Legislature(2019 - 2020)BELTZ 105 (TSBldg)
02/26/2020 01:30 PM Senate JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| SB55 | |
| SB191 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 55 | TELECONFERENCED | |
| *+ | SB 191 | TELECONFERENCED | |
| *+ | SB 192 | TELECONFERENCED | |
SB 191-TRUSTS, TRUSTEES, COMMUNITY PROPERTY
1:39:41 PM
CHAIR COGHILL reconvened the meeting and announced the
consideration of SENATE BILL NO. 191, "An Act relating to trusts
and trustees, including trust division, the powers of trustees,
delayed gifts to trusts, and community property trusts; and
providing for an effective date."
1:39:57 PM
CHAIR COGHILL, speaking as sponsor of SB 191, said he has
previously introduced trust bills, the goal of which has been to
incentivize people to execute their trusts in Alaska. This will
give Alaska a competitive edge over other states and provide
Alaskans with the best trust options. This effort includes
having banks with sufficient funds to provide borrowing power,
and excellent trust laws, he said. He characterized the world of
trusts as dynamic and competitive. This bill pertains to living
trusts and trusts with substantial estates. SB 191 is one of
three bills He said he was still working on developing the
language for SB 192.
1:43:30 PM
AIMEE BUSHNELL, Staff, Senator John Coghill, Juneau, Alaska,
read the sponsor statement for SB 191:
Senate Bill 191 sets out to clarify existing language
within Alaska statutes regarding trust legislation and
add a new opportunity to investors to take advantage
of historically high estate and gift tax exemptions.
Alaska is one of the top states for trusts, and a
long-time leader in adopting laws to improve investing
opportunities and estate planning. SB 191 gives Alaska
the opportunity to continue to draw in more investors
and keep those who are invested in Alaskan trusts to
remain here.
Estate management can be defined as an art of
directing and supervising one's interest in land,
property, or other securities in order to achieve
optimum returns. In law, a trust is a relationship
where assets or property are held by one party, the
trustee, for the benefit of another party. A trust is
created by the owner, also called a "settlor" or
"trustor" who transfers property to a trustee. The
trustee holds that property for the trust's
beneficiaries.
This bill offers clarification on four things
regarding trusts and trustees in the State of Alaska.
First, it clarifies existing powers a trustee already
has, placing the ability to divide trusts into
statute. Second, the bill clarifies two powers
trustees may act upon, including the ability to
purchase fiduciary insurance and allow discretionary
distribution to be made from realized capital gains.
Third, it gives the ability to charge costs incurred
from the duties on that list to the trust.
The fourth and final clarification this bill also
offers is in relation to community property in trusts.
The primary purpose of Alaska's optional community
property system is to obtain an income tax benefit on
property when the first spouse dies. To accomplish
this purpose, appreciation and income must be
characterized as community property. Currently,
appreciation and income made from a community property
trust must be specifically claimed as community
property. The proposed changes have the income made
from the community property be automatically community
property unless expressly stated otherwise, allowing
for easier management of the assets in the trust.
1:45:48 PM
The 'gift promise' section of the bill is a new
concept. This new language would provide that a
promise to make a gift to a trust is enforceable under
Alaska law and may be treated as a note or a
negotiable instrument after 180 days. The promise need
not be backed by consideration (a transfer of property
or cash), so long as the promise is to a qualifying
trust, in writing, references the specific statute,
expresses intent to be legally bound, and the money
will be transferred within nine months after the
person's death. This additional section will allow
taxpayers throughout the United States to use their
current estate and gift tax exemptions, which are at
historic highs, without having to give up the
ownership of property until later when the promise is
fulfilled.
1:46:54 PM
SENATOR COGHILL said staff has provided some background on
trusts, highlighting the four changes the bill will accomplish
plus a new concept, the ["gift promise" in Section 4].
