Legislature(1999 - 2000)

04/10/2000 01:28 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
SB 163-TRUSTS AND TRUSTEES                                                                                                    
CHAIRMAN KOTT announced that the  first order of business would be                                                              
CS FOR SENATE BILL NO. 163(RLS),  "An Act relating to trusts, to a                                                              
trustee's duties  to notify and  inform beneficiaries, and  to the                                                              
revocation, modification, termination,  reformation, construction,                                                              
and trustees of trusts."                                                                                                        
Number 0117                                                                                                                     
STEVE   GREER,  Attorney,   testified   via  teleconference   from                                                              
Anchorage.   He informed the committee  that he had been  asked by                                                              
Sue Mossgrove, Staff  to Senator Taylor, to present  SB 163 to the                                                              
committee.   He  explained that  SB 163  contains two  provisions.                                                              
The  first  provision, Section  1,  refers  to notification.    He                                                              
requested that  all questions regarding  Section 1 be  referred to                                                              
Dave  Shaftel,  Attorney.   Section  2  of  SB 163  addresses  the                                                              
modification provision.                                                                                                         
MR. GREER  explained that Section  1 provides a  limited exemption                                                              
from notification with regard to  beneficiaries.  [This exemption]                                                              
applies  in a  situation  in which  an  individual  has created  a                                                              
trust,  which  has  a discretionary  beneficiary.    He  posed  an                                                              
example in  which one creates a  trust for the benefit  of his/her                                                              
child and  this gift and trust  is being made for  estate planning                                                              
purposes.  At the same time these  gifts are being made for estate                                                              
planning  purposes,  the  person  wants his/her  child  to  attend                                                              
college.   The person does  not want the  child to know  that this                                                              
large sum of money  has been set aside for that  child.  Section 1                                                              
adds a subsection  (b) to AS 13.36.080.  Subsection  (b) says that                                                              
a  settlor  can exempt  a  trustee  from the  normal  notification                                                              
duties with respect to the discretionary  beneficiary, but only if                                                              
the  creator/settlor of  the trust  is alive.   Furthermore,  that                                                              
exemption  must provided  in  a provision  of  the  trust and  the                                                              
instrument that creates the trust at the outset.                                                                                
Number 0297                                                                                                                     
MR. GREER  turned to  Section 2, which  is basically  a safety-net                                                              
provision  that is  found  in the  law of  various  states.   This                                                              
particular  provision is  drawn from  Section 415  of the  Uniform                                                              
Trust Act  and a similar California  statute as well as  a similar                                                              
South  Dakota  statute.    He informed  the  committee  that  this                                                              
provision  merely codifies  existing case  law; the  desire is  to                                                              
have  a supporting  statute.    He  explained that  the  provision                                                              
specifies that  a court, upon  the petition of  certain designated                                                              
individuals, can reform  or modify a trust in  four circumstances.                                                              
One  such circumstance  would  be  if  there is  an  unanticipated                                                              
circumstance.    Another  circumstance  would be  if  the  settlor                                                              
creating the  trust had a  mistake in law  or fact, which  must be                                                              
proven to the court by clear and convincing evidence.                                                                           
MR.  GREER  said  the  third  circumstance   would  exist  when  a                                                              
modification is necessary  to achieve a tax exemption  because tax                                                              
law  changes frequently.    The  fourth circumstance  which  would                                                              
allow  modification is  if all  the beneficiaries  consent to  the                                                              
modification,  the court  will modify  the  trust as  long as  the                                                              
modification  does not  defeat a  material purpose  of the  trust.                                                              
However, if  the modification  does defeat  a material  purpose of                                                              
the trust,  the modification could still  be made by the  court if                                                              
the reasons  for the  modification to the  trust far  outweigh the                                                              
purpose for  which the trust was  created.  Mr. Greer  stated that                                                              
Section   2   would   allow  trusts   to   change   with   current                                                              
MR. GREER  informed the committee  that this is the  same approach                                                              
that the State of Florida took when  that state abolished its rule                                                              
against perpetuities.   He explained that the idea  is that if the                                                              
rule against perpetuities  allow trusts to continue  forever, then                                                              
as time passes  people must be  able to change in  accordance with                                                              
the changing  time.  He pointed out  that Section 2 is  similar to                                                              
Florida's statute that abolished the rule against perpetuities.                                                                 
