Legislature(1999 - 2000)

05/03/1999 02:02 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
                   SB 163-TRUSTS AND TRUSTEES                                                                                   
                                                                                                                                
MS. BETH CHAPMAN, an attorney with the law firm of Faulkner                                                                     
Banfield, explained that SB 163 is additional trust legislation                                                                 
designed to provide guidance to individuals who are establishing                                                                
trusts, to attorneys who are drafting trusts, and to the courts who                                                             
administer trusts if litigation arises.  Current statute requires                                                               
a trustee to inform and to account to beneficiaries of the trust.                                                               
The term "current beneficiary" is used in statute to refer to who                                                               
is to be notified when a trust is registered, however, that term is                                                             
not defined in statute.  SB 163 defines a "beneficiary" as "a                                                                   
person who sees a mandatory distribution of income or principal                                                                 
from a trust," which is how practitioners throughout the state have                                                             
interpreted that term. The court recently used a different                                                                      
interpretation; an interpretation contrary to the grantor's intent                                                              
when the trust was established.                                                                                                 
                                                                                                                                
MS. CHAPMAN maintained that a statutory definition is needed to                                                                 
limit the beneficiary to someone who receives a mandatory                                                                       
distribution of income or principal because attorneys know who that                                                             
individual is and who the obligation runs to.  The court has                                                                    
interpreted a beneficiary to be any discretionary beneficiary under                                                             
a trust.  That interpretation will require attorneys to locate                                                                  
beneficiaries who never receive any income or corpus of the trust,                                                              
including future unborn heirs.  It is also unclear whether the                                                                  
guardian of a minor has to be notified.  The definition in SB 163                                                               
is designed to provide guidance to the practitioners and to the                                                                 
courts.                                                                                                                         
                                                                                                                                
TAPE 99-29, SIDE B                                                                                                              
                                                                                                                                
MS. CHAPMAN said she has personally been involved in litigation                                                                 
that has focussed on this particular statute, in which the grantor                                                              
established a trust for the benefit of his surviving spouse.  The                                                               
trust was registered and the two children were listed as contingent                                                             
beneficiaries to receive the corpus when the surviving spouse                                                                   
passed away.  The children were not notified of the existence of                                                                
the trust, which is consistent with the interpretation used by                                                                  
practitioners throughout the state.  Years later, a lawsuit ensued,                                                             
and the court decided the trustee had breached her obligation by                                                                
not notifying the discretionary beneficiary. When the discretionary                                                             
beneficiary was notified, a lengthy lawsuit ensued, and the trustee                                                             
was stripped of her obligations for doing what every practitioner                                                               
considered to be the proper interpretation of the statute.                                                                      
However, the court disagreed.                                                                                                   
                                                                                                                                
SENATOR DONLEY asked whether the children had a survivor or                                                                     
immediate interest in the trust.                                                                                                
                                                                                                                                
MS. CHAPMAN answered they had a survivor interest, therefore the                                                                
trust could have been expended entirely for the benefit of the                                                                  
surviving spouse which is a typical estate planning technique.                                                                  
                                                                                                                                
CHAIRMAN TAYLOR pointed out the children had an expectancy: first                                                               
they had to out-live the primary beneficiary, and then the trust                                                                
had to contain enough money to make it worthwhile.                                                                              
                                                                                                                                
MS. CHAPMAN said that is correct.  She explained in this instance,                                                              
one of the children went to court and argued that the money was                                                                 
improperly expended for the benefit of the surviving spouse.  That                                                              
caused family disharmony and expensive and lengthy litigation.  She                                                             
repeated the court needs guidance in the area of notification of                                                                
beneficiaries.                                                                                                                  
                                                                                                                                
SENATOR DONLEY asked what guidance Ms. Chapman is proposing.  MS.                                                               
CHAPMAN replied she is proposing that the current beneficiary be                                                                
defined as a person entitled to a mandatory distribution of income                                                              
or principal from a trust.                                                                                                      
                                                                                                                                
