Legislature(2007 - 2008)BELTZ 211
02/15/2008 01:30 PM Senate JUDICIARY
| Audio | Topic |
|---|---|
| Start | |
| SB211 | |
| HB197 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 197 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| = | SB 211 | ||
HB 197 am -TRUSTS
1:36:50 PM
CHAIR FRENCH announced the consideration of HB 197 am.
REPRESENTATIVE RAMRAS, sponsor of HB 197 said this bill will
make Alaska more attractive to take on unique trust issues. The
bill proposes a number of default provisions for trustees that
are new to Alaska statutes.
1:39:55 PM
SENATOR THERRIAULT joined the committee.
DOUGLAS J. BLATTMACHR, President and CEO, Alaska Trust Company,
said that over the last 18 months his company has done extensive
work on HB 197. We support the bill and know of no opposition to
it, he said. HB 197 will continue to move Alaska forward as a
premier trust jurisdiction.
1:40:56 PM
BETH CHAPMAN, Attorney at Law, Faulkner Banfield PC, said she
has practiced in the area of trusts and estates for 20 years and
she was principally involved in drafting HB 197. The bill has
been discussed statewide by estate planning attorneys and has
been the subject of vigorous discussion. From various
perspectives many issues have been vetted and compromises have
been reached to protect the interests of all the parties to a
trust. She will discuss the bill section by section.
MS. CHAPMAN said Section 1 relates to revocable trusts. These
are established by an individual who for a variety of purposes
puts their assets in a trust. In the event the person becomes
disabled, the trustee can handle the trust assets. Also, the
assets can be passed without need of probate upon the person's
death. These trusts may be revoked. Many professionals who own
shares in a professional corporation use revocable trusts and
this would clarify that those professional corporation shares
can be held by a revocable trust. It would not affect any
creditor's ability to access those shares because a revocable
trust does not in and of itself provide creditor protections.
The ability of those shares to be subject to a debt or liability
of the professional would not be changed.
1:42:42 PM
SENATOR WIELECHOWSKI asked for a simple explanation of the real
implication of Section 1.
MS. CHAPMAN explained that a professional who wants to set up a
revocable trust for estate planning purposes can not currently
hold their professional corporation shares in a revocable trust.
This would allow that to occur so if the professional becomes
incapacitated somebody could handle their affairs including
winding up the professional corporation without the need to go
to court for a conservator, and liquidating and passing to the
heirs without the need for a probate. That's why most people use
revocable trusts, she added.
SENATOR WIELECHOWSKI asked if there would be liability issues in
the circumstance where someone establishes a professional
corporation and then gives most of the shares to a revocable
trust.
MS. CHAPMAN replied not at all; the shares would still be
subject to the creditors of the owner of the professional
corporation. Providing creditor protection is not the purpose of
a revocable trust. This absolutely does not set up any type of
shield.
1:45:12 PM
MS. CHAPMAN said Sections 2-8 are the provisions that address
trustees. Currently Alaska doesn't have any rules for removal of
trustees, replacement of trustees, compensation of trustees, or
how co-trustees are supposed to act. These default provisions
would be read into the trust in the event a person drafts a
trust that doesn't contain these provisions. This provides more
efficient administration of the trust.
MS. CHAPMAN said that Section 2--Effect of failure to register--
is a reference that if a trustee is going to be removed for
failing to register a trust, it would be done under the new
removal procedures. Section 3 is a cross reference that the
court has the jurisdiction to appoint and remove a trustee. It
would reference the new procedure. Section 4 does the same
thing. It's a reference to what is now AS 13.36.076.
MS. CHAPMAN said Section 5 is the start of the new provisions.
AS 13.36.055 has always allowed a trustee to be reasonably
compensated. This provision provides that if the trust specifies
how compensation is to be determined, that will be presumed to
be reasonable. That's what the person who established the trust
indicated they wanted. That doesn't mean that a beneficiary who
believes it's unreasonable can't go to court to try and reduce
or eliminate that compensation. They would have to prove that
the compensation is unreasonable by a preponderance of the
evidence.
