Legislature(2001 - 2002)

05/02/2001 03:40 PM Senate L&C

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
        HB 181-COMMUNITY PROPERTY/OBLIGATIONS OF SPOUSES                                                                    
                                                                                                                              
CHAIRMAN PHILLIPS announced HB 181 to be up for consideration.                                                                  
                                                                                                                                
MS. AMY ERICKSON, Staff to Representative Murkowski, said:                                                                      
                                                                                                                                
     In  1998,  the  legislature  passed  Alaska's  Community                                                                   
     Property   Act,   which  allows   married   couples   to                                                                   
     characterize  some or all of  their assets as  community                                                                   
     property.  Since  enactment,  those  dealing  in  estate                                                                   
     planning and trusts on a day-to-day  basis have realized                                                                   
     that  the  statutes  need  minor   adjustment  and  that                                                                   
     happens  in  four  areas.  The  first  provides  that  a                                                                   
     creditor of a debtor spouse  may only reach the separate                                                                   
     property of that debtor spouse  and the spouse's jointly                                                                   
     held  property. It  also allows  property  such as  life                                                                   
     insurance  and IRAs  to be  transferred  to a  community                                                                   
     property   trust   by  designating   the   trust  as   a                                                                   
     beneficiary  of  the  property. It  also  clarifies  the                                                                   
     sources  of funds  used to purchase  life insurance  and                                                                   
     expands   categories  of  family   members  to   include                                                                   
     ancestors or  descendents of  either spouse. So,  it not                                                                   
     only allows a surviving spouse  to be a beneficiary, but                                                                   
     also a grandchild.                                                                                                         
                                                                                                                                
     Since  current  statute  does not  address  division  of                                                                   
     property at  death, HB 181  clarifies that on  the death                                                                   
     of a spouse, certain property  items can be allocated to                                                                   
     the  spouse's  heirs  as long  as  each  spouse's  heirs                                                                   
     receive half the total value of a community property.                                                                      
                                                                                                                                
MS. ERICKSON said there was a question  in Judiciary about whether                                                              
this impacts  family law practice.  She asked the  Bar Association                                                              
and they  located all their  family law  members and there  was no                                                              
adverse reaction from them.                                                                                                     
                                                                                                                                
MR. DAVE  SHAFTEL said he  was one of  a group of  estate planning                                                              
attorneys who has  worked on Alaska's estate  planning legislation                                                              
over the  past four years. The  Community Property Act of  1998 is                                                              
popular  with his  clients and  others. However,  they have  found                                                              
some gaps in the law that this legislation  addresses. He said the                                                              
Act was  originally taken from  the Uniform Marital  Property Act,                                                              
which was  drafted in 1981 and  was initially enacted in  only one                                                              
state, Wisconsin.  He said Alaska is the tenth  community property                                                              
state.                                                                                                                          
                                                                                                                                
This particular  bill clarified  four areas.  It clarifies  if you                                                              
have  an obligation  incurred by  one spouse,  then that  spouse's                                                              
creditor  can  reach  that spouse's  separate  property  and  that                                                              
spouses  one-half of  the families'  community property.  Existing                                                              
statute is ambiguous on this point.  This clarifies that community                                                              
property will be treated the same  as other jointly held property.                                                              
If you had  jointly held property without community  property held                                                              
by  both  spouses,  a  creditor  could  only  reach  the  separate                                                              
property of  the debtor  spouse and that  debtor spouse's  half of                                                              
jointly held property.                                                                                                          
                                                                                                                                
The next clarification  deals with transfers of  certain assets to                                                              
a community property trust, like  life insurance, IRAs, 401K plans                                                              
and  assets  that  have  beneficiary  designations.  They  can  be                                                              
transferred  by designating  the community  property trust  as the                                                              
beneficiary of  such property. This  is important when you  get to                                                              
the fourth change.                                                                                                              
                                                                                                                                
