Legislature(1999 - 2000)
01/19/2000 01:16 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE JUDICIARY STANDING COMMITTEE
January 19, 2000
1:16 p.m.
MEMBERS PRESENT
Representative Pete Kott, Chairman
Representative Norman Rokeberg
Representative Lisa Murkowski
Representative Eric Croft
MEMBERS ABSENT
Representative Joe Green
Representative Jeannette James
Representative Beth Kerttula
COMMITTEE CALENDAR
OVERVIEW OF ALASKA COURT SYSTEM BY CHRIS CHRISTENSEN
HOUSE BILL NO. 220
"An Act relating to the amendment and revocation of spouses'
community property agreements and community property trusts; and
providing for an effective date."
- MOVED HB 220 OUT OF COMMITTEE
HOUSE BILL NO. 222
"An Act relating to the remedies available to judgment creditors
against limited liability company members and their assignees and
against limited partnership general and limited partners and their
assignees; and providing for an effective date."
- MOVED HB 222 OUT OF COMMITTEE
HOUSE BILL NO. 221
"An Act relating to a trustee's duties to inform and account to
beneficiaries; relating to the revocation, modification,
termination, reformation, construction, and trustees of trusts; and
relating to transfer restrictions in trusts."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 220
SHORT TITLE: COMMUNITY PROPERTY AGREEMENT/TRUSTS
Jrn-Date Jrn-Page Action
5/04/99 1158 (H) READ THE FIRST TIME - REFERRAL(S)
5/04/99 1158 (H) JUD
5/07/99 (H) JUD AT 1:00 PM CAPITOL 120
5/07/99 (H) SCHEDULED BUT NOT HEARD
1/19/00 (H) JUD AT 1:00 PM CAPITOL 120
BILL: HB 222
SHORT TITLE: LTD PARTNERSHIPS AND LTD. LIAB. COMPANIES
Jrn-Date Jrn-Page Action
5/05/99 1179 (H) READ THE FIRST TIME - REFERRAL(S)
5/05/99 1179 (H) JUD
1/19/00 (H) JUD AT 1:00 PM CAPITOL 120
WITNESS REGISTER
CHRIS CHRISTENSEN, Staff Counsel
Office of the Administrative Director
Alaska Court System
820 West 4th Avenue
Anchorage, Alaska 99501-2005
POSITION STATEMENT: Presented overview of Alaska Court System and
answered questions.
LESIL McGUIRE, Legislative Assistant
to Representative Pete Kott
Alaska State Legislature
Capitol Building, Room 118
Juneau, Alaska 99801
POSITION STATEMENT: As Committee Aide for House Judiciary Standing
Committee, presented overviews based on sponsor statements for HB
220 and HB 222; answered questions.
ERIC KUEFFNER, Attorney at Law
Faulkner Banfield, PC
302 Gold Street
Juneau, Alaska 99801
POSITION STATEMENT: Testified on HB 220 on own behalf and answered
questions; testified briefly in support of HB 222.
STEPHEN GREER, Attorney at Law
4041 B Street, Suite 205
Anchorage, Alaska 99503
POSITION STATEMENT: Testified briefly in support of HB 220 and HB
222.
DAVID SHAFTEL, Attorney at Law
550 West 7th Avenue
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of HB 220 and explained
provisions at length; testified that HB 222 is an excellent
amendment that will strengthen Alaska's law and is important from
a business standpoint.
DOUGLAS BLATTMACHR, President
and Chief Executive Officer
Alaska Trust Company
1029 West 3rd Avenue
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of HB 220 and answered
questions about the positive effects of community property
legislation on Alaska's business community; testified that HB 222
is an excellent amendment that will strengthen Alaska's law and
will encourage people to use Alaska's trust jurisdiction.
ACTION NARRATIVE
TAPE 00-1, SIDE A
Number 0001
CHAIRMAN PETE KOTT called the House Judiciary Standing Committee
meeting to order at 1:16 p.m. Members present at the call to order
were Representatives Kott, Rokeberg and Murkowski. Representative
Croft arrived as the meeting was in progress. Chairman Kott noted
that Representatives Green, Croft and Kerttula were attending
another hearing and Representative James was out of town.