CHAIR FRENCH asked if this is based on model legislation.
MS. CHAPMAN replied some is based on model legislation and some
is based on a compilation of other state laws. "The bulk of
these default provisions came from the Uniform Trust Code, with
some modifications - after looking at what other states had done
with the Uniform Trust Code as well."
CHAIR FRENCH said he was specifically referring to Section 5.
MS. CHAPMAN relayed that Section 5 was drafted by Alaska
attorneys.
SENATOR WIELECHOWSKI questioned how the beneficiaries would be
impacted if a trustee were to be compensated at an outrageous
amount, say $1,000 or $2,000 per hour. That would use up the
trust funds yet it would be presumed to be reasonable. He asked
if there had been discussion or concern about that.
MS. CHAPMAN acknowledged that there was discussion on that. The
only time it's presumed to be reasonable is if the person who
established the trust specifically said they wanted to pay a
trustee a particular amount. When the person who established the
trust sets out their intent that is what is presumed to be
reasonable. If a trust says nothing about compensation or simply
says it must be reasonable, then there would be no presumption.
"There's only a presumption as to what the settlor may have put
in that trust." Again, she said it can be overturned by a
preponderance of the evidence standard.
1:49:43 PM
MS. CHAPMAN said Section 6 lays out procedures for how someone
agrees to serve as a trustee. One method is by accepting the
property. Another method is by notifying the beneficiary in
writing that they accept the duties of trusteeship. Also this
allows a designated trustee to investigate trust property
regarding potential liabilities without actually accepting the
duties of the trusteeship. This comes up when certain assets are
placed in trusts. For example a property that has a liquor store
or underground oil tanks. This allows a potential trustee to
make a reasonable determination about whether or not they want
to accept the role of a trustee. This is a new provision and
does not amend current statute.
SENATOR WIELECHOWSKI asked what would happen in the event that a
designated trustee takes no action at all.
MS. CHAPMAN said that is addressed in a subsequent section.
There's a procedure for appointing a successor trustee. That
includes court action, if necessary, if nobody is in line to
accept the role.
SENATOR WIELECHOWSKI asked how long that might take since there
could be liability issues.
MS. CHAPMAN said the statute uses the term "reasonable time"
because it may take time to locate the individual. "They want to
have the ability to investigate the assets and the circumstances
to make sure they want to do so."
MS. CHAPMAN said Sec. 13.36.072 addresses co-trustees. It is not
uncommon for a trust to appoint more than one person to act as
co-trustees but it won't say whether they must act by unanimous
consent or by majority decision. This allows co-trustees to
decide to act by majority decision rather than by unanimous
decision. Also it allows a co-trustee to delegate their
authority to another trustee. This can be important if there are
individual trustees rather than corporate trustees and they're
going to be out of town or if the other co-trustee has
particular expertise.
MS. CHAPMAN said Sec. 13.36.073 is a new provision regarding
vacancy in trusteeship and appointing a successor. It sets out
the circumstances under which a new trustee would have to be
appointed when there's a vacancy. That includes rejecting the
trusteeship, not being able to identify the trustee, the trustee
resigning, the trustee being disqualified, the trustee dying,
and when a guardian or conservator is appointed for an
individual who is serving as a trustee. Under Alaska law it's
been unclear what happens if the trustee becomes incapacitated
and the guardian steps in. "I think it's very important that the
fact that they're appointed should cause a vacancy because the
settlor didn't appoint the guardian." She described that as an
important clarification of the law. This also clarifies how the
vacancy will be filled. An overriding consideration in the bill
is that you first look to the terms of the trust. "What the
settlor puts in the trust is going to govern." If that's not the
case, qualified beneficiaries can appoint the trustees, but they
can't appoint one of themselves as a trustee. If that's not the
case, the court will appoint an individual or corporate trustee.
