Legislature(2001 - 2002)

02/23/2001 01:09 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 34 - RULE AGAINST PERPETUITIES                                                                                             
                                                                                                                                
Number 0040                                                                                                                     
                                                                                                                                
CHAIR ROKEBERG announced  that the first order  of business would                                                               
be SPONSOR SUBSTITUTE FOR HOUSE BILL  NO. 34, "An Act relating to                                                               
the statutory  rule against  perpetuities, to  nonvested property                                                               
interests  and trusts,  and to  the  suspension of  the power  of                                                               
alienation of property; and providing for an effective date."                                                                   
                                                                                                                                
Number 0063                                                                                                                     
                                                                                                                                
REPRESENTATIVE LESIL McGUIRE,  Alaska State Legislature, sponsor,                                                               
said that as complicated as the  rule of perpetuities is, SSHB 34                                                               
is very simple.   In 1997 Alaska passed the  Trust Act, which was                                                               
an attempt  to bring Alaska up  to the standards of  other states                                                               
such  as Delaware  - a  state considered  to be  forward-thinking                                                               
with regard  to trust laws.   She noted that Alaska  has a unique                                                               
tax  structure, in  that it  is virtually  nonexistent.   To take                                                               
advantage of this  fact and create a new industry  in Alaska, the                                                               
Trust  Act was  passed.   Through  passage and  revisions of  the                                                               
Trust  Act, a  group of  attorneys discovered  problems with  the                                                               
original  legislation.   Alaska's  attempt  to  abolish the  rule                                                               
against perpetuities  was not entirely  successful.   Current law                                                               
still  rendered trusts  subject to  estate  and gift  tax on  the                                                               
federal level.  Last year, SB  162 was an attempt to clarify that                                                               
the  rule against  perpetuities was  abolished for  all practical                                                               
reasons in Alaska,  in other words, to allow for  the creation of                                                               
dynasty  trusts,  or  perpetual  trusts, as  they  are  sometimes                                                               
called.  These  trusts enable transfer of  property to successive                                                               
generations without federal or state income tax.                                                                                
                                                                                                                                
REPRESENTATIVE  McGUIRE  explained  that  SSHB  34  was  a  minor                                                               
modification  to   Alaska's  trust  law,  which   would  allow  a                                                               
legislatively approved policy to be  carried out.  She added that                                                               
the  committee  may face  similar  technical  bills in  the  near                                                               
future and asked  the committee to remember  that the legislature                                                               
had  made a  decision  for Alaska  to  become a  forward-thinking                                                               
state with regard to trust laws.   In an attempt to diversify the                                                               
state  economically,  the area  of  trusts  was chosen,  and  she                                                               
warned that this required that  Alaska stay ahead of other states                                                               
in order  to attract the same  dollars.  She added  that this was                                                               
why SSHB  34 was  retroactive.   On another  note, she  said that                                                               
while  this  was  a  complex issue,  it  was  not  controversial,                                                               
primarily due to the tax structure in Alaska.                                                                                   
                                                                                                                                
Number 0595                                                                                                                     
                                                                                                                                
CHAIR ROKEBERG  added that  revisions to  Alaska's trust  law had                                                               
created  an entire  new industry.   One  of the  changes was  the                                                               
ability  to elect  community property  status within  a marriage,                                                               
which  would avoid  a "step  up in  basis" should  a spouse  pass                                                               
away.   He  also noted  that  the establishment  of trusts  would                                                               
generate jobs  and bring  money to  the state.   This  would also                                                               
allow for  a capital base  increase for investment purposes.   He                                                               
pointed out that  Alaska Trust Company, National  Bank of Alaska,                                                               
Alaska USA [Federal Credit Union],  and Key Bank have all availed                                                               
themselves  of this  law  to  generate business.    The State  of                                                               
Delaware  has attempted  to replicate  Alaska's trust  laws.   He                                                               
added that Alaska has minimized,  to a very small percentage, the                                                               
premium tax on  life insurance policies that are  involved in the                                                               
establishment  of  trusts.   This  was  called the  jumbo  policy                                                               
premium  tax, and  with its  abolishment, the  amount of  revenue                                                               
generated to the  state has increased.  Other states  now come to                                                               
Alaska  and  use  the  state's  trust law  and  combine  it  with                                                               
insurance  products;  thus  they can  buy  several  multimillion-                                                               
dollar policies and  pay very little tax.  He  said he hoped that                                                               
SSHB 34 would  be one of the few cleanup  bills [the legislature]                                                               
would see this year.                                                                                                            
                                                                                                                                
REPRESENTATIVE McGUIRE  also noted  that one of  the requirements                                                               
of the  original legislation  adopted was that  trusts had  to be                                                               
administered  by   an  Alaskan  trust   company.    It   is  this                                                               
requirement that generates jobs in Alaska.                                                                                      
                                                                                                                                