OVERVIEW OF ALASKA COURT SYSTEM BY CHRIS CHRISTENSEN
CHAIRMAN KOTT invited Chris Christensen to present an overview of
the Alaska Court System.
Number 0119
CHRIS CHRISTENSEN, Staff Counsel, Office of the Administrative
Director, Alaska Court System, first discussed historical concepts
relating to the courts. The framers of the Constitution of the
United States had wanted to put together a system of government
that protected individual liberty by preventing the government from
becoming too powerful, he explained. They looked to the writings
of an eighteenth century French political philosopher, Montesquieu,
who had come up with the concept of separation of powers.
Montesquieu believed the best way to protect individual citizens'
liberty is to split government into three separate entities -
legislative, judicial and executive - and to give each a piece of
the government's power, thereby preventing the government itself
from becoming too powerful.
MR. CHRISTENSEN pointed out that all 50 states follow this model.
According to a number of constitutional scholars, however, Alaska's
constitution has the purest form of separation of powers of any of
the 50 states. The people who put Alaska's constitution together
in the 1950s were libertarians by nature, he noted, being
protective of individuals' rights and wanting to break the shackles
of the federal government.
MR. CHRISTENSEN explained that Alaska has three branches of
government plus the university; it isn't clear whether the
university is part of the executive branch or is an independent
entity. Together, the legislature and the courts make up about 2
percent of Alaska's state government; the executive branch makes up
87 percent; and the university makes up 11 percent. The executive
branch is headed by one person, from whom all the power flows down.
In contrast, the legislature has 60 individuals, each with his or
her own base of constitutionally mandated power. Similarly, the
courts have 57 individual officers, each with individual power.
MR. CHRISTENSEN noted that perhaps more important is how - and why
- the judiciary is different from the legislature. The judiciary
is generally considered by political scientists the least powerful
of the three branches. The federal constitution was drafted so
that Congress was the most powerful, followed by the executive
branch and then the judiciary; since the Civil War, that has
changed a bit, and people now generally accept that the executive
branch is more powerful than Congress. Alaska's constitutional
framers had a little different perspective, wanting the executive
branch to be more powerful than the legislature, with the courts in
third place. In the last 40 years, the power has shifted a little,
and Alaska's executive branch has become even more powerful
relative to the legislature. The primary reason that the judiciary
has less power than other branches is because the courts are purely
reactive and cannot initiate actions.
Number 0401
MR. CHRISTENSEN explained that the other major difference between
the legislature and the judiciary goes to the heart of the system
which the framers were trying to set up to ensure that liberty was
protected. The legislature essentially is the majoritarian
institution in Alaska's government. Its members are elected, and
thus its focus is on implementing the will of the majority of the
people. In contrast, the courts are not a majoritarian
institution. Judges aren't elected, which was intentional.
MR. CHRISTENSEN noted that James Madison - who is called the father
of the constitution, and who wrote most of the Federalist papers -
said a majority in a democracy is capable of behaving just as
tyrannically as the worst despot. To protect the rights of the
minority, Madison believed that needed were a bill of rights and an
independent judiciary not controlled by the majority. Mr.
Christensen pointed out that "minority" refers not only to groups
but also to the ultimate minority - the individual. An independent
judiciary ultimately protects individuals from the arbitrary
exercise of government power and assures the rule of law.
MR. CHRISTENSEN noted in the Alaska Court System's dealings with
the legislature two major differences between the judiciary and
executive branches. First, the judiciary is affected by more
pieces of legislation than any other state government entity.
Therefore, its representatives attend hearings to inform the
legislature what something will cost or how it will affect the
courts, or to offer suggestions on making it better. However, in
99.9 percent of legislation, the court system takes no position.