1:48:30 PM
LINDA HULBERT, Agent, New York Life; Director, Alaska Trust &
Estate Professionals, Fairbanks, Alaska, spoke in support of SB
191. She stated that she has been an Alaska resident for 50
years and a life insurance agent for 30 years. She represents
clients in Anchorage and Fairbanks, with offices in both
communities. Alaska Trust & Estate Professionals is the group
that helped draft the bill.
She highlighted the value of the Alaska Trust Act and what it
can accomplish in the future. She explained that the Alaska
Trust concept has created jobs, bringing in substantial assets
and tax income to Alaska. She offered her view that it has been
a very positive influence in the state. Alaska's statutory
framework for trusts has put Alaska in the forefront of will,
trusts and estate planning. However, other states that have seen
Alaska's success have followed suit in some of the activities
and laws in Alaska.
She said this bill could create opportunities for Alaska to stay
in the forefront of planning throughout the nation. This bill is
really important for her clients and Alaskans. It will allow
them to pass along assets that are deeply rooted in the family
to their children and grandchildren.
1:51:20 PM
MS. BUSHNELL read the sectional analysis for SB 191:
Sec. 1 AS 13.36
Adds new a section that changes the default of trusts
to allow for easier trust division. Providing that if
more than one settlor created the trust, the
contributions from each settlor are well documented,
as are the earnings and reinvestments, and the trust
is governed by Alaska State Law.
Sec. 2 AS 13.36.109
Clarifies the specific powers of trustees (those
responsible for the trust fund) to include insurance
against liability with respect to the beneficiaries as
an expressly allowed expense to the trust. This
section also clarifies that a trustee may treat or
deem, within the meaning of United States Treasury
Regulation Section 1.643(a)-3, discretionary
distributions as first coming from capital gains
realized during the year.
1:52:22 PM
Sec. 3 AS 13.36.109
Adds a new subsection, allowing a trustee to pay for
the authorized actions mentioned earlier in the
section with funds from the trust itself.
Sec. 4 AS 13.36.305
Adds new a section outlining the ability to make a
promise of a gift enforceable in relation to trusts.
The promise must be to a qualifying trust, in writing,
reference this statute, express intent to be legally
bound, the money will be transferred within nine
months after the person's death, and after 180 days of
the promise, it may be treated as a note and a
negotiable instrument. This section also outlines what
a qualifying trust is: that it intends to be a trust
governed by Alaska law, it contains at least $10,000
of principal assets deposited within the state of
Alaska and has at least one trustee in the state.
Sec. 5 AS 34.77.030
Clarifies the original intent of the existing statute
regarding community property, stating that unless
expressly declared non-community property, individual
or otherwise, appreciation and income accrued in a
community property trust is assumed to community
property.
Sec. 6 Uncodified Law
Adds a new section to the uncodified law, stating that
sections 1-4 become effective following the normal
effective date procedure as outlined in AS 01.10.070.
Sec. 7 Uncodified Law
Adds a new section to the uncodified law, a saving
clause, stating that Section 5 does not affect
actions, proceedings, or rights accrued on or after
May 23, 1998, the year the Alaska Community Property
Act was created and placed into law. Sec. 8
Uncodified Law Section 5, dealing with community
property, is retroactive to May 23, 1998, the year the
Alaska Community Property Act was created and placed
into law
Sec. 8 Uncodified Law
Section 5, dealing with community property, is
retroactive to May 23, 1998, the year the Alaska
Community Property Act was created and placed into
law.
Sec. 9 Effective Date
Sections 5 and 8 of this Act take effect immediately.
1:54:33 PM
CHAIR COGHILL asked her to explain the reason that applicability
goes back to 1998.
MS. BUSHNELL answered that this bill follows the rules that were
created in Alaska for community property, so all income and
appreciation will be community property. There won't be a trust
caught in the middle, subject to different provisions. Instead,
the trusts will all be treated in the same way.
CHAIR COGHILL commented that this is a prospective action.