1:54:33 PM
MS. CHAPMAN said if it's a charitable trust the provision allows
the charitable organizations that are designated to receive
distributions to be involved in deciding who would be the
successor trustee. Most trusts name successors in the document
but a lot of individuals write their own trusts based on forms
so these provisions will be particularly helpful to those
individuals when the trust is interpreted.
MS. CHAPMAN said that Sec. 13.36.074 establishes that a trustee
who wants to resign must give 30 days written notice or receive
approval of the court. Importantly, a trustee who resigns is not
discharged from their obligations and liabilities. They have to
go through the normal course of wrapping up the trust
responsibilities.
MS. CHAPMAN said that Sec. 13.36.076 dealing with removal of a
trustee was one of the most controversial provisions, but it
does work to protect the settlor's intent of who they wanted to
be the trustees. It also protects the trustees so they aren't
continually threatened with removal by beneficiaries who are
unhappy with their decisions. The provision also protects
beneficiaries so that if there are serious issues, they have
rights to remove a trustee. There are two procedures for
removing a trustee - by decision of a trust protector and by
invoking the court's jurisdiction. A trust protector is an
individual who is appointed to oversee the trustee. If there is
a trust protector, they are first in line to decide about a
removal. Notwithstanding a trust protector, a trustee may be
removed by invoking the court's jurisdiction it it's necessary.
1:56:39 PM
MS. CHAPMAN said that Sec. 13.36.077 establishes that the
trustee who resigns or is removed must deliver the trust
property as soon as possible to a co-trustee or a successor
trustee.
Sec. 13.36.078 regarding reimbursement of expenses came directly
from the Uniform Trust Code. A trustee who spends his or her own
funds on behalf of a trust is entitled to reimbursement for
those reasonable and proper expenditures. Subparagraph (B) says
that even if a court were to find that the expenses were not
properly incurred, the trustee is to be reimbursed "to the
extent necessary to prevent unjust enrichment of the trust." The
trust beneficiaries are not supposed to benefit from what might
be a mistake in the way expenses were incurred.
1:57:57 PM
CHAIR FRENCH asked for an example.
MS. CHAPMAN described a circumstance where a trustee used his or
her own funds to purchase a piece of property on behalf of the
trust and had the title put in the name of the trust. But
pursuant to the terms of the trust, the trustee wasn't supposed
to be able to buy that particular piece of property. The trustee
made a mistake and the result is that the trust owns the
property and the trustee is out the money. This provision says
that the trustee is to be reimbursed from the trust otherwise
the trustee's mistake enriches the trust.
1:58:47 PM
SENATOR HUGGINS joined the meeting.
MS. CHAPMAN said Sec. 13.36.079 relates to certification of
trust. She explained the provision as follows:
Those of us who work with banks, brokerage houses or
even real estate title companies many times we have to
demonstrate that the trustee has the authority to take
the action that they are going to take. But the trust
also contains people - the settlor's dispositive
provisions. What's going to happen when they die. They
don't want people to know that. They don't want to
share that information. This provision would allow us
to instead furnish a certification of the trust -
which we all do in practice anyways. And that
certification would highlight what the powers are of
the trustee, who's the trustee, who's the settlor, the
tax identification number, and would allow us to give
excerpts of those provisions alone. But would prevent
some brokerage house or title company from saying 'I
want the entire trust.' Even though many of the
provisions will become effective at the death of the
settlor and can be changed because it's a revocable
trust and they'd want that to be kept private just
like they would with their last will and testament.
This has been the practice and has been accepted by
most banks and brokerage houses - but not by all. And
so we thought it would be very important along the
lines of the Uniform Trust Code to have on the books,
statutory authority to use trust certifications.
2:01:07 PM
MS. CHAPMAN said that Section 8 corrects a reference to the
removal procedure. Section 9 amends AS 13.36.157(b), which
allows a trustee who has the discretion to distribute assets out
of a trust to put those assets into another trust instead of
giving them to the beneficiary outright. This is used when a
trust is going to terminate and it wouldn't be in the
beneficiary's best interest to receive the assets outright. The
assets are moved to a new trust that has the same terms and
conditions. What the amendment does is allow individuals from
outside Alaska to move trusts to Alaska by having an Alaska
trustee. It's a provision that is likely to bring more trust
business to the state.
