Legislature(2001 - 2002)

04/08/2002 01:45 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 316 - POWERS OF APPOINTMENTS/TRUSTS/CREDITORS                                                                              
Number 2129                                                                                                                     
CHAIR ROKEBERG  announced that  the last  order of business  would                                                              
be SPONSOR  SUBSTITUTE FOR  HOUSE BILL NO.  316, "An  Act relating                                                              
to  trusts,  including  trust protectors,  trustee  advisors,  and                                                              
transfers  of trust interests,  and to  creditors' claims  against                                                              
property subject to  a power of appointment; and  providing for an                                                              
effective date."                                                                                                                
Number 2092                                                                                                                     
REPRESENTATIVE LESIL  McGUIRE, Alaska State  Legislature, sponsor,                                                              
said  that  SSHB   316  attempts  to  make  Alaska's   trust  laws                                                              
competitive  with other  states  such as  Delaware.   She  relayed                                                              
that in  1997 the legislature passed  the Alaska Trust  Act, which                                                              
she  opined,  has  been a  tremendous  success  by  all  accounts.                                                              
Representative  McGuire noted that  last year  she brought  a bill                                                              
before  the  committee that  did  some  fine-tuning to  that  1997                                                              
legislation, and  that this area  of law is continually  changing;                                                              
thus [SSHB  316] is  before the  committee today.   Representative                                                              
McGuire   highlighted  that   SSHB  316   makes  changes   to  the                                                              
"spendthrift  trust"  area  of  the law,  and  adds  the  ability,                                                              
similar  to  Delaware, to  have  a  trust  protector and  a  trust                                                              
advisor.   She pointed  out that this  ability allows  the settlor                                                              
to have  as much  control as  possible when  the decision  to give                                                              
money is made.                                                                                                                  
Number 1977                                                                                                                     
STEPHEN E. GREER,  Attorney at Law, said that he  is interested in                                                              
ensuring  that Alaska  has the  best trust  laws.   He noted  that                                                              
although his  constituent base  is the  average Alaskan  who wants                                                              
to protect  his/her family,  passage of  SSHB 316 will  indirectly                                                              
benefit  the  Alaska  trust  industry   and  allow  it  to  remain                                                              
competitive with  trust industries  in other states,  particularly                                                              
Delaware.  Mr.  Greer explained that because Alaska  was the first                                                              
state to  pass trust laws,  other states  have since been  able to                                                              
draft improved legislation.   Therefore, SSHB 316,  while adding a                                                              
few  new provisions,  mainly clarifies  what those  in the  estate                                                              
planning community view the law to be.                                                                                          
MR. GREER  pointed  out that Sections  1 and  2 provide  statutory                                                              
authority  for  trust  provisions   that  are  commonly  found  in                                                              
trusts.   The legislation  also provides  clarity to the  existing                                                              
spendthrift  provisions,  which   are  presently  found  under  AS                                                              
34.40.110.   Furthermore, Section 3  adds two new  provisions that                                                              
pertain  to "charitable  remainder  trusts,  and grantor  repaying                                                              
unit  trusts, and  grant  retained annuity  [trusts]."   He  noted                                                              
that these provisions  are found in Delaware's law.   Moreover, he                                                              
added,  this legislation  restates the  [American Law  Institute's                                                              
Restatement   (Second)  of   Property   ("Second  Restatement   of                                                            
Property")]  regarding the  power of appointments  and the  extent                                                              
to which  property  subject to a  power of  appointment should  be                                                              
protected from creditor claims.                                                                                                 
REPRESENTATIVE  BERKOWITZ turned  to Section 1  and asked  if that                                                              
section  requires  the  hiring of  professional  trust  protectors                                                              
because it has to be a disinterested party.                                                                                     
MR.  GREER,   in  response,   posed  a   situation  in   which  he                                                              
establishes  a trust and  the Alaska  Trust Company, for  example,                                                              
is named  as the  trustee of  that trust.   However,  he wants  to                                                              
ensure  that the Alaska  Trust Company  isn't  going to view  [the                                                              
trust]  as  a   permanent  position  of  employment   for  itself.                                                              
Therefore, the settlor  could name a disinterested  party, a trust                                                              
protector,  that  could  be  given  the  authority  to  remove  or                                                              
replace   that  [trustee]   with   the  trustee   of  the   [trust                                                              