SENATOR DONLEY said that proposal cuts out the children.  MS.                                                                   
CHAPMAN clarified only for the purpose of notification when the                                                                 
trust is established.                                                                                                           
                                                                                                                                
SENATOR DONLEY asked Ms. Chapman if she believes the children                                                                   
should know.  MS. CHAPMAN said she does not.                                                                                    
                                                                                                                                
SENATOR DONLEY said he totally disagrees because the children have                                                              
a survivor's expectation of preservation of the corpus, and they                                                                
ought to be involved depending on how it is written.  MS. CHAPMAN                                                               
said the problem is that most trusts are written to give the                                                                    
surviving spouse sole discretion.  A person with a mere expectancy                                                              
can cause the grantor's intent to be undermined when the contingent                                                             
beneficiaries are notified that the trust has been established and                                                              
a conflict ensues.                                                                                                              
                                                                                                                                
SENATOR DONLEY maintained SB 163 is designed to make things simple                                                              
for trust lawyers and to get around the intent of the grantors.  He                                                             
pointed out the only reason a trust like that is created is to                                                                  
benefit the children in the long run while maintaining support of                                                               
the spouse for his/her lifetime.  He stated the corpus should be                                                                
preserved, otherwise the grantor would not bother to create a                                                                   
trust, he/she would bequest the entire amount to the spouse.                                                                    
                                                                                                                                
MS. CHAPMAN responded some trusts are set up for that purpose, but                                                              
the majority of trusts are bypass trusts that are not set up for                                                                
the preservation of the corpus for the children.  They are designed                                                             
primarily and solely for the benefit of the surviving spouse and                                                                
are used as an estate tax savings device.                                                                                       
                                                                                                                                
Number 542                                                                                                                      
                                                                                                                                
MS. CHAPMAN discussed additional aspects of SB 163, relating to the                                                             
rules regarding modification and revocation of trusts.  At present,                                                             
Alaska has no statutory provisions regarding modification or                                                                    
termination of trusts.  The courts must look to the common law.  SB
163 will allow the court to modify or terminate trusts under                                                                    
certain stated rules.  Many times, trusts need to be modified                                                                   
because of unexpected events that arise after the trust is                                                                      
established, particularly in cases in which a trust was established                                                             
for estate tax savings or for the care of minor children.  For                                                                  
example, a minor child may become disabled and unable to handle the                                                             
trust when he/she comes of age, however, under current law, the                                                                 
trust cannot be modified.  SB 163 will allow the court to modify                                                                
trusts if consistent with the grantor's intent.                                                                                 
                                                                                                                                
SENATOR DONLEY asked whether Section 2 applies to all kinds of                                                                  
trusts.  MS. CHAPMAN answered Section 2 applies to all trusts.                                                                  
                                                                                                                                
SENATOR DONLEY said he cannot support this legislation.                                                                         
                                                                                                                                
Number 524                                                                                                                      
                                                                                                                                
CHAIRMAN TAYLOR discussed a scenario in which a couple set up a                                                                 
trust naming the surviving spouse as the beneficiary.  The couple                                                               
established the trust to avoid probate, and with the intent that                                                                
the surviving spouse would use the money to live on, and that any                                                               
remaining money, if any, would be split among the children after                                                                
the spouse's death.  If each spouse has stepchildren, the family is                                                             
set up for immediate litigation under current law.  The                                                                         
stepchildren's expectancy might lead them to dictate how the                                                                    
surviving spouse spends his/her money.  He said he would hate to                                                                
see a child be able to sue a parent over what should be left in the                                                             
estate.                                                                                                                         
                                                                                                                                
MS. CHAPMAN said that is what happened in the case she referred to                                                              
earlier.                                                                                                                        
                                                                                                                                
CHAIRMAN TAYLOR pointed out if a trust was set up assuring the                                                                  
children a percentage of the estate, the children would be a                                                                    
mandated beneficiary and would have to receive notification.  If a                                                              
trust is not set up in that manner, the children are given an                                                                   
expectancy only.                                                                                                                
                                                                                                                                