Number 0525                                                                                                                     
DAVE  SHAFTEL,   Attorney,  testified   via  teleconference   from                                                              
Anchorage.  Mr. Shaftel addressed  the notification provision.  He                                                              
said that often  it is not wise  to bring minor children  or other                                                              
beneficiaries  into  the  settlor's  estate  planning  while  that                                                              
person is alive and has the ability  to oversee that trust.  After                                                              
the settlor has passed away, then  the accountability is placed on                                                              
the beneficiaries who need notice  and accountings when requested.                                                              
This is  all that is accomplished  with Section  1 of SB 163.   He                                                              
pointed out  that [this  section] would also  place Alaska  on the                                                              
same  footing as  other states  in  which Alaska  is competing  in                                                              
regard to trust business.                                                                                                       
MR.  SHAFTEL turned  to the  second portion  of SB  163, which  is                                                              
important in order to simplify judicial  proceedings.  If there is                                                              
a statute that merely codifies what  the case law says, then it is                                                              
easy for the  court to refer to  the statute, rely on  it and make                                                              
the  necessary  changes  to  accommodate  trusts.   A  statute  is                                                              
preferable to having  attorneys file lengthy briefs  in the court,                                                              
which has to review all the case  law in order to come to the same                                                              
conclusion.   He pointed  out that these  provisions exist  in the                                                              
Uniform  Trust  Act as  well  as in  many  other states  and  have                                                              
existed in  the law of those  states for a considerable  amount of                                                              
time.  He  referred to this "as  catching up."  He said  these are                                                              
good provisions  that will  strengthen our  statutory law  dealing                                                              
with the trust created by wills or by lifetime trusts.                                                                          
Number 0706                                                                                                                     
REPRESENTATIVE MURKOWSKI  referred to Section 1,  which allows for                                                              
an  exemption  to be  provided  orally  if  the trust  is  created                                                              
orally.  She asked  if that is problematic in terms  of proof that                                                              
one did or did not do what was said.                                                                                            
MR. SHAFTEL  stated that  Representative Murkowski had  identified                                                              
the problem with  an oral trust.  He remarked that  he didn't know                                                              
of any practitioners  who would create such a trust.   However, he                                                              
imagined  there  could  be  circumstances  in  which  very  little                                                              
professional  planning was  done, although  there would be  enough                                                              
evidence  and  testimony  to establish  that  someone  had  placed                                                              
certain property  in trust.  With  such evidence, he  supposed the                                                              
settlor  of  the  trust  could  orally   provide  a  statement  to                                                              
establish such an exemption.  Mr.  Shaftel believes that this oral                                                              
trust language  was inserted by Legislative  Council.  He  did not                                                              
know of anyone who creates or relies on an oral trust.                                                                          
MR. GREER  specified that  this [oral trust]  language was  not in                                                              
the original  version before the  Senate Judiciary  Committee, but                                                              
was  included  in  the  version that  passed  out  of  the  Senate                                                              
Judiciary Committee.  He noted that  he nor Mr. Shaftel were privy                                                              
to that testimony.   He echoed Mr. Shaftel's sentiments  in regard                                                              
to the creation of an oral trust.                                                                                               
REPRESENTATIVE MURKOWSKI posed a  situation in which an oral trust                                                              
is created.   She commented  that she was  not aware that  an oral                                                              
trust could  be created.   Recognizing that  an oral trust  can be                                                              
created and  now that an  oral exemption  can be created  is cause                                                              
for concern.   Furthermore, under Section  2 of SB 163,  the court                                                              
can  interpret what  the  settlor intended  under  an oral  trust.                                                              
This sounds like a murky area.                                                                                                  
MR. SHAFTEL  stressed that there  will be a significant  burden on                                                              
anyone  who attempts to  rely on  an oral  trust.   If there  is a                                                              
dispute, the individual will have  to produce evidence in court in                                                              
order to carry the  burden of proof.  The individual  will have to                                                              
prove  the  terms  of  the  trust   and  any  exemption  provided,                                                              
otherwise that  trust will not  exist or satisfy  the modification                                                              
requirements.   Mr.  Shaftel surmised  that this  oral trust  must                                                              
have been devised from someone's  experience or situation and then                                                              
there was  the desire to  cover it in  the exemption  provision as                                                              