It is their firm belief that it is the legislature's prerogative to
craft and draft legislation, and that it is inappropriate for the
courts to take a position in this forum. Mr. Christensen also
pointed out that unlike the executive branch, the courts have no
veto power over the legislature.
MR. CHRISTENSEN turned attention to structure. First, Alaska has
a unified judiciary: there are no courts other than state courts.
Only about eight states have a fully unified judiciary, which gives
some tremendous economic efficiencies and makes laws more uniform;
Mr. Christensen said he believes it is a good system. Second,
Alaska is one of only five states in which all funding for the
courts comes from the legislature; Mr. Christensen believes this
also is good because people know who is responsible. In other
states, funding comes from the counties, the state and other
entities, which point the finger at each other when people argue
that the courts are inadequately funded. And third, the Alaska
Court System has a professional administrative director who is a
constitutional officer. Alaska has a "strong city manager system
of administering the courts"; that is in contrast to having the
courts run by judges, who are appointed not because they are great
managers but because they are smart lawyers. Taking into
consideration the foregoing three things, Alaska is unique among
the 50 states in terms of structure.
Number 0624
MR. CHRISTENSEN discussed the Alaska Supreme Court, the state's
highest level of court. Its five members are headquartered in
Anchorage. At statehood, it was assumed the headquarters would be
in Juneau at the state capitol, but the supreme court surprised
everyone by moving, an extremely controversial decision at the
time; they believed the headquarters should be where the bulk of
the people would be - the Railbelt - as the state expanded. The
court meets monthly in Fairbanks and twice a year in Juneau to hear
cases as well. Unlike the U.S. Supreme Court or the supreme courts
of most states, Alaska's is not a "cert. court." Therefore,
whereas the U.S. Supreme Court may hear only one of every hundred
cases appealed to it, the Alaska Supreme Court must hear every
civil case appealed to it. The inability to manage the caseload by
just saying "no" is one reason for extensive delays from the time
a case is filed until an opinion is issued.
MR. CHRISTENSEN next discussed the court of criminal appeals, which
hears most criminal appeals that come up from the superior court.
Composed of three members stationed in Anchorage, it was created by
the legislature in the early 1980s, when the Alaska Supreme Court's
increasingly heavy caseload was causing tremendous delay. Although
there had been talk about expanding the supreme court to seven or
nine members, the legislature - working with the court system -
determined that would be inefficient. If someone writes an
opinion, all members get to debate it, and all review it, Mr.
Christensen pointed out, and the more members there are on a
committee, the more inefficient the committee becomes. Since the
legislature created the court of appeals almost 20 years ago,
several other states have looked at the Alaskan model and actually
reduced the size of their own supreme court and created an
intermediate court of criminal appeals.
Number 0768
MR. CHRISTENSEN directed attention to the superior court, Alaska's
court of general jurisdiction. Its 32 members are stationed in 13
cities; judges fly in to three additional cities, for a total of 16
superior court sites. They have exclusive jurisdiction over cases
involving felonies, juvenile delinquency, child protection and
domestic relations. Because of child custody and divorce issues,
those are the judges about whom legislators' constituents will
complain the most, Mr. Christensen noted. In looking at statistics
of violence in the courtroom, he has found the worst thing that can
happen to somebody is to have his or her kids taken away.
Nationally there are far more shootings, stabbings and beatings in
courtrooms during child custody cases than there are during felony
cases, he added.
MR. CHRISTENSEN next addressed the district court, Alaska's court
of limited jurisdiction, which has two types of judges. First,
there are 17 district judges in seven locations around the state;
their jurisdiction is civil cases under $50,000 in value -
including small claims cases - and misdemeanor criminal cases.
Second, there are 39 magistrates, who aren't officers of the state
but employees of the court system, hired at the pleasure of the
presiding judge; they can hear small claims cases and infractions,
and they can hear misdemeanor cases with the consent of the
defendant. In many parts of Alaska, Mr. Christiansen noted, the
local magistrate is the only representative of state government
other than the employee of the Department of Transportation and
Public Facilities who plows the runway. Furthermore, there are a
number of part-time magistrates who might work upstairs over the
general store, for example, 15 hours a week.