protector's] choice.   Therefore, the provision is  actually meant                                                              
to protect the settlor's intent in creating the trust.                                                                          
Number 1761                                                                                                                     
REPRESENTATIVE  BERKOWITZ  turned to  Section  5, which  clarified                                                              
that fraudulent conveyance  actions may only be  brought against a                                                              
settlor of a trust  and only [with regard to] a  specific transfer                                                              
of assets, and noted  that this would be a change  to current law.                                                              
He  asked who  else  would  be subject  to  fraudulent  conveyance                                                              
actions,  what other  assets might  be consumed,  and "how  are we                                                              
limiting the scope?"                                                                                                            
MR. GREER  clarified that this  is not  a change to  existing law.                                                              
He  explained  that the  novelty  of  this trust  legislation  [AS                                                              
34.40.110]  is  that it  has  really always  been  the  law.   For                                                              
example, a  settlor may decide to  give someone money,  but, being                                                              
uncertain as  to how the money will  be used, the settlor  names a                                                              
trustee.    Assuming  there  is   a  spendthrift  provision  -  as                                                              
recognized by the  1875 U.S. Supreme Court case,  Nichols v. Eaton                                                            
- attached  to the  trust, the beneficiary  would have  no ability                                                              
to assign  his/her interest in the  trust.  Moreover, none  of the                                                              
creditors  of  the  beneficiary   would  be  able  to  attach  the                                                              
interest, assuming  that there has  been no fraudulent  conveyance                                                              
in transferring  the assets into that  trust.  The novelty  of the                                                              
1997  law  is  that  it  allows  an  individual,  while  retaining                                                              
discretionary interest  in the trust,  to create a trust  and name                                                              
a trustee,  thus ensuring  that no creditor  of the  [settlor] can                                                              
attach  these assets.   Mr. Greer  noted that  three other  states                                                              
have passed laws that copy Alaska's trust laws.                                                                                 
MR.  GREER  explained  that Sections  5  and  6  have to  be  read                                                              
together.   He  pointed out  that Sections  5 and  6(g) only  deal                                                              
with the  self-settled trust, as  just described, that  allows the                                                              
[settlor] to  retain discretionary interest  in the trust.   Under                                                              
current  law, a  preexisting creditor  is allowed  one year  after                                                              
the trust could  have reasonably been discovered  by that creditor                                                              
[to  be fraudulent]  in  which to  bring  a fraudulent  conveyance                                                              
action against [the  settlor].  If that action  is successful, the                                                              
spendthrift provision  would be held null and void.   However, the                                                              
problem is that  the current statute doesn't contain  a definition                                                              
of a  preexisting creditor.   Therefore,  Section 6(g)(1)  and (2)                                                              
provide the definition of a preexisting creditor.                                                                               
Number 1587                                                                                                                     
MR.  GREER  offered  an  example  of a  contractor  who  builds  a                                                              
building that  he believes has  been built to the  specifications.                                                              
The  contractor  then  decides  to do  some  estate  planning  and                                                              
subsequently  transfers  some property  in  trust.   He  explained                                                              
that the problem  with making a transfer in trust  is that without                                                              
maintaining  a discretionary  interest, the  money is  gone.   Mr.                                                              
Greer  commented  that people  are  hesitant  to make  such  gifts                                                              
unless  they  are  extremely  wealthy.     In  this  example,  the                                                              
[settlor] maintains  a discretionary  interest and upon  death the                                                              
property  will  pass  on  to the  children.    Subsequent  to  the                                                              
[settlor's]  death,  however, a  lawsuit  is brought  against  the                                                              
settlor  regarding  the building  that  he  built.   The  question                                                              
becomes:   at  what point  in  time does  the  plaintiff have  the                                                              
ability  to bring  a  fraudulent  conveyance action  against  that                                                              
contractor to attack the transfer in the trust?                                                                                 
MR. GREER  related his belief that  with the adoption  of [Section                                                              
6(g)(1) and  (2)], the plaintiff  - [creditor] -  must demonstrate                                                              
either that  the claim was  asserted against the  contractor prior                                                              
to the  creation of  the trust or  that the fraudulent  conveyance                                                              
action is filed  within four years  of transfer to the  trust.  He                                                              
reiterated that these  provisions of SSHB 316 attempt  to define a                                                              
