announced HB 181 to be up for consideration.
MS. AMY ERICKSON, Staff to Representative Murkowski, said:
In 1998, the legislature passed Alaska's Community
Property Act, which allows married couples to
characterize some or all of their assets as community
property. Since enactment, those dealing in estate
planning and trusts on a day-to-day basis have realized
that the statutes need minor adjustment and that
happens in four areas. The first provides that a
creditor of a debtor spouse may only reach the separate
property of that debtor spouse and the spouse's jointly
held property. It also allows property such as life
insurance and IRAs to be transferred to a community
property trust by designating the trust as a
beneficiary of the property. It also clarifies the
sources of funds used to purchase life insurance and
expands categories of family members to include
ancestors or descendents of either spouse. So, it not
only allows a surviving spouse to be a beneficiary, but
also a grandchild.
Since current statute does not address division of
property at death, HB 181 clarifies that on the death
of a spouse, certain property items can be allocated to
the spouse's heirs as long as each spouse's heirs
receive half the total value of a community property.
MS. ERICKSON said there was a question in Judiciary about whether
this impacts family law practice. She asked the Bar Association
and they located all their family law members and there was no
adverse reaction from them.
MR. DAVE SHAFTEL said he was one of a group of estate planning
attorneys who has worked on Alaska's estate planning legislation
over the past four years. The Community Property Act of 1998 is
popular with his clients and others. However, they have found
some gaps in the law that this legislation addresses. He said the
Act was originally taken from the Uniform Marital Property Act,
which was drafted in 1981 and was initially enacted in only one
state, Wisconsin. He said Alaska is the tenth community property
state.
This particular bill clarified four areas. It clarifies if you
have an obligation incurred by one spouse, then that spouse's
creditor can reach that spouse's separate property and that
spouses one-half of the families' community property. Existing
statute is ambiguous on this point. This clarifies that community
property will be treated the same as other jointly held property.
If you had jointly held property without community property held
by both spouses, a creditor could only reach the separate
property of the debtor spouse and that debtor spouse's half of
jointly held property.
The next clarification deals with transfers of certain assets to
a community property trust, like life insurance, IRAs, 401K plans
and assets that have beneficiary designations. They can be
transferred by designating the community property trust as the
beneficiary of such property. This is important when you get to
the fourth change.
The third change deals with life insurance. There can be
complications when a person uses funds from a community property
account, like a bank account to buy life insurance. There are
both ownership and tax complications. If it's unclear that the
spouse who is not making the contribution agreed to the
contribution, this legislation creates some presumptions of
agreement, as long as the policy is benefiting family members. It
also clarifies an area in the estate gift tax law if community
property funds are being used by one spouse to create a life
insurance trust for the surviving spouse. It makes it clear that
the presumption is the surviving spouse agreed that the funds
used would be first the community property, which would be
changed to separate property, so that the insured spouse is
contributing these funds to the trust. The end result of this is
to make sure the life insurance proceeds are not included in the
surviving spouse's estate and taxed at his or her death. The
presumptions are safety nets when dealing with funds that are
community property and are used to purchase life insurance.
The last clarification deals with the provision that talks about
what happens at death to the community property. It clarifies
that at death, one half of the community property belongs to the
surviving spouse and the other one half belongs to the decedent's
estate. It also adopts the "aggregate theory of division of
community property assets," which allows for "non-prorata funding
of trusts." Basically, this means that you don't have to divide
every item of community property exactly in half and give half to
the deceased spouse's estate and half to the surviving spouse.
Rather, you just have to make sure that the deceased spouse's
estate gets one half of the total aggregate value and the
surviving spouse gets only one half of the total aggregate value.
This is important, because they often find that the couple
together may have had retirement assets, all of which should go
to the surviving spouse. This is because there is a better income
tax result if all the other assets go to the deceased spouse's
estate, so they can fund a bypass trust. This kind of trust is
for the benefit of the surviving spouse, but then it goes on to
the children without any further transfer taxation.
MR. SHAFTEL said these changes would strengthen the act and make
it a lot more useable. It will also make it available in the
retirement plan the life insurance area for nonresidents of
Alaska who have chosen to use Alaska's optional community
property system. He hasn't run into any opposition to it.
Number 330
REPRESENTATIVE MURKOWSKI said that these changes seem to make
sense.
CHAIRMAN PHILLIPS asked what triggered this legislation.
REPRESENTATIVE MURKOWKSI replied that she is not a trust
attorney, which is a very select group of practitioners. Mr.
Shaftel is her constituent, as well as a trust attorney.
SENATOR DAVIS said she had someone called her last week with the
concerns that were addressed in this bill.
SENATOR LEMAN said he thought the change of not requiring each
item to be divided in half was good, but asked if he ran into
cases where an estate argued over pieces of property because
someone values it as being important to them. "In those cases,
does this help bring resolution or not or does it make any
change?…Are we neither harming or helping?"
MR. SHAFTEL replied that was right and he thought good drafting
could solve that problem, but good administration would do it if
good drafting didn't. This legislation does not affect that one
way or the other.
SENATOR LEMAN moved to pass CSHB 181(KUD) from committee with
individual recommendations and the $0 fiscal note. There were no
objections and it was so ordered.
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