MS. CHAPMAN said the beneficiaries who have the expectancy are not                                                              
prevented from suing.  SENATOR DONLEY indicated the beneficiaries                                                               
should not be prevented from knowing about the trust.  The problem                                                              
is that notification for all trusts will be wiped out based on one                                                              
case.  He noted Section 2 is not targeted toward the problem                                                                    
identified in that case; it will undo notification for people who                                                               
reasonably should be notified and who should have a reasonable                                                                  
expectation of survival of the corpus.                                                                                          
                                                                                                                                
MS. CHAPMAN repeated a current beneficiary who is entitled to a                                                                 
mandatory distribution will receive notice.                                                                                     
                                                                                                                                
SENATOR DONLEY said Ms. Chapman is anticipating that the spouses                                                                
will write the children in as co-beneficiaries, which they do not                                                               
tend to do even though they do intend that the corpus survive.  He                                                              
repeated he disagrees with this policy.                                                                                         
                                                                                                                                
SENATOR DONLEY noted one has to have an estate valued at $650,000                                                               
before taxes become a problem and suggested that estates below that                                                             
value be excluded.                                                                                                              
                                                                                                                                
CHAIRMAN TAYLOR maintained $650,000 is below the value of the                                                                   
average person's house on the hillside.                                                                                         
                                                                                                                                
SENATOR DONLEY contended this bill will make life easy for tax                                                                  
lawyers and that it would be much more fair to include a provision                                                              
allowing the grantor to specify the potential beneficiaries and to                                                              
waive the notification requirement within the trust document.  He                                                               
repeated Section 2 goes too far.                                                                                                
                                                                                                                                
Number 449                                                                                                                      
                                                                                                                                
MARY ZEMP, an attorney with Faulkner Banfield, clarified that lack                                                              
of notification does not mean a beneficiary cannot get information                                                              
because trusts must be registered and anyone can look at the court                                                              
record.  In the particular litigation referred to by Ms. Chapman,                                                               
MS. ZEMP explained the father, who set up the trust for his wife,                                                               
specifically stated it was not his intent to preserve the trust for                                                             
the benefit of the remainderman.  Also, the trust specifically said                                                             
the trustee did not need to account to anyone other than the                                                                    
surviving spouse. His daughter sued and each client spent at least                                                              
$200,000 in legal fees.                                                                                                         
                                                                                                                                
SENATOR DONLEY said we should make that the law rather than cutting                                                             
everyone out from the notification requirement.                                                                                 
                                                                                                                                
MS. ZEMP said the trust may say the opposite.                                                                                   
                                                                                                                                
CHAIRMAN TAYLOR asked how one is to know who the potential                                                                      
beneficiaries could be and how they are to be notified.                                                                         
                                                                                                                                
SENATOR DONLEY replied a lot of them will be known up front, but                                                                
the law can be written so that the trustee must use his/her best                                                                
effort.                                                                                                                         
                                                                                                                                
CHAIRMAN TAYLOR asked at what point the beneficiaries must be                                                                   
notified.  MS. ZEMP replied when the trust is established, Alaska                                                               
law requires that the trust be registered and that notification of                                                              
registration be sent to current beneficiaries.  Alaska trusts can                                                               
be established for ten generations.  Determining whether one made                                                               
a reasonable effort will give rise to litigation.                                                                               
                                                                                                                                
SENATOR DONLEY repeated that the law should require that the person                                                             
setting up the trust specify whether the purpose is to save the                                                                 
corpus for future beneficiaries, such as children.                                                                              
                                                                                                                                
Number 408                                                                                                                      
                                                                                                                                
DAVE SHAFTEL, a member of an informal group of estate planning and                                                              
business attorneys in Anchorage, made the following comments.  His                                                              
group has participated in the drafting of SB 162, and is strongly                                                               
in favor of it, particularly the rule against perpetuities issue.                                                               
The rule was essentially abolished in previous legislation yet some                                                             
technical remnants remain, making the elimination of the rule                                                                   
awkward.  One example is with a charitable lead trust, a second                                                                 
example is with trusts for children.  SB 162 will clarify the                                                                   
abolishment of the rule.  The purpose of SB 163 is to provide a                                                                 
statutory provision that allows for the reformation or termination                                                              
of trusts where their purposes are not being met.  Sometimes the                                                                
intent of the person who created the trust cannot be met due to                                                                 
mistake of facts, mistake of law, or changed circumstances.  In                                                                 
such cases, the trust needs to be changed.  Many other states have                                                              
similar legislation.  These provisions track the restatement of                                                                 
trust and the Uniform Trust Act.  He stated SB 163 will establish                                                               
good, solid law for the State of Alaska.                                                                                        
                                                                                                                                