preexisting creditor.                                                                                                           
REPRESENTATIVE  BERKOWITZ  inquired   as  to  the  source  of  the                                                              
language for this legislation.                                                                                                  
MR. GREER  indicated  that there  is no specific  source for  this                                                              
Number 1430                                                                                                                     
DOUGLAS J. BLATTMACHR,  President, Chief Executive  Officer (CEO),                                                              
Alaska Trust Company,  testified via teleconference  in support of                                                              
SSHB  316, remarking  that it  improves Alaska  law, makes  Alaska                                                              
competitive with Delaware, and clarifies some issues.                                                                           
CHAIR  ROKEBERG asked  what  would  happen if  an  income tax  was                                                              
enacted on trust clients.                                                                                                       
MR. BLATTMACHR answered  that Alaska's trust clients  from outside                                                              
Alaska  would leave  within one  year  and go  to Delaware,  South                                                              
Dakota,  or  Nevada because  of  the  lack  of  an income  tax  on                                                              
foreign trusts.                                                                                                                 
REPRESENTATIVE  BERKOWITZ  noted  that he  has  cautioned  against                                                              
including trusts in with an income tax.                                                                                         
REPRESENTATIVE  COGHILL asked  if  there would  be any  "interface                                                              
problems" in applying SSHB 316 to existing trusts.                                                                              
MR.  BLATTMACHR  responded that  he  didn't foresee  any  problems                                                              
because  [the  legislation]  merely  recognizes  things  that  are                                                              
already included in most trusts.                                                                                                
MR.  GREER  clarified that  only  the  ability  for a  settlor  to                                                              
create a  charitable remainder  trust would  be prospective.   All                                                              
other provisions  are retroactive and  are commonly done  in trust                                                              
instruments; SSHB  316 merely provides the statutory  authority to                                                              
do so.                                                                                                                          
CHAIR  ROKEBERG  noted  that  the legislation  does  not  make  it                                                              
mandatory  to have  a trust  protector; if  the owner  of a  trust                                                              
desires  a trust  protector,  he/she  would have  to  specifically                                                              
implement such provisions in his/her trust.                                                                                     
MR. GREER  agreed, and  confirmed SSHB 316  would allow  a settlor                                                              
to modify  an existing  trust to  provide for  a trust  protector,                                                              
but  only on  the  condition  that the  trust  can  be amended  or                                                              
modified.   He  pointed out  that  there is  another provision  in                                                              
Alaska  law that  allows for  modifications or  amendments if  one                                                              
returns to court, for instance.                                                                                                 
REPRESENTATIVE  BERKOWITZ asked  if there  is anything in  statute                                                              
that would preclude the appointment of a trust protector.                                                                       
MR. GREER replied no.                                                                                                           
REPRESENTATIVE  BERKOWITZ inquired, then,  whether Section  1 does                                                              
anything other than codify existing practice.                                                                                   
MR. GREER said that it merely codifies existing practice.                                                                       
Number 1189                                                                                                                     
DAVID  G. SHAFTEL,  Attorney, testified  via  teleconference.   He                                                              
informed the committee  that as a member of the  informal group of                                                              
attorneys   that  has   worked   on  trusts   and  related   state                                                              
legislation,  and as  someone who  [deals] with  these trusts,  he                                                              
agrees  with  previous  testimony.   Mr.  Shaftel  echoed  earlier                                                              
testimony  that  SSHB 316  clarifies  various  provisions  already                                                              
used in  trusts now:   "This bill clarifies  that if a  court ever                                                              
needs to review  these trusts and evaluate these  provisions, that                                                              
we  have  the support  of  the  legislature  that they  have  been                                                              
statutorily authorized."   He informed the committee  that about a                                                              
half  dozen  or so  estate  planning  attorneys [in  Alaska]  have                                                              
reviewed  SSHB 316  and are  in support  of it, and  he urged  the                                                              
committee's support.                                                                                                            
REPRESENTATIVE  BERKOWITZ   directed  attention  to   language  in                                                              
Section  3,  page 3,  line  7,  which  says:   "the  transfer  was                                                            
intended  primarily [IN  WHOLE OR  IN PART] to  hinder, delay,  or                                                            
defraud creditors or  other persons under AS 34.40.010".   He said                                                              
