Legislature(1999 - 2000)
05/03/1999 02:02 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
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.