Legislature(1999 - 2000)
04/10/2000 01:28 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 circumstances. 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 existence. 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 adopted.] 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.