he interpreted  this language as a  change to the burden  of proof                                                              
required by creditors, and asked Mr. Shaftel for his opinion.                                                                   
MR. SHAFTEL said  this language ensures that in  the determination                                                              
of whether one is  going to "set aside a transfer,"  the motive to                                                              
[hinder,   delay,  or   defraud]   must  be   a  significant   and                                                              
substantial one.  Therefore, the word "primarily" was inserted.                                                             
REPRESENTATIVE BERKOWITZ  remarked that in his  mind, "significant                                                              
and substantial"  is different than "primarily";  "significant and                                                          
substantial" could,  for example, amount  to 20-25 percent  of the                                                              
reason, while  "primarily" would  [necessitate] 51 percent  of the                                                          
MR. SHAFTEL replied,  "Your point is accurate; I  can't argue with                                                              
MR.  GREER  argued  that  the  [aforementioned  language]  doesn't                                                              
really change  the law, noting  that the  motive will always  be a                                                              
question  of fact  decided  by a  jury.   He  pointed  out that  a                                                              
transfer restriction  can always set  aside if one can  prove that                                                              
when  the  settlor  created  the trust,  there  was  a  fraudulent                                                              
intent behind it.   To prove the fraudulent intent,  the plaintiff                                                              
has to show that  the primary purpose of the trust  was to defraud                                                              
the creditor.   Therefore, he  reiterated, he didn't  believe this                                                              
[language  change]  adds anything,  noting  that  the main  reason                                                              
people create  trusts is for estate  planning purposes.   In order                                                              
to set aside the  trust, the intent to defraud  the creditor can't                                                              
be  merely 1  percent of  [the trust];  rather,  it has  to be  to                                                              
"primarily" defraud  the creditor.   He opined  that this  is what                                                          
the court would've had to find in the past.                                                                                     
Number 0896                                                                                                                     
REPRESENTATIVE  BERKOWITZ  related  his view  that  [the  language                                                              
change regarding  "primarily"] has  added a  second element  to be                                                          
proven.   The existing statute  requires proof of  fraud; however,                                                              
now the  requirement is  that [the fraud]  is the primary  intent.                                                              
He  said  that  it  seems  that  the  balance  has  been  changed.                                                              
Therefore, he said,  he disagrees with Mr. Greer's  assertion that                                                              
[the  language  is]  the  same,   since  [that  would  mean  that]                                                              
"primarily"  is equated with  "in whole  or in  part".   He opined                                                          
that the two terms are not the same.                                                                                            
CHAIR ROKEBERG asked  whether it was [the trust  attorneys] or the                                                              
drafter who suggested the use of "primarily".                                                                               
MR. GREER replied  that that language was suggested  by [the trust                                                              
REPRESENTATIVE  JAMES,  returning  to  the earlier  example  of  a                                                              
contractor  who builds a  building and  then establishes  a trust,                                                              
and assuming that  the time period pertaining to  the contractor's                                                              
liability hasn't  expired, asked  whether a fraudulent  conveyance                                                              
action  could be  made against  [the settlor]  simply because  the                                                              
trust existed.                                                                                                                  
MR.  GREER, in  response, posed  a  situation in  which a  builder                                                              
builds a  building, which  he thinks  is fine.   Then the  builder                                                              
decides  to transfer  money  to  his children,  but  a lawsuit  is                                                              
subsequently filed  against the builder.  Therefore,  the question                                                              
is whether  one can set  aside a transfer  for any reason  at all.                                                              
Mr.  Greer said  that [SSHB  316]  specifies that  a transfer  can                                                              
only be  set aside if  the [plaintiff]  can show that  the primary                                                              
intent in transferring  the assets to the children  was to defraud                                                              
Number 0725                                                                                                                     
MR.  SHAFTEL  remarked  that all  estate  planning  involves  some                                                              
intent to  protect assets.   He related  his belief that  it would                                                              
be a flimsy provision  if all transfers could be  set aside merely                                                              
by proving  that someone discussed  asset protection  with his/her                                                              
attorney.  He noted  that almost all of his clients  discuss asset                                                              
protection  to  some degree,  and  that it  is  normal  to do  so.                                                              
Therefore, this  provision says that  if the primary purpose  of a                                                              
transfer was to  defraud creditors, then [the  transfer] should be                                                              
