Legislature(1999 - 2000)

05/10/1999 01:38 PM House JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
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HB 219 - RULE AGAINST PERPETUITIES                                                                                              
                                                                                                                                
CHAIRMAN KOTT announced the next order of business is HOUSE BILL                                                                
NO. 219, "An Act relating to the rule against perpetuities,                                                                     
nonvested property interests, and powers of appointment; and                                                                    
providing for an effective date."                                                                                               
                                                                                                                                
Number 0079                                                                                                                     
                                                                                                                                
CORY WINCHELL, Administrative Assistant to Representative Pete                                                                  
Kott, Alaska State Legislature, came before the committee and                                                                   
presented the following sponsor statement:                                                                                      
                                                                                                                                
     This legislation corrects a technical problem created by                                                                   
     the Alaska Trust Act.  The Alaska Trust Act effectively                                                                    
     repealed the rule against perpetuities.  As a practical                                                                    
     matter, this old common rule prevented the continuation                                                                    
     of trusts for longer than 90 to 110 years.  The Alaska                                                                     
     Trust Act changed the common law rule to allow a trust to                                                                  
     continue in perpetuity if the income of principle of the                                                                   
     trust could be distributed in the discretion of the                                                                        
     trustee to a person who was living when the trust was                                                                      
     created.                                                                                                                   
                                                                                                                                
     The problem with the Alaska Trust Act is that it does not                                                                  
     allow a person to create a perpetual charitable lead                                                                       
     trust.  A typical perpetual charitable lead would pay all                                                                  
     income to a charity for a term of 20 years (not to a                                                                       
     person who was living when the trust was created) and                                                                      
     then would continue in perpetuity for the benefit of the                                                                   
     descendants of the person creating the trust.  Since the                                                                   
     passage of the Alaska Trust Act, many persons have                                                                         
     contacted trust companies and attorneys in Alaska and                                                                      
     have expressed a desire to create perpetual charitable                                                                     
     lead trusts.  This new legislation would completely                                                                        
     repeal the rule against perpetuities and would permit the                                                                  
     creating of perpetual charitable lead trusts.                                                                              
                                                                                                                                
Number 0241                                                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT referred to Section 2 of the bill and noted                                                                
that it doesn't eliminate perpetuities, but that it gives a 90-year                                                             
optional savings clause.                                                                                                        
                                                                                                                                
MR. WINCHELL stated under the language in the bill a person would                                                               
not be able to create a trust so that a person's descendants would                                                              
receive money from it.  However, a trust could be created as a                                                                  
charitable lead so that a person's descendants could take advantage                                                             
of it.                                                                                                                          
                                                                                                                                
Number 0360                                                                                                                     
                                                                                                                                
REPRESENTATIVE MURKOWSKI asked Mr. Winchell what the reason is for                                                              
the April 2, 1997 date in the bill [Section 7].                                                                                 
                                                                                                                                
REPRESENTATIVE JAMES noted that is the date of the Alaska Trust                                                                 
Act.                                                                                                                            
                                                                                                                                
Number 0400                                                                                                                     
                                                                                                                                
ERIC KNEFFNER, Attorney, Faulkner Banfield P C, testified in                                                                    
Juneau.  The real reason for the bill is to allow charitable lead                                                               
trusts for a state to take a charitable deduction thereby "getting                                                              
money to charities that might not otherwise get there."  In                                                                     
contrast, a charitable remainder trust is one in which the benefits                                                             
go to human beings first and the remainder goes to charities.                                                                   
                                                                                                                                
Number 0483                                                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT said in either case a trust has to satisfy the                                                             
old rule against perpetuities, or vest or terminate within 90                                                                   
years.                                                                                                                          
                                                                                                                                
MR. KNEFFNER said that's right.  That's his understanding.  The                                                                 
existing rule required "life" for the first period rather than a                                                                
charity or institution.                                                                                                         
                                                                                                                                
Number 0580                                                                                                                     
                                                                                                                                
REPRESENTATIVE MURKOWSKI asked Mr. Kneffner whether there was a                                                                 
point - prior to enacting the Alaska Trust Act - when the state did                                                             
not have a rule against perpetuities.                                                                                           
                                                                                                                                
MR. KNEFFNER replied a modification was made at the same time of                                                                
the Alaska Trust Act.                                                                                                           
                                                                                                                                
REPRESENTATIVE MURKOWSKI said then, prior to April 2, 1997 the                                                                  
state has always had a rule against perpetuities.                                                                               
                                                                                                                                