1:56:35 PM
ABIGAIL O CONNOR, Attorney, O'Connor Law, LLC; Vice President,
Alaska Trust & Estate Professionals, Anchorage, Alaska, stated
that every time she represents a new trustee and drafts or
administers a new trust, she has found herself wishing for more
clarification in the law on certain things. Although it is very
difficult to predict everything that could ever happen, this
bill will provide additional clarification in the trust laws.
She directed attention to Section 1 of the bill that allows
assets to be divided into separate trusts. She currently has a
trust that has two different people contributing assets to the
trust, so that their contributions are very easy to trace. This
bill will make it much simpler to divide the trust, which will
be very helpful to beneficiaries. In some settings, different
tax attributes apply. In such instances, the goal is to divide
the trust so one trust has one tax attribute and the other has a
different tax attribute, yet overall to save taxes for the
beneficiaries.
She said Section 2 will allow and clarify that trustees can
obtain trustee insurance, similar to a personal representative
of a state obtaining a bond. This will allow trustees to better
protect themselves and their beneficiaries by purchasing
insurance in case claims are brought by the beneficiaries. This
can result in the state attracting better trustees. It also will
allow trustees to treat discretionary distributions to a
beneficiary as being made first from capital gains, which is
also helpful. The bill replaces the passive "consider" with
"treat" which is more active. This provision will allow the
trustees to make tax decisions that could ultimately reduce
their income taxes. Even though this can currently occur, using
the term "treat" more accurately captures what the treasury
regulations had in mind, she said.
2:00:10 PM
MS. O'CONNOR said the IRS currently allows for an unprecedented
estate tax exemption for all individuals in the U.S. That
exemption will be reduced by half in 2026, so people have a
limited time to take advantage of this estate tax exemption. Her
clients are trying to take advantage of this opportunity yet not
disadvantage other parts of their estate planning. She
characterized the promise to transfer money into a trust as a
good concept.
Safeguards were built into Section 4 of the bill so someone will
not inadvertently make a promise to transfer money as a gift,
that the person would not normally be held to. This provision
requires the promise of a gift to be in writing, signed, and
delivered to the trustee. It's important to ensure that whoever
is making this promise understands the irrevocable implications
of the statute, so the statute must be referenced. The
individual must indicate an understanding that the person is
legally bound by the promise. This bill balances the
opportunities for Alaskans and non-Alaskans to use Alaska's
trust statutes to bring money into the state by protecting
people from mistakenly making the promise of a gift that cannot
be undone.
2:02:22 PM
SENATOR MICCICHE referred to the insurance provision in Section
2 [AS 13.36.109(17)]. He asked if this provision was limited to
insurance against claims brought by beneficiaries.
MS. O'CONNOR answered that although trustees can currently
obtain insurance, most trustees do not do so. While there is no
express prohibition in the statute, this language clarifies that
trustees are able to obtain insurance in case the beneficiary
were to bring an action against them. Further, it allows the
trustee to use the trust funds to pay for the policy. She
compared this provision to the one where a personal
representative is often required to get a bond in estates and
probate law.
2:03:39 PM
SENATOR MICCICHE asked if this change would allow the trustee to
insure any real asset in the trust at the expense of the trust
itself.
MS. O'CONNOR explained that currently trustees can insure the
assets in a trust. This language would simply allow them to also
insure against a breach of trust action by a beneficiary.
SENATOR MICCICHE referred to Section 1. He asked how often
contributions [to trusts] by individuals are well documented,
splitting out the earnings and reinvestments. He asked whether
that is normally a clear path.
MS. O'CONNOR said she was unsure if it is normal because it
greatly depends on the grantors, the settlors creating the
trusts, and the trustee records. More often than not, there is a
fairly clear path. However, she has also seen instances where
there is no clear notion as to how the assets were put into the
trust. In those cases, the provision to allow for a trust to be
divided into two or more trusts would not be available.
2:05:16 PM
SENATOR KIEHL asked whether an attorney's professional liability
insurance covers lawsuits by beneficiaries of the trust where
she serves as the trustee.