MR. SHAFTEL suggested, if the committee continues to have concerns                                                              
about the notification issue, the burden should be placed on the                                                                
party who drafted the trust to state, with an introductory phrase,                                                              
that unless the trust instrument states otherwise, the duty to                                                                  
inform and account applies.  That would allow the person who sets                                                               
up the trust, at the time it is drafted, to say he/she does not                                                                 
want to put the burden to inform contingent beneficiaries or                                                                    
remainder persons of the trust's registration.  Current statute                                                                 
provides that notification is a mandatory obligation so one cannot                                                              
draft around it.  He noted the mandatory requirement places a                                                                   
tremendous administrative burden on trustees and a way needs to be                                                              
found to alleviate that burden if the trustor so chooses.                                                                       
                                                                                                                                
Number 345                                                                                                                      
                                                                                                                                
CHAIRMAN TAYLOR thanked Mr. Shaftel and asked him to contact                                                                    
Senator Donley directly with his suggestions.                                                                                   
                                                                                                                                
Number 338                                                                                                                      
                                                                                                                                
RICH HOMPESCH, a Fairbanks attorney, said he agrees with the                                                                    
comments of previous speakers about SB 162 and SB 163.  He directed                                                             
his comments to Section 2, regarding the duty to account.  He has                                                               
drafted many trusts since the Alaska Trust Act passed two years                                                                 
ago.  Most of his clients tell him they do not want the trustee to                                                              
go to the expense of notifying all of the beneficiaries of the                                                                  
trust.  Most clients only want the trustee to notify and account to                                                             
the individual who is receiving the current income and corpus.                                                                  
When he informs his clients of the statute's mandate regarding                                                                  
notification, it causes a lot of problems.  As written, Section 2                                                               
contemplates that unless the trust otherwise specifies, the rule                                                                
requiring that all beneficiaries be notified applies.                                                                           
                                                                                                                                
CHAIRMAN TAYLOR asked Ms. Chapman if any judgment was rendered when                                                             
the case she referred to was settled.  He questioned whether that                                                               
case will set precedent.                                                                                                        
                                                                                                                                
MS. CHAPMAN replied it is not precedential.  No judgment was                                                                    
rendered in that case; interlocutory orders were issued.                                                                        
                                                                                                                                
CHAIRMAN TAYLOR said the judge stepped out on a very thin reed and                                                              
does not realize the impact that type of decision may have across                                                               
the board on all kinds of documents.  MS. CHAPMAN said she agrees,                                                              
and that the judge may have understood the ramifications after                                                                  
having then seen how far that litigation continued on before it                                                                 
finally settled.  She stated she does believe Senator Donley's                                                                  
concerns can be addressed with language allowing the grantor to                                                                 
except the trustee from the mandatory requirement of notification.                                                              
                                                                                                                                
CHAIRMAN TAYLOR said that would be far superior to what Mr.                                                                     
Hompesch said people are now doing, that is drafting trust                                                                      
documents that hold the trustee harmless from lack of enforcement                                                               
of the law.                                                                                                                     
                                                                                                                                
Number 271                                                                                                                      
                                                                                                                                
CHAIRMAN TAYLOR asked those interested in seeing this legislation                                                               
move to talk to Senator Donley about his concerns, and to update                                                                
Senators Torgerson and Halford as well.  He hoped to get a quorum                                                               
on Wednesday.  He thanked all participants for their input and                                                                  
adjourned the meeting at 3:20 p.m.                                                                                              

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