MR. KNEFFNER replied that's his recollection.                                                                                   
                                                                                                                                
Number 0623                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA referred to the language - "A nonvested                                                                 
property interest is invalid unless the interest is created on or                                                               
after January 1, 1996, and before the effective date of this Act                                                                
and" [Section 2] -  and asked Mr. Kneffner why there is a window.                                                               
                                                                                                                                
MR. KNEFFNER replied that's when the rule against perpetuities was                                                              
modified.  The period between January 1, 1996 and April [2], 1997                                                               
is the section that needs to be applied.                                                                                        
                                                                                                                                
REPRESENTATIVE KERTTULA said:  "Don't you want to change it so that                                                             
they can always be done?  Why would you want it only for that                                                                   
window of time?"                                                                                                                
                                                                                                                                
MR. KNEFFNER replied prior to that time the rule against                                                                        
perpetuities was in effect...                                                                                                   
                                                                                                                                
REPRESENTATIVE KERTTULA interjected and said:  "Right.  During this                                                             
time only the other Act is in effect and then there's some interim                                                              
Act in effect and then the final Act comes into effect."                                                                        
                                                                                                                                
MR. KNEFFNER said what is being done with the bill would be in                                                                  
effect since April [2], 1997.  It can't go back beyond January [1],                                                             
1996 because that's when the rule was modified the first time                                                                   
around.                                                                                                                         
                                                                                                                                
Number 0718                                                                                                                     
                                                                                                                                
REPRESENTATIVE MURKOWSKI asked Mr. Kneffner what the modification                                                               
was in 1996.                                                                                                                    
                                                                                                                                
MR. KNEFFNER replied, according to his recollection, it was                                                                     
modified to vest or terminate in 90 years.                                                                                      
                                                                                                                                
Number 0771                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA asked Mr. Kneffner why the bill is being                                                                
limited to before the effective date of the Act in Sections 2, 4                                                                
and 5; they create a window.  She is concerned about creating a                                                                 
window upon which it drops out again.                                                                                           
                                                                                                                                
MR. KNEFFNER replied that's not the intention.  The sections talk                                                               
about three different kinds of powers or trusts, which is why the                                                               
language has to be repeated for each section.  He further noted                                                                 
that after the date of the Act the common law is superseded.                                                                    
Therefore, in going forward it is not needed anymore.                                                                           
                                                                                                                                
Number 0914                                                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT stated that he thinks there was a pure rule                                                                
against perpetuities until January 1, 1996 and then there were                                                                  
modifications made to the Alaska Trust Act - the 90 years.  The                                                                 
statute refers to SLA 1994, which went into effect on January 1,                                                                
1996.                                                                                                                           
                                                                                                                                
Number 0990                                                                                                                     
                                                                                                                                
REPRESENTATIVE KERTTULA said, given this particular topic, she is                                                               
concerned about inadvertently dropping the whole thing, especially                                                              
since Section 6 talks about the extent provided under AS 34.27.050                                                              
- 34.27.090.                                                                                                                    
                                                                                                                                
MR. KNEFFNER noted that Section 6 is key because it supersedes the                                                              
rule of the common law.  The other four sections deal with the                                                                  
interim period.  After that interim period, it is completely                                                                    
repealed, which is why there are Sections 3, 4 and 5 - to deal with                                                             
the period from January 1, 1996 to April 2, 1997.                                                                               
                                                                                                                                
REPRESENTATIVE KERTTULA noted the language appears to be circular.                                                              
                                                                                                                                
Number 1067                                                                                                                     
                                                                                                                                
DICK THWAITES testified via teleconference from Anchorage.  He                                                                  
explained that the pure version of the Act was amended in 1994 to                                                               
provide clarification in limiting the rule against perpetuities to                                                              
90 years.  When the Alaska Trust Act was adopted in 1997, the                                                                   
concept of charitable lead trusts were overwhelming; therefore,                                                                 
they were left out.  The bill attempts to bring forward that period                                                             
because there are charitable lead trusts that have been created in                                                              
other jurisdictions that have mobility language:  language that                                                                 
allows them to be transferred to one of the Alaska trust                                                                        
institutions, if they can get around the rule of a 1996 effective                                                               
date of the state's 90-year rule against perpetuities.                                                                          
                                                                                                                                
Number 1213                                                                                                                     
                                                                                                                                
REPRESENTATIVE MURKOWSKI asked Mr. Thwaites to explain - in real                                                                
terms - what the adoption of HB 219 would mean for the state.  In                                                               
other words, would it increase business for the state?                                                                          
                                                                                                                                