set  aside.   He  opined that  current  law regarding  this  issue                                                              
needs clarification because the language is vague.                                                                              
REPRESENTATIVE  BERKOWITZ agreed  that the  "in part" language  is                                                              
problematic  because  it  implies  that  the  least  scintilla  of                                                              
evidence  is  sufficient,  adding  that this  is  not  appropriate                                                              
either.  He remarked  that it seems to him that  if a "significant                                                              
and substantial  reason for  the intent,  not the primary  reason,                                                              
but  a  significant  and  substantial  [reason]  played  into  the                                                              
transfer," then  the individual  shouldn't be allowed  to benefit.                                                              
He expressed  concern with  the requirement  for proof  of primary                                                              
intent; "that's going to be difficult to get to."                                                                               
REPRESENTATIVE    JAMES    commented   that    "significant    and                                                              
substantial"  versus  "primary"   relates  to  intent.    Although                                                              
[protection of  the trust]  could be a  substantial reason  [for a                                                              
transfer],  it  may not  be  the primary  reason.    She said  she                                                              
didn't [believe]  that "significant  and substantial" is  equal to                                                              
"primarily".   She opined  that the language  is trying  to convey                                                              
that  if most  of the  reason  for establishing  the  trust is  to                                                              
defraud creditors, then the trust should be set aside.                                                                          
REPRESENTATIVE  BERKOWITZ  agreed,  but foresaw  "in  part"  being                                                              
interpreted  as next to  nothing, whereas  "primarily" amounts  to                                                              
just  over  50  percent  of  the   reason,  and  "significant  and                                                              
substantial" could be somewhere in between.                                                                                     
MR.  GREER  remarked  that  the intent  is  to  anticipate  future                                                              
problems.   He  said  that he  was unaware  of  any lawsuit  being                                                              
filed  "under this  section."    He noted  that  if  there is  any                                                              
possibility  that a  transfer  might be  set  aside, the  attorney                                                              
won't do it.  He remarked that this statute has not been abused.                                                                
Number 0421                                                                                                                     
REPRESENTATIVE  COGHILL,  referring to  Section  5, observed  that                                                              
the  aforementioned  language is  critical  because  the cause  of                                                              
action hinges on it.                                                                                                            
MR.  GREER  said that  Representative  Coghill  was correct.    He                                                              
pointed   out  that   a   transfer  restriction,   a   spendthrift                                                              
provision,  will only be  set aside  under the four  circumstances                                                              
listed  in  [Section  3],  and  that  (b)(1)  specifies  that  the                                                              
transfer  is primarily  shown  to be  a  fraudulent transfer  with                                                              
respect to  that creditor.  The  other circumstances:   (b)(2) and                                                              
(4)  aren't being  changed, although  (b)(3) is  being altered  to                                                              
allow for  charitable remainder  trusts, grantor retained  annuity                                                              
trusts, and  unit trusts.  Mr.  Greer agreed that under  (b)(1) of                                                              
Section  3, in  order for  the creditor  to set  aside a  transfer                                                              
restriction,  he/she  has  to  establish  that  the  transfer  was                                                              
intended primarily to defraud the creditor.                                                                                     
MR. SHAFTEL  pointed out  that Section 6  requires that  an action                                                              
or claim  can only be brought  when a "preponderance  of evidence"                                                              
has  been  demonstrated.    Generally,  when  proving  fraud,  the                                                              
burden of  proof is  higher, with  clear and convincing  evidence.                                                              
By allowing  51 percent  [with the use  of "primarily"],  SSHB 316                                                              
protects a  plaintiff who  is attempting to  set aside  a transfer                                                              
to a  trust.   Use of the  term "primarily"  is consistent  with a                                                              
liberal  burden  of  proof.    He noted  that  the  group  he  was                                                              
involved  with viewed  [the use  of "primarily"]  as a  compromise                                                              
and  agreed   that  "preponderance   of  the  evidence"   was  the                                                              
appropriate approach.   Mr. Shaftel said  that he felt it  to be a                                                              
balanced  and fair  approach, both  for  the settlor  and for  the                                                              
Number 0111                                                                                                                     
REPRESENTATIVE  JAMES moved to  report SSHB  316 out of  committee                                                              
with individual  recommendations and the accompanying  zero fiscal                                                              
note.  There  being no objection,  SSHB 316 was reported  from the                                                              
House Judiciary Standing Committee.                                                                                             

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