MS. O'CONNOR answered that her malpractice insurance covers her
when she serves as a trustee. However, she was unsure if all
malpractice insurance covers attorneys serving trustees.
2:06:01 PM
SENATOR KIEHL asked if she believes this change is necessary
because she perceives a prohibition for trustees charging the
trust for malpractice insurance.
MS. O'CONNOR replied she does not see a prohibition, but this
language provides clear permissive language. When a beneficiary
sees a line item for insurance, it is clear that it is
allowable, she said.
SENATOR COGHILL referred to Section 4 related to the promise of
transfer of gifts. He asked what the exit strategy the trustee
has to make any changes to the gift.
MS. O'CONNOR said she was not sure there is an exit strategy.
She explained that the promise of a gift must be irrevocable in
order to use this exemption.
CHAIR COGHILL asked the record to reflect that people must
understand that [Section 4 establishes] an irrevocable gift.
2:08:03 PM
SENATOR MICCICHE expressed concern that that provisions in
Section 4 might conflict with federal tax law. He related a
scenario in which a person makes a promise of a gift, but the
trustee's asset may lose value due to market corrections. The
person will have received the federal tax deduction but then the
asset loses value. He asked how the trust law would address the
circumstance in which the promise of a $5 million gift is now
worth $60,000.
MS. O'CONNOR said she envisioned the gifts would be gifts of
money. She referred to the language in [AS 13.36.305(a) and
read, "if a person promises to transfer a specific amount of
money." This would not necessarily be another type of asset.
MS. BUSHNELL added that [the gift] is in the form of a contract,
such that the person will write a promise, but the trust must
accept it. She said if the trust views it as a business and
could discern that the asset would not retain its value in two,
five or ten years, the trust will not want to accept the
promissory note since it would not be seen as beneficial.
SENATOR MICCICHE expressed concern that this provision is
largely directed at money.
2:11:20 PM
DAVE SHAFTEL, Attorney, Shaftel Delman, LLC, Anchorage, Alaska,
spoke in support of SB 191. He noted that he has practiced trust
and estate law in Alaska for over 30 years. He did not
participate in drafting all of the provisions since his focus
has been on the community property provision in Section 5. He
deferred to Jamie Delman and Jonathan Blattmachr to answer
questions on the promise to transfer money to the trust.
2:13:14 PM
JONATHAN BLATTMACHR, Principal, ILS Management, LLC, Long
Island, New York, characterized SB 191 as a very good bill that
will continue to put Alaska on top. It will continue to bring
business and money into Alaska, he said. Every time someone
creates an Alaska trust, the individual is required to deposit
certain funds in the state. At any given time, this provides
between $50 million and $100 million to Alaska's financial
institutions to use for loans or to help businesses.
He turned to the concerns raised about the Alaska gift trust,
which is a new concept [in Section 4]. It provides that
individuals have an opportunity to use a very high tax exemption
although not everyone can afford to give away even a fraction of
the current, allowable $11 million exemption. He reiterated that
this exemption will be reduced in 2026. In fact, it is possible
that with a potential change in administrations, this exemption
could be cut back even sooner. This exemption will allow a
person to make a completed gift for federal gift tax purposes
while still retaining the assets. When the person dies, the
trust will pay the promise of the gift. Alaska will be the first
state to do so. He offered his view that [SB 191] would make
Alaska a very sophisticated trust and estate jurisdiction in the
country.
2:15:12 PM
SENATOR KIEHL asked if any safeguards exist to prevent someone
from taking the tax benefit. He suggested the person could be "a
bad character," who actually does not have the cash. He did not
recall that the bill requires that the money subject to the
promise exists.
MR. J. BLATTMACHR responded that he believes a safeguard exists.
