Legislature(1999 - 2000)
03/22/2000 01:44 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
Number 1877 HB 275-UNIFORM PROBATE CODE/TRUSTS/PROPERTY MS. WILDA RODMAN, staff to Representative Therriault, stated that HB 275 is intended to enhance the estate planning climate in the state of Alaska. The bill augments and clarifies the Uniform Probate Code that was adopted in 1996. The changes in HB 275 were drafted by estate planning attorneys and have been through extensive review on a state and national level. The changes are, for the most part, based on other state statutes and allow Alaska residents to take advantage of federal tax provisions that have been passed since the enactment of the uniform probate law. MS. RODMAN gave the following sectional analysis of HB 275. Section 1 pertains to "nonademption of specific devises." This section deals with the specific instance of nonademption when the person creating the will (decedent) has sold the gift (specific devise) prior to the decedent's death and is still owed money for the property. The question of who ultimately receives the proceeds should not depend on whether the decedent received full or partial payment before death. Presently if the property were sold and the decedent did not receive full payment before death, the payment received after death and any promissory note will go to the specific devisee--this will not happen under HB 275. Instead, the payment and any promissory note will be treated in the same manner as all other property that the decedent owned, and will be distributed equally among the beneficiaries. Section 2 makes the rules of construction under 13.12.606 applicable to trusts as well as wills. The second part of section 2, section 13.12.720, allows Alaska residents eligibility for a new IRS deduction for a family-owned business. In addition to the present $600,000 tax shelter, people will be eligible for an additional $675,000 tax shelter for their new family-owned business. This is to prevent people from having to sell their business in order to pay the taxes on their inheritance. This lowers and raises the ceiling between the tax shelter and family owned business deduction. Section 3 will change the amount of interest that is paid on a pecuniary devise. By state law if a person wills money, that pecuniary bequest has to accrue interest, which comes from the residuary estate. Presently, the money accrues interest at the legal rate of 10.5%. HB 275 changes the interest rate from 10.5% to a discount borrowing rate (variable rate) taken from AS 45.45.010(b). The provisions in section 4 do not apply to a marital pecuniary devise, this section enables people to qualify for an IRS deduction. Section 5 gives the personal representative more discretion over how to distribute the residuary estate assets to devisees, as long as it is in the best interests of the distributees. HB 275 has added AS 13.16.560(a)4 which says a person can make non pro-rata distributions of assets. This means if there are two devisees, and a decedent has a life insurance policy and an IRA account both policies can be split down the middle and half of each account can be given to each devisee, this is so neither devisee will have to bear the full tax consequence. Section 6 relates to restrictions on exercising certain trustee powers. This section says that for tax purposes a person who is both the trustee and beneficiary can only distribute those assets to himself for his reasonable comfort. There is a difference between "reasonable comfort" and "comfort and happiness." Support in "reasonable comfort" is not taxable but support for "comfort, welfare or happiness" is taxable. The bill says that unless specifically stated in the trust document, the spouse will only have the right to distribute principal in a manner limited to an ascertainable standard. Tape 00-16, Side B Section 7 relates to new IRS allowances that allow a person to divide a single trust into two or more separate trusts as long as each trust remain substantially identical in terms of the existing trust, the only difference is that they be administered separately. Trusts written before this new IRS ruling may not have this provision, and section 7 allows for the division of a trust without having to go to court for approval. Section 8 is the application of special distribution provisions. This section takes the tried and true provisions that apply to the distribution of wills and applies them to the administration of a trust. Section 9 relates back to Sections 6 and 7, Title 13, Chapter 36. The only other place that "party in interest" appears in Chapter 36 is in sections 7 and 9. These sections are the restrictions on the trustees power to distribute assets (ascertainable standards), and the division of trust. This section says if a person knows of the tax benefits and they still want to give Uncle Sam more money, they can opt out. Section 9 defines who has to sign off on the trust in order to opt out of these two provisions. Number 2310 SENATOR ELLIS asked about mandatory distribution in section 9. MS. RODMAN answered that this language causes there to be an increase in the number of people who have to sign. This provision is only to opt out--not who can go to court or who is a party of interest. MS. RODMAN explained that section 10 is for tax purposes. The beneficiary of the trust can require the trust to produce income, this relates to the qualification for the marital deduction. This section provides that in those trusts where the spouse is entitled to all the income earned by a trust paid no less frequently than annually, and a marital deduction is