Legislature(1995 - 1996)
02/13/1996 01:30 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 258 TRUSTS & PROPERTY TRANSFERS IN TRUST
JOE RYAN, Legislative Aide to Representative Al Vesey, Sponsor of
SB 258, said this Trust law is simple and would allow trusts to be
administered in Alaska and this has the potential of bringing in a
lot of outside money to Alaska.
RICHARD THWAITES, an estate planning attorney, testified that SB
258 would create an opportunity for investors to place property in
trust, with an Alaska trustee, and thereby establish its situs as
Alaska. If a current New York resident, with property in New York,
put property in a trust anywhere else, it would still be taxed in
New York. If the situs of the trust is in Alaska, with an Alaskan
trustee, and is an irrevocable transfer as set forth in SB 258, it
removes the property out of the jurisdiction and places it in the
jurisdiction of Alaska. That would mean a $50 million trust in New
York would no longer be subject to New York State taxes. Most
members of the American College believe that if and when Alaska
passes a state income tax, it will be less than the combined taxes
of New York City and New York State. SB 258 does not create any
shelter for estate taxes or income taxes. This measure makes
Alaska similar to the jurisdictions of the Cook Islands, the Cayman
Islands, and the Bahamas. The difference is that the trust would
be subject to federal income tax in Alaska. Alaska is an
attractive jurisdiction because the U.S. military and the Alaska
National Guard provide legal stability.
The Joint Committee on Taxation for the U.S. House of
Representatives did a study two years ago and estimated that $460
billion dollars per year was going offshore. MR. THWAITES believed
Alaska could pick up a substantial portion of that business in a
relatively short period of time. Most of the dollars would come in
the form of commissions to banks, trust companies and brokers
managing the funds. Using a three-eighths percent average return on
a $200 billion corpus, commissions would total approximately $750
million dollars per year. On a $1 million trust the commission is
one percent. As the volume of the trust increases, the commission
decreases, however if the asset requires unusual management, the
commission increases.
Number 414
SENATOR KELLY asked if the bill would attract more trust attorneys
to Alaska. MR. THWAITES replied there are currently 12 to 15, and
he does not know if the number will increase. SENATOR KELLY asked
if trust attorneys work independently, or whether they are employed
through banks. MR. THWAITES stated one-quarter of the membership
of the American College are law professors, mostly in private
practice. The American College is an organization devoted to
education, therefore members must be published, and give
presentations to the college to become elected nationally. SENATOR
KELLY asked if all members must be attorneys. MR. THWAITES replied
affirmatively. SENATOR KELLY inquired whether any other
accreditation is necessary. MR. THWAITES replied negatively and
explained the function of the College is to recognize those with
expertise in the field.
MR. THWAITES said the money in trust must be "clean" money; no
fraudulent transfers can occur, no liens or claims against it can
exist. Once the money is placed in trust, it is irrevocable. Only
the very wealthy will take advantage of this type of trust.
SENATOR KELLY asked if any other states besides Missouri have a
similar set up. MR. THWAITES responded that Missouri passed a
similar statute, however the statute was too ambiguous therefore
trust holders have not established trusts in that state. Alaska is
not encumbered by any statutes in particular regarding which types
of trusts are permissible, and has no case law on trusts, therefore
as a state, Alaska has a relatively clean slate to begin with. He
suspected Nevada may try to pass a similar statute.
SENATOR KELLY asked if a sales tax would have much affect on these
types of trusts. MR. THWAITES replied it would depend on the
nature of the sales tax, and whether it applied to brokerage items.
Alaska is unique on that basis because it does not have a past
record. If SB 258 passes, a private letter ruling will have to be
obtained from the Internal Revenue Service, which a New York firm
is planning to pay for. The IRS categorizes trusts in three ways
to determine taxability: grantor trusts; complex trusts; and
simple trusts. SB 258 would establish grantor trusts which are
taxed at the rate of the grantor or the beneficiaries of the trust.
SB 258 does not change existing statute substantively, it merely
adds some provisions within the trust section. The definition of
an Alaska resident is that used to define recipients of permanent
fund dividends.
Number 481
SENATOR TORGERSON questioned why that definition is used, since it
has nothing to do with the qualifications of the person managing
the trust. MR. THWAITES explained by statute, there is a
difference between domicile and residence. The definition of
resident was used to be consistent with existing statutory language
at the recommendation of the legislative drafter, Terry Bannister.
MR. THWAITES noted in the House version, the trust company is
organized under AS 06.25 with its principal place of business in
the state, and adds that a bank, organized under AS 06.05, or a
national banking association organized under 12 USC 12.21-216(d)
that has trust powers, must have its principal place of business in
this state.
SENATOR KELLY asked for an example of a banking association. MR.
THWAITES specified National Bank of Alaska or First National Bank
would be designated as national banking associations. State banks
and national banking associations differ depending upon which
section they were incorporated under. SENATOR KELLY inquired
whether credit unions would fall under this definition. MR.
THWAITES replied it would not matter, since credit unions have
never been granted fiduciary powers to function in that capacity.
Number 516
SENATOR KELLY asked how much money would move to Alaska if SB 258
passed. MR. THWAITES projected, under a best case scenario, the
amount could range from $200 to $500 billion. SENATOR KELLY asked
how much of that would be sitting in Alaska banks, as opposed to
being in the form of property elsewhere. MR. THWAITES felt it
would be a large percentage, since these types of trusts are not
usually funded with active assets that are normally used to develop
and run a business. This transfer is irrevocable and is meant to
benefit one's succeeding generations.
Number 526
SENATOR SALO requested more elaboration on "clean" money. MR.
THWAITES pointed out the question arose, in earlier discussions,
whether someone could set up a trust fund knowing he/she planned to
file bankruptcy to discharge debts later on. There is a fraudulent
transfer statute to prevent that from happening. He also explained
a person cannot put their money in a trust knowing he/she is about
to be sued for malpractice, because money cannot be sheltered in
the trust. Likewise, if an airplane is part of a trust, and a
beneficiary uses the airplane and causes damage, the trust is open
to suit. If assets in a trust are used as collateral, those assets
can be taken. It is only those assets with no lien or claim that
are protected from creditors. SB 258 would extend the same status
that protects shareholders from the liability of a corporation to
family trusts. In the Cayman Islands and the Cook Islands, there
are no treaties with the U.S. Even though there is a legal
obligation for a U.S. resident to pay tax on those dollars, the
resident does not, because records are not available from the
administrator on the Cook Islands. That would not be the case in
Alaska since trusts in Alaska would be subject to IRS review and
claims.
SENATOR SALO commented SB 258 would attract wealthy investors who
are not trying to avoid paying U.S. taxes. MR. THWAITES believed
the bill would hurt jurisdictions such as New York and California.
WES COYNER, representing the Alaska Bankers Association, stated the
banking community in Alaska is still reviewing this issue, and has
no position on SB 258. SENATOR KELLY asked when a position might
be forthcoming. MR. COYNER believed a position might be determined
in one week. MR. THWAITES commented he has not received a response
from Key Bank, but he has received a response from the National
Bank of Alaska, which indicated they were interested in the
legislation and wanted to know how it would be promoted. They are
hesitant to accept placing real property in a trust, because of the
problem of environmental regulations. SENATOR KELLY asked if they
were hesitant to accept real property anywhere. MR. THWAITES
clarified real property anywhere. In other states real property is
accepted, but the commission is higher.
SENATOR KELLY announced the bill would be held over until Thursday
to give the banking industry time to determine a position. He
adjourned the meeting at 2:20 p.m.
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