Legislature(1999 - 2000)

03/22/2000 01:44 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
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.                                                                                                                        

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