He related a scenario in which a person has $3 million but
wanted to use the entire allowable $11 million tax exemption,
because the person hopes to have $11 million when the person
dies and the note is due. At that time the trustee will present
the $11 million note for payment. If the person's estate only
consists of $3 million, that would be the amount paid into the
trust. There won't be any adverse effect, but the person has the
opportunity not to just to cover what he or she currently has
but to anticipate future gains, which could be up to $11.5
million.
2:17:38 PM
KEVIN WALSH, Certified Public Accountant (CPA); Co-Owner, Walsh,
Kelliher & Sharp, Fairbanks, Alaska, spoke in support of SB 191.
He said he is a longtime member and past president of Fairbanks
Estate Planning Council and a member of the Alaska Trust and
Estate Professionals Group. He has been involved in tax matters
his entire career. His firm regularly deals with trust and
estate matters for clients all over Alaska. The income gift and
estate taxes of the United States applies federal tax rules to
property as defined and governed by state law. Improvements to
Alaska law governing trust and estates can only improve the
efficiency with which these trusts operate. When there is
clarity of law, it reduces controversy and saves money on
accounting, legal, and trustee fees. He said Ben Franklin
supposedly indicated two certainties in life, which are death
and taxes. This bill can help reduce the certainty of the amount
of taxes one might pay by allowing Alaska law to be the most
efficient possible and for Alaskan citizens to take full
advantage of any opportunity to reduce their federal tax
burdens.
SENATOR COGHILL stated his intention to hold SB 191 in committee
since this was the first hearing.
2:19:47 PM
JAMIE DELMAN, Attorney, Shaftel Delman LLC, Anchorage, Alaska,
said he was involved in drafting many of the provisions in SB
191. He directed attention to questions raised in Section 4,
which was referred to as the Alaska "gift trust" provision. One
earlier question was what happens if a promise is made but the
expected property or the estate is reduced in value prior to
paying on the promise. He related a scenario in which a client
makes a promise of $2 million to an Alaska trust. The client has
assets but is unsure of which one to convert to money, but the
person wants to take advantage of the high exemption amount [for
federal tax purposes]. If the estate contracts in value over the
next 20 years, the person will have used the $11.4 million
exemption. However, the client would not need the full exemption
if the estate value has contracted. He agreed with Jonathan
Blattmachr that there is no real harm in the contraction. He
offered his support for SB 191.
2:22:18 PM
SENATOR MICCICHE said he understood the case, but it does not
answer his concern. He offered to put his questions in writing.
He was not aware of any other situation where someone can enjoy
a federal tax exemption from dollars that potentially do not
exist without being subject to penalties. He acknowledged that
he could be wrong.
2:23:28 PM
SENATOR KIEHL referred to Section 4. He referred to [AS
13.36.305](c) that states, "when 180 days have elapsed after a
person delivers a promise to a trust ?" He asked what happens to
the gift if someone dies before the 180 days lapses, prior to
the gift being placed into the trust.
MR. DELMAN answered that if someone died on day 90, the trust
would still have an enforceable obligation against the estate of
the person who died.
SENATOR KIEHL asked what benefit is derived on day 181.
MR. DELMAN answered that [AS 13.36.305(c) cites AS 45.03] which
provides trustees guidance as to what they can do with this
asset on day 181. This obligation is being created by using the
new statutory provision but referencing AS 45.03 provides
instruction on how the property can be transferred, sold, or
negotiated.
SENATOR COGHILL suggested that what he probably needs is a
"white paper" on Section 4, in terms of how it would work for
time periods and for assets.
2:26:29 PM
RICH HOMPESCH, Attorney, Hompesch & Evans, Fairbanks, Alaska,
spoke in support of SB 191. He responded to Senator Micciche's
question about the diminution in the value from the date the
gift is made until death. He understood the purpose of Section
4, or the "Alaska gift trust" is so the person can use the
federal tax exemption of $11 million before the window closes
and the exemption is reduced on December 31, 2025. If the
estate's value is reduced in the meantime, the person does not
have an estate tax problem, so it does not matter. The idea is
to address the estate that grows beyond the exemption so use the
exemption before it is reduced under federal law. He concurred
with testimony given by the previous testifiers.