well.   He identified the safeguard  as the burden of proof, which                                                              
led to him not being personally concerned with this provision.                                                                  
Number 0147                                                                                                                     
REPRESENTATIVE  KERTTULA  referred  to  the trust  being  held  in                                                              
secrecy  from  the  person  who will  ultimately  take  it.    She                                                              
inquired as to what the current law  specifies in terms of telling                                                              
minors that there is a trust.                                                                                                   
MR. SHAFTEL  clarified that [this  bill] is not referring  to only                                                              
minors for which the age of majority  is 18.  He explained that an                                                              
individual in  their early  teens who hired  an attorney  would be                                                              
entitled  to  this  information  per the  current  statutes.    He                                                              
informed the  committee of the  following example, which  he noted                                                              
is common for estate  planners to face.  He explained  that he has                                                              
three children,  all of  which are  in their 20s  now and  thus he                                                              
would not have  a problem with the children knowing  about a trust                                                              
he had created for them.  When the  children were 18 years of age,                                                              
he would  not have wanted  them to know  about trusts that  he had                                                              
created  for  them   so  that  the  children   would  function  as                                                              
productive people  and not get caught  up in looking to  the trust                                                              
for their future.                                                                                                               
MR. SHAFTEL  said this  is a  very common  situation.   Therefore,                                                              
this statute  would allow a provision,  an affirmative act,  to be                                                              
included in the trust that says during  the settlor's lifetime and                                                              
capacity,  the  settlor   would  be  the  only   one  entitled  to                                                              
information.   Only when  the settlor is  no longer able  to track                                                              
the   trustee,   due  to   incapacitation   or   death,  are   the                                                              
beneficiaries entitled  to information  that the trust  is created                                                              
and to an  annual accounting.   Mr. Shaftel pointed out  that this                                                              
would take  care of  the situation  in which  a father has  passed                                                              
away and left a  trust for his second wife.  In  such a situation,                                                              
the  father's children  from the  first marriage,  who would  take                                                              
after the  second wife  passes, are  entitled to information  that                                                              
the  trust is  created as  well as  to accountings.   Mr.  Shaftel                                                              
emphasized that  this is a narrow  exemption that only  applies to                                                              
the lifetime and capacity of the  person who created the trust and                                                              
only  if the  person takes  an affirmative  action  and says  that                                                              
he/she wants this in the trust.                                                                                                 
REPRESENTATIVE   KERTTULA  surmised,  then,   that  there   is  no                                                              
difference between minors and adult children in the current law.                                                                
MR. SHAFTEL replied no.                                                                                                         
Number 1274                                                                                                                     
REPRESENTATIVE   ROKEBERG  referred  to   page  1,   lines  10-11,                                                              
regarding oral  statements.  He asked  if Mr. Greer had  said that                                                              
the  oral  [trust]  language  was   not  in  the  original  Senate                                                              
Judiciary  Committee  version,  but   was  perhaps  added  in  the                                                              
[Senate] Rules Committee.                                                                                                       
MR. GREER  answered,  "That's my  guess."  He  explained that  the                                                              
version  submitted  to  the Senate  Judiciary  Committee  did  not                                                              
include that  provision, as  he read  it.   Therefore, this  was a                                                              
surprise.  Mr.  Greer echoed Mr. Shaftel's comments  that he could                                                              
not  imagine that  an  oral trust  would ever  really  occur.   He                                                              
surmised that if  there was an oral trust, it would  be the result                                                              
of some  court proceedings.   Therefore, any possibility  of abuse                                                              
can't occur due to the court's oversight.                                                                                       
MR. GREER,  in further response  to Representative  Rokeberg, said                                                              
oral trusts  are allowed  under common law.   Still, it  remains a                                                              
matter  of proof  that property  is held  in trust  verbally.   He                                                              
posed the following situation, "If  I give property to you ... and                                                              
tell you  that I  want to hold  this for  the benefit of  somebody                                                              
else and then  you take this money  and abscond with it,  then the                                                              
person who  was supposed  to benefit from  that property  could in                                                              
fact bring  a lawsuit."   Therefore, he  did not foresee  had this                                                              
situation could arise without it being in a court.                                                                              
REPRESENTATIVE ROKEBERG  said it seems maybe the  settlor had this                                                              
