Legislature(2001 - 2002)
04/21/2001 11:24 AM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 181 - COMMUNITY PROPERTY Number 0088 CHAIR ROKEBERG announced that the first order of business would be HOUSE BILL NO. 181, "An Act relating to the obligations of spouses, to insurance policies of spouses, to the nonprobate transfer of property on death to a community property trust, to the division of the community property of spouses at death, and to the Alaska Community Property Act; and providing for an effective date." Number 0094 REPRESENTATIVE LISA MURKOWSKI, Alaska State Legislature, sponsor of HB 181, noted that in 1998, the legislature passed the Alaska Community Property Act, which allows married couples to characterize some or all of their assets as community property. Since implementation of that Act, those who deal with estate planning and trusts on a day-to-day basis have identified certain statutes requiring improvement and adjustment. She proffered HB 181 as a means of amending and strengthening those community property statutes. REPRESENTATIVE MURKOWSKI explained that the first area addressed by HB 181 is the extent to which a creditor can reach a couple's community property. Section 1 provides that a creditor can only reach the separate property of the debtor spouse and that spouse's half of jointly held property. The second area addressed by HB 181 relates to transfers of property to a community property trust by beneficiary designation, whereby certain property such as life insurance policies and Individual Retirement Accounts (IRAs) can be transferred to a community property trust by designating the trust as the beneficiary of the property. REPRESENTATIVE MURKOWSKI said the third area addressed by HB 181 clarifies the sources of funds used to purchase life insurance, in that it will be presumed that the spouse who buys the life insurance has used his/her own property to purchase that life insurance. In addition, HB 181 will expand the category of "family member" to include ancestors or descendants of either spouse. Typically, community property funds may be used by a couple to purchase their life insurance, and when the primary beneficiaries are family members, then it is presumed that both spouses consented to the choice of beneficiaries. The fourth area addressed by HB 181 is the division of community property at death. Section 4 clarifies that "different items can be allocated to the spouse's share as long as each spouse's share receives half of the total aggregate value of the community property." Number 0431 REPRESENTATIVE JAMES made a motion to adopt the proposed committee substitute (CS) for HB 181, version 22-LS0567\L, Bannister, 4/19/01, as a work draft. There being no objection, Version L was before the committee. REPRESENTATIVE MURKOWSKI added that Version L clarifies "that these favorable presumptions with the trust are only available to the portion of the trust that's for the benefit of the family member." Number 0501 STEPHEN E. GREER, Attorney, testified via teleconference and explained that Section 3 of Version L, which is in reference to life insurance, provides a safety net provision in the event that an estate plan is audited by the Internal Revenue Service (IRS). Currently, if a life insurance policy is purchased for one spouse via a community property account, half the policy is considered to be owned by the insured spouse and the other half by the uninsured spouse, which negates any estate-tax benefits that would be derived if the policy were owned solely by the insured spouse. He said Version L expands the list of individuals for whom a policy can be [made] payable to, and is considered to be done with the consent of the uninsured spouse. He noted that this presumption could always be overcome by the testimony of the uninsured spouse. MR. GREER, in response to questions, reiterated that Version L provides a safety net and removes the foibles that can create havoc with an estate planner and his/her clients. He said he did not see any downside to HB 181, or anything in it that might be controversial. He noted that Section 1 reflects current law with regard to what property is held liable for a debtor spouse's obligation; it simply clarifies how community property stands in relationship to current law in the event of a spouse's death. Number 0877 DAVID G. SHAFTEL, Attorney, testified via teleconference and explained that existing law essentially makes Alaska a separate property state. By default, a husband and wife's property is owned as separate property. Therefore, if the husband incurs an obligation - because of negligence, for example - during the course of his occupation, then his separate property is liable for that obligation, but his wife's property is not. Similarly, if the couple owned their property jointly - as tenants in common, for example - if one spouse incurs an occupational liability, only that spouse's half of the jointly held property is liable for that obligation. By comparison, in community property states, there are a number of different rules regarding the extent to which community property is going to be liable for one spouse's obligations. MR. SHAFTEL offered that Version L will simply bring into conformity Alaska's optional community property system with its separate property system, so that if one spouse - not both spouses - incurs a liability, then that spouse's separate property and one-half of their community property will be liable for that obligation. Consequently, the other spouse's separate property and his/her half of their community property would not be liable for that obligation. He added that there is also a provision in Version L that says if the liability is incurred by both spouses, then all the community property is responsible for that liability. For example, if a couple purchases - together - some investment property, then all of the community property would be liable for any obligations. REPRESENTATIVE BERKOWITZ asked Mr. Shaftel whether he has heard any criticism of HB 181. MR. SHAFTEL said that he has not heard any criticism of HB 181 from among the people who work with "this rule". As a matter of fact, he added, the criticism is directed toward the current statute because it creates an ambiguity that will result in extra litigation. He noted that a community property system is a very attractive and advantageous way for a married couple to own their property; most of his clients, he said, want to take advantage of this system but the cloud of ambiguity regarding community property liability