2:02:28 PM
MS. CHAPMAN said Section 10 references the removal procedure. If
a trustee violates any of the statutory requirements, they could
be removed under the procedure outlined in Sec. 13.36.076.
Section 11 provides the definition of "qualified beneficiary"
for all the trustee provisions. It means a beneficiary who is
entitled or eligible to receive a distribution of trust income
or principal. Or it's a beneficiary who would be entitled to
receive a distribution of the trust income or principal if the
event causing the trust termination occurs. For example, if
there's a trust for the mother and at her death it goes to the
children, those children would have the same rights as the
mother under the statute.
MS. CHAPMAN said that Section 12 deals with charitable trusts.
In 2003 the Uniform Principal and Income Act was adopted. At the
same time a provision for charitable and other trusts was
adopted to be able to define income by reference to a percentage
of the value of the trust rather than what would normally be
considered income. "So when we consider income, we look at
what's the interest earned on bank accounts, what are the
dividends on the stock account. And that's what's going to be
distributed to the beneficiaries." As a result, trustees who
have to distribute what is known as "traditional incomes" have
to invest very conservatively. They can't look to grow the trust
because they have to generate income. In particular charitable
trusts are perpetual and they only benefit charities. When there
is only income distributions to charities, they're getting very
little because the trustees aren't able to grow the principal.
Thus it becomes less beneficial to the charitable organization.
SENATOR WIELECHOWSKI observed that this looks like a significant
change moving from what is probably a conservative approach to
one that potentially allows a lot of change. He asked if this is
from the model statute or if it's in line with what other states
have done.
MS. CHAPMAN replied this is very much in line with what other
states have done. There's been a move in trust investments from
the traditional investment policy to a total return investment
strategy. This accommodates income beneficiaries who want income
and remainder beneficiaries who want growth. Several years ago
the uniform prudent investor rule was adopted and it allows the
value of the trust to be expressed as a percentage rather than
in terms of traditional income. In most circumstances this
allows more investment opportunity, more growth, and more
income.
2:07:35 PM
MS. CHAPMAN said that she worked with trustees of a Sitka
charitable trust who wanted to do total return investing.
Although statute has allowed this since 2003, the trustees were
restricted to looking at the investments just once every ten
years. That was challenged in court and the court agreed the
limitation was not reasonable. This will allow trustees to look
at their investment strategies and distributions more often and
respond to changes in circumstance.
CHAIR FRENCH asked if this is the same concept as the prudent
investor rule that was adopted by the Permanent Fund.
MS. CHAPMAN replied it's the same concept.
2:08:34 PM
SENATOR WIELECHOWSKI asked if she is aware of any negative
experience with this kind of language. "It's just a big change
and I want everyone to make sure we understand what we're
getting ourselves into."
MS. CHAPMAN explained that the change is designed to take into
account the fact that there could be a fluctuation in the stock
market. You're basing this on the value of the trust averaged
over three years. That takes ups and downs in the stock market
into consideration. "I believe it's actually the more prudent
way and the better way to protect trust assets than the
traditional investing and distribution methods."
2:09:46 PM
CHAIR FRENCH added that the statute says that the percentage of
the value of the trust that will be considered income can't be
less than 2 percent or more than 7 percent per year.
MS. CHAPMAN agreed.
MS. CHAPMAN said Section 13 is about value determination. The
value of the trust may be averaged over three or more preceding
years. If the trust has been in existence less than three years
and the trustee wants to average the value, then the average is
taken over the period during which the trust has been in
existence.
MS. CHAPMAN said that Section 14 addresses a court case from the
Ninth Circuit Court of Appeals. Currently Alaska has uniform
fraudulent conveyance laws meaning that the intent to defraud
creditors is unlawful. "If you set up a trust with the intent to
defraud your creditors, they can come and attack the trust and
possibly reach the assets." The Ninth Circuit said that
expressing the intent to do asset protection could be equivalent
to intent to defraud. This provision makes it clear that asset
planning protection in and of itself is not inappropriate. For
example, if a parent sets up a trust for a child because they're
worried that their spendthrift child might in the future run up
huge credit card bills, that in itself is not intent to defraud.
