Legislature(2001 - 2002)
04/08/2002 01:45 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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 language. 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 reason. MR. SHAFTEL replied, "Your point is accurate; I can't argue with it." 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 attorneys]. 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 creditors. 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 plaintiff. 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.