Number 0977                                                                                                                     
                                                                                                                                
STEPHEN E.  GREER, Attorney at Law,  testified via teleconference                                                               
and  assisted with  the presentation  of SSHB  34.   He explained                                                               
that SSHB  34 was needed  to clarify legislation that  was passed                                                               
last year [SB  162].  The dynasty trust, which  is just one small                                                               
aspect of  the entire  umbrella of  trust legislation,  allows an                                                               
individual to  create a trust that  can go on from  generation to                                                               
generation, whereby individuals  within a family can  make use of                                                               
the trust  assets.  It  can also be structured  in such a  way so                                                               
that, as assets  pass from generation, federal and  state tax can                                                               
be avoided.   However, when  the rule [against]  perpetuities was                                                               
abolished,  Alaska inadvertently  fell  into what  is called  the                                                               
Delaware  tax   trap.    He   said  that  although   last  year's                                                               
legislation  fixed  that  problem,  current  law  still  lacks  a                                                               
distinction  between a  presently  exercisable  general power  of                                                               
appointment and a testamentary general  power of appointment.  He                                                               
opined that SSHB  34 was a technical amendment  that provided for                                                               
this distinction in Alaska's rule against perpetuities.                                                                         
                                                                                                                                
Number 1275                                                                                                                     
                                                                                                                                
MR. GREER explained that the  rule against perpetuities says that                                                               
at some point  in time, all trusts must end  and the trust assets                                                               
must be  distributed to the  beneficiaries.  That length  of time                                                               
is measured by  "life and being," at the time  of the creation of                                                               
the trust,  plus 21 years.   Essentially, a  trust can go  on for                                                               
the benefit  of an individual's  children, but  it has to  end at                                                               
some  point  when  it  gets  distributed  to  the  grandchildren,                                                               
thereby subjecting  the assets  to gift  taxation, and  to estate                                                               
taxation when  the grandchildren die.   He offered that  it would                                                               
be  wonderful to  create  a  trust whereby  the  assets are  made                                                               
available for  use to  succeeding generations,  a trust  in which                                                               
the  assets  are not  subject  to  estate  tax  as they  pass  to                                                               
succeeding generations.   In order to accomplish  the creation of                                                               
this type of trust, the  rule against perpetuities was amended in                                                               
1997 so  that the period  of time  a trust may  continue extended                                                               
for as  long as  beneficiaries existed.   This allowed  people of                                                               
wealth  to  establish  trusts that  ensured  dramatic  growth  of                                                               
assets by not subjecting them to estate taxation.                                                                               
                                                                                                                                
MR. GREER gave an example of a  $1 million trust with a return of                                                               
5 percent after  taxes.  If that trust was  permitted to grow for                                                               
120 years, but  subjected to an estate taxation of  50 percent at                                                               
each generation, it would grow to  $21 million.  However, if that                                                               
same trust  were exempt  from estate taxation,  it would  grow to                                                               
$348 million.   He went on  to say that Alaska  had abolished the                                                               
rule against perpetuities so that  individuals could create these                                                               
types  of trusts.   All  that is  needed is  an Alaskan  resident                                                               
willing  to  take  on  the   duties  of  trustee.    Out-of-state                                                               
residents wishing  to create such  a trust must move  their money                                                               
to Alaska because the trusts must  be administered in Alaska.  He                                                               
said  he understood  that South  Dakota, another  state that  had                                                               
abolished  the  rule  against   perpetuities,  managed  over  $80                                                               
billion in trusts.  He believed  one of the primary reasons South                                                               
Dakota  had  been  able  to  garner so  much  money  was  because                                                               
Citicorp moved  in and had  huge marketing potential.   Currently                                                               
Alaska has not had any  similar large institution enter the state                                                               
in order to market Alaska's [trust] law.                                                                                        
                                                                                                                                
Number 1693                                                                                                                     
                                                                                                                                
MR.  GREER  also   explained  that  a  dynasty   trust  could  be                                                               
structured in such a way that  the assets would be made available                                                               
for the  use of an  individual's children without  being included                                                               
in the  children's estate tax base,  and the assets would  not be                                                               
subject to the  claims of the children's creditors.   In order to                                                               
accomplish these  goals and  stay within  state tax  law, certain                                                               
powers can  be given to  the children:  a  child can be  made the                                                               
beneficiary of his  or her own dynasty trust and  use both income                                                               
and  principal as  he or  she sees  fit; also,  the child  can be                                                               
given a nongeneral  power of appointment so that he  or she could                                                               
decide who  receives the assets  and how they are  distributed at                                                               
his or her death.                                                                                                               
                                                                                                                                
MR.  GREER brought  up the  fact that  the Internal  Revenue Code                                                               
contained a  provision whereby  if a beneficiary  of a  trust who                                                               
possesses   a  nongeneral   testamentary  power   of  appointment                                                               
exercises that  power in  such a  way that  the trust  assets are                                                               
passed on to  another trust, which also has a  beneficiary with a                                                               
nongeneral power of appointment, then  the assets will be subject                                                               
to estate tax at the death  of the original beneficiary.  This is                                                               
sometimes known as  the Delaware tax trap.   Currently, any state                                                               
that has abolished  the rule against perpetuities  will fall into                                                               
this tax  trap if a  beneficiary exercises his or  her nongeneral                                                               
power  of appointment  to create  a further  nongeneral power  of                                                               
appointment.  He believed that SSHB  34 would allow Alaska to fix                                                               
its trust  law retroactive to April  22, 1997, in order  to avoid                                                               
this tax trap.                                                                                                                  
                                                                                                                                