2:12:27 PM
SENATOR WIELECHOWSKI asked if a trust beneficiary could also be
a potential future creditor. For example, could a child who is a
beneficiary of his parent's trust also be a potential creditor.
MS. CHAPMAN said no, he is a beneficiary of the trust.
SENATOR WIELECHOWSKI asked if there could be a circumstance
where someone who is a future beneficiary would also be
considered a creditor.
MS. CHAPMAN replied she's not aware of that situation.
MS. CHAPMAN said Section 15 repeals the definition of qualified
beneficiary in AS 13.36.360(d). Section 16 is the enactment in
the indirect court rule change. That's because of the penalties
and potential award of attorney fees if there's a challenge of
one of the trust certifications.
2:14:05 PM
SENATOR WIELECHOWSKI noted that this applies to trusts on or
after the effective date of this Act so basically all trusts
come under this.
MS. CHAPMAN replied that's correct with some of the sections,
most of which are the default provisions.
CHAIR FRENCH opened public testimony.
2:14:45 PM
JONATHON BLATTMACHR relayed that he was fortunate to have helped
in drafting HB 197. He has clients nationwide and most of trusts
his clients elect to use are located in Alaska. This bill
continues to put Alaska in the forefront of having the best
trust system in the country. He hopes the committee approves the
bill.
2:15:32 PM
LINDA HOLBERG, Agent, New York Life, Fairbanks said she's been
with New York Life for about 20 years and has had the
opportunity to work with Alaska trust ideas and legislation.
Alaska trusts have brought jobs, opportunities, and a great deal
of money into the state, which has made a lot of other economic
development possible. "I'd like to support this bill."
2:16:16 PM
DAVE SHAFTEL, Attorney at Law, said he along with a number of
other attorneys worked on HB 197 but Ms. Chapman has done the
brunt of the work to come up with a very practical bill. It
provides default provisions if they aren't already included in
the trust instrument. These provisions could be included in
every trust document but that would lengthen and make more
complicated the trust instrument. "We can rely on these
previsions when we want to as being inserted by our state
statutes and we don't need to cover them in the trust
documents." This is an excellent bill that is much needed.
2:18:08 PM
CHAIR FRENCH asked if he's aware of any opposition to the
changes that are incorporated in HB 197.
MR. SHAFTEL replied he's not aware of any opposition.
2:18:29 PM
ROBERT MANLEY, Attorney at Law, Anchorage, said he practices in
the area of trusts and estates. He supports HB 197 not only
because it keeps Alaska an attractive environment for trusts
that may be funded from outside Alaska, but also because the
provisions make it easier and less expensive for Alaskans to
carry out their estate plans. "That's why I am supporting the
bill."
2:19:04 PM
CHAIR FRENCH said he wanted to read a letter into the record. It
seems to ring of authenticity.
My name is Stephen E. Greer and I am a sole
practitioner whose area of practice is exclusively
estate planning. I do not represent any of the trust
companies and my typical client is the average working
Alaska individual and couple. I am particularly
sensitive to the needs and concerns of trust
beneficiaries. I would like to express my support for
HB 197. This bill, even before its introduction in the
House, went through a rigorous discussion and drafting
process in which the three competing interests:
settlors, trustees, and beneficiaries were addressed
and resolved. This bill represents a compromise
between those interests and an improvement over
existing law. Even though I am not able to attend
telephonically, if you have any questions I will be
more than happy to answer any questions which a member
might have.
2:20:15 PM
SENATOR THERRIAULT relayed that Mr. Greer was instrumental in
working on trusts laws that were passed some years ago. "I was
glad to see that he's still involved."
CHAIR FRENCH announced he would hold HB 197 am for a future
hearing. His expectation is that it will move from committee
next week.
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