provision in  the trust and then  changed his/her mind,  which led                                                              
to an oral declaration  to the trustee to inform  the beneficiary.                                                              
Perhaps, that is the impetus for this language.                                                                                 
MR. SHAFTEL  remarked that it seems  that a situation  could arise                                                              
in litigation  in court whereby one  party says that  the property                                                              
was intended to be held in trust.   To which the response would be                                                              
questioning  whether  the  beneficiaries  were  notified  of  this                                                              
trust.     It  would  be  argued   that  failure  to   notify  the                                                              
beneficiaries and  provide them with  accountings is a  failure to                                                              
establish  this  oral trust.    If  persuasive evidence  could  be                                                              
offered  that there  is an exemption  that applies  - because  the                                                              
settlor  is able  to  prove, by  third  party  testimony, that  no                                                              
notice of this was  to be given to the beneficiaries  - that would                                                              
adequately  counter such  an  argument.   This  is something  that                                                              
could hypothetically  happen and  would only  happen in  very rare                                                              
circumstances.  Mr. Shaftel commented  that it does not seem to be                                                              
harmful at  all to  the statute  that is  being considered  as the                                                              
safeguard is always going to be the burden of proof.                                                                            
REPRESENTATIVE ROKEBERG  referred to the language on  page 1, line                                                              
11, "if the  trust is created  orally," which is the  portion that                                                              
is of concern to  him.  He commented that he didn't  know why that                                                              
language is included.                                                                                                           
CHAIRMAN  KOTT  asked if  there  was  anyone  else who  wished  to                                                              
testify.  There being no one, public testimony was closed.                                                                      
Number 1601                                                                                                                     
REPRESENTATIVE  MURKOWSKI  announced  that  she  would  feel  more                                                              
comfortable removing  the language that provides  for the creation                                                              
of  an  oral trust  and  an  oral exemption,  unless  someone  can                                                              
explain why the language was inserted and why it is necessary.                                                                  
REPRESENTATIVE CROFT  pointed out that if oral  trusts are allowed                                                              
in  other areas,  the  question  becomes whether  this  additional                                                              
provision   should  only   be  allowed   in  writing  or   orally.                                                              
Representative Croft  said that if one [agrees]  with the original                                                              
premise that there can be oral trusts,  then it would seem to make                                                              
sense that  the exemption  could be made  orally when there  is an                                                              
oral trust.                                                                                                                     
REPRESENTATIVE ROKEBERG  said he  believes that the  Department of                                                              
Law (DOL) stated earlier that oral  trusts can exist.  He believes                                                              
that  the recognition  of an  oral  trust in  [this bill]  muddies                                                              
things.  Representative  Rokeberg reiterated his  concern that the                                                              
experts don't know why this oral  trust language was included.  He                                                              
further  expressed concern  that  by including  this language,  it                                                              
would codify  oral trusts  as it seems  to give credence  to their                                                              
REPRESENTATIVE KERTTULA  remarked that  she was not sure  that she                                                              
even liked  the idea  of exempting trustees  from their  duties to                                                              
begin  with, especially  with adult  children.   By including  the                                                              
oral trust, it  further creates a chance to have  things go wrong.                                                              
Representative  Kerttula  said that  she  would  delete [the  oral                                                              
trust] language.                                                                                                                
Number 1760                                                                                                                     
REPRESENTATIVE   KERTTULA  moved  that   the  committee   adopt  a                                                              
conceptual amendment to remove [the oral trust language].                                                                       
REPRESENTATIVE ROKEBERG specified  that the language to be removed                                                              
is the following:   "by oral statement to the trustee  at the time                                                              
of the  creation of the  trust if the  trust is created  orally,".                                                              
This language is located on page 1, lines 10-11.                                                                                
[There being no  objection, it was so ordered and  Amendment 1 was                                                              
Number 1808                                                                                                                     
REPRESENTATIVE ROKEBERG  moved to report CSSB 163(RLS)  as amended                                                              
out  of   committee  with   individual  recommendations   and  the                                                              
accompanying zero fiscal  note.  There being no  objection, it was                                                              
so  ordered and  HCS CSSB  163(JUD)  was reported  from the  House                                                              
Judiciary Standing Committee.                                                                                                   

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