The  third  change  deals  with   life  insurance.  There  can  be                                                              
complications when  a person uses funds from a  community property                                                              
account,  like a bank  account to  buy life  insurance. There  are                                                              
both ownership  and tax  complications. If  it's unclear  that the                                                              
spouse  who  is   not  making  the  contribution   agreed  to  the                                                              
contribution,  this  legislation   creates  some  presumptions  of                                                              
agreement, as long as the policy  is benefiting family members. It                                                              
also clarifies  an area  in the estate  gift tax law  if community                                                              
property  funds are  being used  by one  spouse to  create a  life                                                              
insurance trust for  the surviving spouse. It makes  it clear that                                                              
the  presumption is  the surviving  spouse agreed  that the  funds                                                              
used  would  be  first the  community  property,  which  would  be                                                              
changed  to  separate property,  so  that  the insured  spouse  is                                                              
contributing these funds  to the trust. The end result  of this is                                                              
to make sure  the life insurance proceeds are not  included in the                                                              
surviving  spouse's estate  and taxed  at  his or  her death.  The                                                              
presumptions  are safety  nets when  dealing with  funds that  are                                                              
community property and are used to purchase life insurance.                                                                     
                                                                                                                                
The last clarification  deals with the provision  that talks about                                                              
what  happens at  death to  the community  property. It  clarifies                                                              
that at death,  one half of the community property  belongs to the                                                              
surviving spouse and the other one  half belongs to the decedent's                                                              
estate.  It  also adopts  the  "aggregate  theory of  division  of                                                              
community property assets," which  allows for "non-prorata funding                                                              
of trusts."  Basically, this means  that you don't have  to divide                                                              
every item of community property  exactly in half and give half to                                                              
the deceased  spouse's estate  and half  to the surviving  spouse.                                                              
Rather,  you just have  to make  sure that  the deceased  spouse's                                                              
estate  gets  one  half  of the  total  aggregate  value  and  the                                                              
surviving spouse gets only one half  of the total aggregate value.                                                              
This  is  important,  because  they often  find  that  the  couple                                                              
together may  have had retirement  assets, all of which  should go                                                              
to the surviving spouse. This is  because there is a better income                                                              
tax result  if all the  other assets  go to the deceased  spouse's                                                              
estate, so  they can fund  a bypass trust.  This kind of  trust is                                                              
for the benefit  of the surviving  spouse, but then it  goes on to                                                              
the children without any further transfer taxation.                                                                             
                                                                                                                                
MR. SHAFTEL said  these changes would strengthen the  act and make                                                              
it a  lot more  useable. It  will also  make it  available in  the                                                              
retirement  plan  the  life insurance  area  for  nonresidents  of                                                              
Alaska  who  have  chosen  to  use   Alaska's  optional  community                                                              
property system. He hasn't run into any opposition to it.                                                                       
                                                                                                                                
Number 330                                                                                                                      
                                                                                                                                
REPRESENTATIVE  MURKOWSKI said  that  these changes  seem to  make                                                              
sense.                                                                                                                          
                                                                                                                                
CHAIRMAN PHILLIPS asked what triggered this legislation.                                                                        
                                                                                                                                
REPRESENTATIVE  MURKOWKSI   replied  that  she  is   not  a  trust                                                              
attorney,  which is  a  very select  group  of practitioners.  Mr.                                                              
Shaftel is her constituent, as well as a trust attorney.                                                                        
                                                                                                                                
SENATOR DAVIS said  she had someone called her last  week with the                                                              
concerns that were addressed in this bill.                                                                                      
                                                                                                                                
SENATOR LEMAN  said he  thought the change  of not requiring  each                                                              
item to  be divided  in half was  good, but asked  if he  ran into                                                              
cases  where an  estate  argued over  pieces  of property  because                                                              
someone values  it as  being important to  them. "In  those cases,                                                              
does this help bring resolution or not or does it make any                                                                      
change?…Are we neither harming or helping?"                                                                                     
                                                                                                                                
MR. SHAFTEL  replied that was right  and he thought  good drafting                                                              
could solve that  problem, but good administration would  do it if                                                              
good drafting  didn't. This legislation  does not affect  that one                                                              
way or the other.                                                                                                               
                                                                                                                                
SENATOR LEMAN moved to pass CSHB 181(KUD) from committee with                                                                   
individual recommendations and the $0 fiscal note. There were no                                                                
objections and it was so ordered.                                                                                               

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