SENATOR COGHILL suggested that the committee might need a primer
on the tax requirements.
2:28:51 PM
MATTHEW BLATTMACHR, President & Chief Executive Officer, Peak
Trust Company; President, Alaska Trust & Estate Professionals,
Anchorage, Alaska, spoke in support of SB 191. He said the
Alaska legislature has a 24-year legacy of reviewing [estate and
trust] bills. This bill will clarify Alaska law and adding the
"gift trust" concept, which is new under any state law will
improve planning options for Alaskans.
2:29:51 PM
SENATOR COGHILL remarked that he would like to frame the tax
question prospectively, such that an asset that may not have the
same value when the person dies as when it was gifted.
2:30:35 PM
SENATOR KIEHL asked if he could quantify the size of the trust
industry in Alaska, such as the number of jobs, trust assets
from nonresidents, and any figures on the rate of anticipated
growth.
MR. M. BLATTMACHR responded that there are several ways to
quantify the trust industry in Alaska, including the number of
trusts, the assets in banks, and the number of people employed
by the industry. Several years ago, a bill dealing with life
insurance premium tax included estimates that about 350 jobs
were directly related to the industry and the state collected $7
million in direct taxes on life insurance policies. At the time
it was the second largest contributor to the general fund. This
also doesn't take into consideration those indirectly related to
the industry, such as attorneys or accountants whose practice is
incidental to trusts. He said he could speak to assets in terms
of Peak Trust, but the scope goes beyond their practice. For
example, the First National Bank of Alaska's trust company also
generates assets. He reported that Peak Trust has static
deposits of well over $100 million in Alaska's banking
institutions and 2,500 trusts. This does not take into account
other trust companies, such as First National Bank's trust,
where Alaska residents as individuals are the trustees. He
offered to provide more information on gross figures.
2:33:49 PM
SENATOR MICCICHE said he supports improving the trust policies
and he recognizes the value to the state.
He asked for assurance that the Alaska Trust & Estate
Professionals had thoroughly thought through the gifting
provision. He expressed concern that the person promising the
gift might not have sufficient funds in his or her estate to
satisfy the amount promised in the will. The person may make
decisions later on in life, after the promise of the gift is
made, that adversely affect the estate to the extent that the
person's liabilities at the time of his or her death exceed the
promise to the trust. He said he was unsure of the order or
priority to satisfy the trust.
SENATOR COGHILL suggested his concern could be framed by
considering how other conflicts would be handled in general
trust management in terms of the promise of a gift to the trust.
He said his goal with SB 191 is to keep Alaska attractive,
ensure that beneficiaries benefit, and provide clarity in
statute for businesses.
SENATOR COGHILL indicated the bill would be set aside. He
referred to Section 2, page 5, lines 9 - 10, which read:
(29) to treat [CONSIDER] discretionary distributions
to a beneficiary as being made first from capital
gains realized during the year.
He asked the Alaska Trust & Estate Professionals to explain how
distributions were previously made and the reason to prioritize
them as "first".
2:38:11 PM
CHAIR COGHILL held SB 191 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| O'Connor Law LLC Letter of Support SB 191.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| SB191 ver. A.PDF |
SJUD 2/26/2020 1:30:00 PM |
SB 191 |
| Walsh, Kelliher & Sharp Letter of Support for SB191.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| SB191 Sponsor Statement.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| Shaftel Delman LLC Letter of Support SB191.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| SB191 Sectional Analysis.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| Peak Trust Company Letter of Suport SB191.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| Fiscal Note SB 191-LAW-CIV-2-21-20.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| ATEP Letter of Support SB191.pdf |
SJUD 2/26/2020 1:30:00 PM |
|
| Richard W. Hompesch II Letter of Support SB191.pdf |
SJUD 2/26/2020 1:30:00 PM |