MR. THWAITES replied he believes that it would bring increased                                                                  
business to the state.  A charitable lead trust is a device used in                                                             
the estate planning world that allows for someone with a fair                                                                   
amount of wealth to give money to a charity, to receive an income                                                               
tax deduction (the difference in value between what goes to charity                                                             
and what goes to the rest of the family), and to set up a perpetual                                                             
benefit to the family and successive generations - the intent of                                                                
the Alaska Trust Act.  He further noted that many of the                                                                        
practitioners around the country have indicated that the Alaska                                                                 
Trust Act is flawed in that regard.  He reiterated the intent of                                                                
the bill is to bring charitable lead trusts into Alaska in order to                                                             
be administered by one of the Alaska trust institutions.                                                                        
                                                                                                                                
Number 1310                                                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT asked Mr. Thwaites what the flaw was.  The                                                                 
biggest change in the bill is to AS 34.27.050, which is only the                                                                
deletion of an "or" provision.                                                                                                  
                                                                                                                                
MR. THWAITES deferred the question to the bill drafter [Terry                                                                   
Bannister, Legislative Affairs Agency].                                                                                         
                                                                                                                                
REPRESENTATIVE CROFT asked Ms. Bannister to explain the effective                                                               
dates - January 1, 1996 and April 2, 1997.                                                                                      
                                                                                                                                
Number 1354                                                                                                                     
                                                                                                                                
TERRY BANNISTER, Attorney, Legislative Legal Counsel, Legislative                                                               
Legal and Research Services, Legislative Affairs Agency, replied                                                                
January 1, 1996 is the date that the current modification of the                                                                
rule against perpetuities went into effect - the 90 years.                                                                      
                                                                                                                                
REPRESENTATIVE CROFT asked Ms. Bannister why there needs to be a                                                                
window for that modification.                                                                                                   
                                                                                                                                
MS. BANNISTER replied the abolition in the bill starts                                                                          
prospectively, except for a few things in AS 34.27.042.  The other                                                              
property interests that have been created before the effective date                                                             
are to be covered as they are currently being covered.                                                                          
                                                                                                                                
REPRESENTATIVE CROFT asked Ms. Bannister what happens after the                                                                 
effective date of the Act.                                                                                                      
                                                                                                                                
MS. BANNISTER replied the bill creates a window for both interests.                                                             
She doesn't know the reason for it, however.                                                                                    
                                                                                                                                
REPRESENTATIVE CROFT said that Section 2 would invalidate the                                                                   
interest created by the window.  He asked Ms. Bannister what would                                                              
be the state of the law after the effective date of the Act in                                                                  
regards to Section 2.                                                                                                           
                                                                                                                                
MS. BANNISTER replied the property interests created and subjected                                                              
to the current statute would still be covered under AS 34.27 -                                                                  
Sections 2-6 in the bill.  The property interests created                                                                       
afterwards in AS 34.27.042 would be handled by the new prospective                                                              
law.                                                                                                                            
                                                                                                                                
REPRESENTATIVE CROFT asked Ms. Bannister where the new prospective                                                              
law is referred to in the bill.                                                                                                 
                                                                                                                                
MS. BANNISTER replied in Section 1.  There are two sections within                                                              
Section 1 - AS 34.27.040 and 34.27.042.  The limited coverage of                                                                
current interests are covered in 34.27.042.                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT said:  "So, there's no 90-day [year] limit                                                                 
either.  I mean, we've gotten rid of the 90-day [year].  So,                                                                    
getting through all that Mr. Chairman, why is it a good idea to get                                                             
through the 90-day [year] and just abolish ... We've in effect                                                                  
created a complicated rule or 90-day [year] and then we're just                                                                 
saying forget the whole thing and just do what you want.  Why                                                                   
wouldn't it be appropriate to keep some sort of outer clear limit                                                               
like the 90-day [year] we have?"                                                                                                
                                                                                                                                
MR. KNEFFNER replied that's a policy question for the legislature                                                               
to decide.  The reason for the bill is to create a fair amount of                                                               
flexibility for charitable lead trusts.  The existence of the                                                                   
Alaska Trust Act contemplates perpetual trusts; and, under that                                                                 
scheme, it's already assumed that the legislature has decided - in                                                              
some circumstances - that perpetual trusts are a good idea.                                                                     
                                                                                                                                