claimed for the trust, the spouse has the power to require the trustee to make the trust assets produce income. This simple provision is a required statement in all trusts intending to qualify for the marital deduction. This section provides the required language for those trusts lacking this provision. MS. RODMAN noted that section 11 ends the confusion over the ability to transfer real property to or from a trust in the name of the trust. This section also helps title companies prevent future legal problems. MS. RODMAN indicated the amendment she distributed to the committee has been reviewed by the Department of Law, resulting in one change being made to the conveyance section. Number 2081 CHAIRMAN TAYLOR moved to amend page 8, line 24, deleting the word "mandatory," and on page 8, line 26, also deleting the word "mandatory." The new language will read: (ii) each beneficiary entitled to receive a distribution of income or principal from a trust or, if a beneficiary entitled to receive a distribution of income or principal from a trust is not 19 years of age or is incapacitated, the beneficiary's legal representative under applicable law or the beneficiary's agent under a durable power of attorney; and MR. STEVE GREER commented there is no problem in going along with the amendment because Section 9 is a provision that no one will ever use. The entire bill is a safety net to protect against sloppy drafting, preventing a bad tax result. Section 9 is in the bill because Alaska has taken its laws from other states that have such a provision. CHAIRMAN TAYLOR said as long as the wording is "mandatory" there is a limited number of people involved, but once that wording is removed it will never be known who the signatures have to be collected from. MR. GREER noted the intent of the amendment was to protect people, but people are not protected because it is impossible to elect out of the provisions. He does not think that the people who drafted the amendment really understood what it was about. MS. TAMMY TROYER, staff to Representative Cissna, stated that Representative Cissna's concern is that beneficiaries who are not "mandatory distribution" and are at the discretion of the trustee, should not be allowed to be present when electing to agree to the provision to opt out. CHAIRMAN TAYLOR asked how people can be hurt by not being present when a group of people opt out of the trust enabling them to receive their distribution--this would be the only reason to opt out of the trust. MS. TROYER responded it is to opt out of the provisions outlined in sections 6 and 7 and not to opt out of the trust. MR. GREER responded that Representative Cissna did not know what she was proposing with the amendment. There is pending federal legislation, the Uniform Trust Act, which will help fill the void in states that do not already have detailed laws indicating how trusts should operate--section 9 goes beyond the Uniform Trust Act. This section was included only because it was felt that the other states Alaska looked at for direction included it for constitutional reasons. But if the category of people who have to opt out is opened up, it will be impossible for the trust to elect out of this provision. MS. TROYER interjected that Representative Cissna is aware of this, and the intent is not to include a distant relative who could potentially be a beneficiary. What Representative Cissna is trying to do is open the door for beneficiaries who are now at the discretion of the trustee. The statute, on line 24, says a person has to be entitled to a mandatory distribution, and often times there are no mandatory distributions--distributions are at the discretion of the trustee. Representative Cissna would like to make sure these beneficiaries are included. Number 1705 SENATOR DONLEY asked if notification is the intent of "party of interest." MS. TROYER answered to "elect to agree" to the provisions outlined in sections 6 and 7. MR. GREER responded that is not correct. It is to define those people who can elect to not be subject to provisions in sections 6 and 7. MS. TROYER agreed, and said it allows the beneficiaries to be part of the discussion of whether or not to opt out of the provisions. SENATOR DONLEY clarified it has nothing to do with notice. MS. TROYER agreed. MR. GREER explained that the whole bill, including sections 6 and 7, is safety net legislation that other states already provide. It is meant to protect people who have their trusts drawn by lawyers who do not keep current with state law and for people who have had their trust prepared by competent estate planning attorneys but who have not keep the trust updated. This bill is meant to take care of commonly occurring traps that allow the federal government to get more money than was originally intended. There is nothing controversial about this bill. The importance of section 9 is very low in comparison to the rest of the bill and it should have nothing to do with the bill passing or not. Section 9 is just about who can elect out of the safety net provisions. Number 1537 SENATOR HALFORD commented that he is not comfortable with moving the bill out of committee until he has more time to look at it. MR. SHEFTEL commented that HB 275 is a safety net piece of legislation that is designed to remedy obsolete trusts and poor tax planning. Most of the provisions in the bill have been taken from legislation that has been recommended by national experts. HB 275 is designed to bring Alaska law relating to estate planning up to contemporary standards with that of other states. SENATOR ELLIS asked to hold the amendment and the bill for further thought.