Legislature(2001 - 2002)

04/21/2001 11:24 AM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= 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.                                                                                                                      
                                                                                                                                

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