MR.  GREER outlined  that  a beneficiary  of a  trust  who has  a                                                               
nongeneral testamentary  power of  appointment can  exercise that                                                               
power  without estate  taxation resulting.   A  beneficiary could                                                               
also choose  to vest the trust  to himself or herself.   The rule                                                               
against perpetuities  demands that  the time  a trust  might last                                                               
must be  computed.  With the  passage of SB 162,  trusts could no                                                               
longer go on  forever, and would thus avoid the  tax trap.  There                                                               
had  to  be a  period  of  time  within  which trusts  must  end.                                                               
Current law  dictates that  a trust must  vest within  a thousand                                                               
years of the  creation of the trust if a  beneficiary exercises a                                                               
nongeneral testamentary power  of appointment.  If,  on the other                                                               
hand,  a beneficiary  is given  a  presently exercisable  general                                                               
power  of appointment,  it is  as  if the  beneficiary were  just                                                               
given the trust property, and  thus the thousand-year computation                                                               
begins  from the  time the  beneficiary received  the power.   He                                                               
listed an  example of a  beneficiary of a  trust in excess  of $1                                                               
million who  has a testamentary  nongeneral power  of appointment                                                               
and  gives another  beneficiary a  presently exercisable  general                                                               
power of appointment  in order to avoid a  55 percent generation-                                                               
skipping tax.   This action actually  trips the tax trap,  but by                                                               
doing this,  it subjects  the property to  the lesser  estate tax                                                               
rate versus the higher generation-skipping tax rate.                                                                            
                                                                                                                                
MR. GREER concluded  by expressing his belief that  SSHB 34 would                                                               
perfect  Alaska's  trust  law  and   conform  it  to  common  law                                                               
understanding of the rule against perpetuities.                                                                                 
                                                                                                                                
TAPE 01-23, SIDE B                                                                                                              
                                                                                                                                
Number 2390                                                                                                                     
                                                                                                                                
MR. GREER, in response to  questions from Representative Coghill,                                                               
said  that  it   was  unlikely  SSHB  34  would   see  any  court                                                               
challenges.   He  also said  that if  Alaska were  to change  its                                                               
estate  tax structure,  it might  necessitate altering  the trust                                                               
laws  to  accommodate dynasty  trusts.    However, because  often                                                               
states choose to have their  estate and income taxes resemble the                                                               
federal taxing  scheme, dynasty trusts would  probably be allowed                                                               
to continue.   He said he saw that the  biggest threat to Alaskan                                                               
trusts would  be the imposition of  an income tax on  the trust's                                                               
assets.                                                                                                                         
                                                                                                                                
MR. GREER  elaborated on points  brought up by Chair  Rokeberg by                                                               
saying  that if  a state  income tax  were to  be established,  a                                                               
provision could  be made to exempt  nonresident trusts maintained                                                               
in  Alaska, but  he did  not  see any  way to  avoid taxation  of                                                               
trusts formed  by Alaska  residents.   Mr. Greer  went on  to say                                                               
that he believed,  should Congress repeal the  estate tax, Alaska                                                               
would have an ability to take  the billions of dollars outside of                                                               
dynasty trusts  and move  them to  Alaska because  current Alaska                                                               
law exempts trust assets from  state income taxation and protects                                                               
them from creditor claims.                                                                                                      
                                                                                                                                
MR. GREER explained that the reason  for the changes in Section 1                                                               
was  to  make   a  distinction  in  the   law  between  presently                                                               
exercisable  general   power  of  appointment   and  testamentary                                                               
general power of  appointment.  The latter power  relates back to                                                               
the  date of  the original  trust instrument.   The  former power                                                               
relates to the date that power  was granted to a beneficiary.  He                                                               
also clarified that the addition  of the words "of alienation" in                                                               
Section 3 was to conform with  the first part of each sentence in                                                               
which those words were added.   Mr. Greer confirmed that the term                                                               
"settlor", inserted  in Section 3,  was someone who had  formed a                                                               
revocable  trust  and subsequently  died,  causing  the trust  to                                                               
become  irrevocable.   He also  agreed that  he was  in favor  of                                                               
raising estate taxes  higher than they are  currently but capping                                                               
them to protect small businesses.                                                                                               
                                                                                                                                
Number 1457                                                                                                                     
                                                                                                                                
REPRESENTATIVE  OGAN moved  to report  SSHB 34  out of  committee                                                               
with individual recommendations and  the accompanying zero fiscal                                                               
notes  and  asked   for  unanimous  consent.     There  being  no                                                               
objection,  SSHB  34 was  reported  out  of the  House  Judiciary                                                               
Standing Committee                                                                                                              

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