prevents them. He opined that Version L will provide a fair way of resolving this ambiguity, and is entirely consistent with rules governing property held jointly as tenants in common. In response to a question, he pointed out that Version L would not affect division of property during a divorce because the "just and equitable rule" would still be used; thus family law attorneys would not object to Version L either. Number 1300 CHAIR ROKEBERG asked whether HB 181 is simply resolving a creditors' rights issue. MR. SHAFTEL said, "Yes, it is." REPRESENTATIVE BERKOWITZ, referring to language in Section 1, subsection (k), suggested that essentially one spouse could be bankrupted without significantly impacting the other. He said that this raises questions about the impact on property settlements pursuant to a divorce situation. He said he would like to hear from a family law practitioner regarding what impact HB 181 might have in a divorce situation. MR. SHAFTEL asserted that [subsection (k)] is not new; it is existing law. He said that subsection (j) is new, but subsection (k) merely restates existing law under AS 34.77.070, which says that an obligation incurred during marriage by both spouses will be satisfied from both their separate property and their community property. He explained that one of the changes proposed by Version L is to do away with the concept - found in AS 34.77.070(c) - that an obligation incurred by one spouse in the interest of the marriage or the family will be satisfied from the community property as well as the property of the spouse who incurred that obligation. In its place subsection (j) will provide that when one spouse incurs an obligation, either before or during marriage, that obligation may be satisfied only from that spouse's separate property and from that spouse's interest in the community property. MR. SHAFTEL also explained that the existing law pertaining to the division of community property upon divorce stipulates that a just and equitable standard will be used for both community property and separate property; Version L does not change that law. He reiterated that this is not a family law issue; it is, at most, a creditors' rights issue. Version L is fair to the creditor and to the non-negligent spouse, he added. It will result in the same rule being applied to community property as with separate property: the negligent spouse's separate property and his/her half of the community property is all that should be liable for an obligation incurred only by that spouse. If, on the other hand, both spouses participated in the negligence, the legal system already resolves those kinds of issues; Version L should in no way affect those procedures. Number 1640 CHAIR ROKEBERG asked whether community property (or separate property) has to be liquidated in order to satisfy a creditor's claim. MR. SHAFTEL said that depends; it could result in a forced sale if that is the only way to satisfy the obligation. What may happen is that the creditor could attach the property and become owner of that half interest, but what most likely - and practically - occurs, is that the property is sold and half of the proceeds go to the creditor and half go to the non-liable spouse. In response to a further question, he affirmed that when a person enters into an optional community property agreement, he/she can stipulate what is held as community property. Through an agreement or a community property trust, a couple can say what portions of their property are to be considered separate property and what portions are to be considered community property. One example he said he is familiar with is when one spouse has inherited property and wishes to keep it separate; another example is when one spouse is in business with other individuals and wishes to keep the business holdings separate from any community property. MR. SHAFTEL, with regard to the division of community property at death, explained that Version L fleshes out current statute by adding the provision which clarifies that at death, one half of the property is owned by the deceased spouse and the other by the surviving spouse. It also establishes what is called an aggregate form of ownership of property, which allows different items of the community property to be allocated to the separate halves so that not every item has to be divided equally as long as the aggregate value is divided equally. He said that this often comes into play with pension or IRA accounts because it is almost always preferable to have the surviving spouse receive these accounts and simply fund the deceased spouse's "bypassed trust" with other community property assets. He noted that this provision of Version L eliminates some federal income tax arguments that might otherwise exist, and is a strong addition to the Alaska Community Property Act. Number 1909 MR. SHAFTEL explained that Section 2 of Version L allows transfers to a community property trust by beneficiary designation, which means that if a person has an IRA account, he/she can name a community property trust as a beneficiary of that account and then the IRA will be considered community property. This will facilitate estate planning by Alaskans as well as facilitate the use of Alaska community property trusts by nonresidents should they chose to use an Alaskan trustee. MR. GREER explained that Amendment 1 simply conforms AS 34.77.120(e) to the changes incorporated by Version L regarding the presumptions pertaining to an insured spouse. Number 2007 CHAIR ROKEBERG made a motion to adopt Amendment 1, which read [original punctuation provided]: AS 34.77.120(e) is amended to read: This section does not affect the ownership interest or proceeds of a policy unless a spouse or a trust described in (b)(7) of this section is designated as an owner or on the records of the policy issuer and community property is used to pay a premium on the policy. There being no objection, Amendment 1 was adopted. MR. GREER, in an attempt to allay Representative Berkowitz's concerns regarding property divisions during a divorce, said that HB 181 does not affect family law at all; it will not affect the "rights or obligations of the spouse with respect to each other with community property." Number 2129 REPRESENTATIVE MEYER moved to report the committee substitute (CS) for HB 181, version 22-LS0567\L, Bannister, 4/19/01, as amended, out of committee with individual recommendations and the accompanying fiscal note. There being no objection, CSHB 181(JUD) was reported from the House Judiciary Standing Committee.