Number 1585                                                                                                                     
                                                                                                                                
MS. BANNISTER said that the application-back erases contract                                                                    
impairment issues.  However, it's not a great idea to change                                                                    
contracts that have already been entered into before putting in a                                                               
new bill.                                                                                                                       
                                                                                                                                
Number 1629                                                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT said, as he recalls, the rule against                                                                      
perpetuities was put on because there were tax consequences to                                                                  
vesting back in the time of Henry VIII.  He asked Mr. Thwaites how                                                              
true is that now; have the tax consequences changed so that's not                                                               
as significant?                                                                                                                 
                                                                                                                                
MR. THWAITES replied yes there is the generation skipping transfer                                                              
tax now.  The purpose of the rule then was because of an                                                                        
inexhaustible supply of land, and the idea of commerce was to keep                                                              
the land revolving in "the commerce."  Now, with conservation                                                                   
easements, for example, land is perpetually protected from                                                                      
development.  It's a change of policy from the 1600s to now.  He                                                                
further noted that the actual provision, under the rule against                                                                 
perpetuities, is found in AS 34.27.050 (3), which states that the                                                               
interest is in a trust and all or part of the income or principle                                                               
of the trust may be distributed, at the discretion of the trustee,                                                              
to a person who is living when the trust is created.  He noted, of                                                              
course, a charity is not a person; therefore, repealing the Act in                                                              
this sense would allow Alaska to have perpetual trusts for                                                                      
charitable lead trusts.                                                                                                         
                                                                                                                                
Number 1764                                                                                                                     
                                                                                                                                
REPRESENTATIVE CROFT said:  "Why would you want to get rid of                                                                   
subsection (3) then?  Do we get ourselves in any bind by--I mean                                                                
why wouldn't you want to just say what we say in Sections 1 and 2.                                                              
Create this window for the current law and then know that you could                                                             
write these--these ones that start with the designation of a                                                                    
charity only after the effective date."                                                                                         
                                                                                                                                
MR. THWAITES said the discussion following the passage of the                                                                   
Alaska Trust Act was to create a more aggressive environment in the                                                             
estate planning area, which is what the bill does.  He noted that                                                               
the state of Delaware, within 16 weeks after the Alaska Trust Act                                                               
was effectuated, included the language - "this is an act to keep                                                                
Delaware the preeminent trust jurisdiction like the Alaska                                                                      
statute."  The state of Delaware also repealed the rule against                                                                 
perpetuities entirely because there doesn't seem to be a lot of                                                                 
reason for continuing exceptions because of the way society has                                                                 
developed.                                                                                                                      
                                                                                                                                
Number 1853                                                                                                                     
                                                                                                                                
RICH HOMPESCH testified via teleconference from Fairbanks.  Section                                                             
1 - AS 34.27.040 - abolishes the rule as to nonvested property                                                                  
interest, a general power of appointment not presently exercisable.                                                             
He noted, because the existing law took effect January 1, 1996,                                                                 
Sections 2, 3 and 5 have to be carried in the bill.  But from then                                                              
on, the rule against perpetuities would be abolished.                                                                           
                                                                                                                                
Number 1899                                                                                                                     
                                                                                                                                
MR. KNEFFNER stated, at the time the rule against perpetuities was                                                              
created, there weren't things like charitable trusts or                                                                         
foundations.  Those kinds of charitable enterprises are already                                                                 
allowed to be perpetual under Alaska law.  He said, "If your                                                                    
looking for a reason to evolve into allowing to have perpetual                                                                  
trusts, that's perhaps one reason.  I'm not saying that's the                                                                   
defining one, but it's certainly something to consider."                                                                        
                                                                                                                                
Number 1941                                                                                                                     
                                                                                                                                
SHARALYN SUE WRIGHT testified in Juneau as the beneficiary of a                                                                 
trust.  She is concerned that the bill would benefit a few                                                                      
attorneys, when it isn't necessarily true that the money would stay                                                             
in the state.  She mentioned that the committee hasn't heard from                                                               
any bankers yet that would benefit from this.  Furthermore, if this                                                             
bill perpetuates trusts, it would also perpetuate trust violations                                                              
and the bad things that go on with trustees.  However, she is                                                                   
mostly concerned that the bill is being rushed, given its magnitude                                                             
and given that very educated and concerned people don't fully                                                                   
understand it.                                                                                                                  
                                                                                                                                
Number 2031                                                                                                                     
                                                                                                                                
CHAIRMAN KOTT indicated that the bill would be held over for                                                                    
further consideration; there wasn't a quorum to conduct business.                                                               

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