MR. CHRISTENSEN reported that last year these judges heard about
156,000 different cases, an increase of 5.5 percent over the year
before. The trend for the court system's caseload has been a
steady rise over the last decade.
Number 0914
MR. CHRISTENSEN noted that the Alaska Court System also includes
the administration under which he himself works. He commented that
separation of powers is not particularly efficient. For example,
the court system has to have its own personnel office, facilities
office, computer shop and so forth, as does the legislature.
MR. CHRISTENSEN pointed out two other small entities within the
judicial system. First, the Alaska Commission on Judicial Conduct
has an executive director and nine members: three judges, three
members of the general public, and three lawyers who have at least
ten years' experience practicing in Alaska. Second, the Alaska
Judicial Council is composed of three public members, three
attorneys and the chief justice; however, the chief justice only
votes in case of a tie. When there is a judicial vacancy, the
Alaska Judicial Council takes applications from lawyers, evaluates
their professional qualities, then sends a list of nominees to the
governor for selection. The council also collects information from
lawyers, police officers and jurors about the qualifications of a
judge who is standing for retention.
Number 1011
CHAIRMAN KOTT noted that the committee has several matters before
it dealing with selection, election or appointment of judges. He
requested confirmation that the court system wouldn't be supportive
of electing judges or other members of the judiciary.
MR. CHRISTENSEN agreed that several proposed constitutional
amendments would affect the manner in which judges are selected.
He then explained that looking at the trend over the last 200
years, the method of selection of federal judges has always been
the same: they are appointed by the President, without regard to
qualifications beyond their being an attorney, and then it goes to
the U.S. Senate for confirmation. This is the pure form that the
framers of the federal constitution set up.
MR. CHRISTENSEN continued. As states began adopting their own
constitutions, most adopted this federal method. As time went on,
however, people in control - those making up the majority of a
state - frequently resented that an institution was charged with
protecting the rights of the minority and individuals. Therefore,
most states changed over to an electoral system. Judges became
elected officers, just like legislators. They ran in contested
elections and became yet another majoritarian body.
MR. CHRISTENSEN noted that around the 1940s, things started
swinging back, settling not on the federal model but on the so-
called Missouri Plan, which was a happy medium. Under this system,
a list of nominees goes to a governor, based on merit. From that
list, the governor has to pick one person, who is appointed to the
bench. Then, every so many years, the voters have a chance to vote
"yes" or "no" as to whether they are comfortable with that judge.
Missouri was the first state to adopt the plan, and Alaska was the
second. Now about a third of the states use it, and Alaska is
actually looked to as a model by these other states. Alaska has
the most comprehensive retention elections anywhere, Mr.
Christensen noted, and more information is provided to the voters
than in any other state.
MR. CHRISTENSEN expressed confidence that Alaska's current system
of selection is working quite well. He suggested that attorneys
practicing in Alaska over the last 30 years would almost uniformly
say the quality of judges on the bench today is head and shoulders
above what it was 20 or 30 years ago.
Number 1177
CHAIRMAN KOTT referred to a conference in Washington to be held
March 2 - 3 regarding judicial selection. He asked whether anyone
from the Alaska Court System would be attending that.
MR. CHRISTENSEN offered to find that out. In response to another
question, he said the Alaska Supreme Court's twice-yearly visits to
Juneau used to be more frequent, but the caseload in Juneau has
been decreasing. The court also has been attempting to use some
video networking to try to hear cases in various places, simply to
make it more convenient for litigants and attorneys around the
state, so they don't have to fly to one of the three major cities.
CHAIRMAN KOTT mentioned a meeting in Anchorage a couple of months
ago regarding electronic filings. He asked Mr. Christensen to
briefly summarize that discussion and the direction that the Alaska
Court System is going.
Number 1251
MR. CHRISTENSEN answered that electronic filing of court documents
is the future. Unfortunately, for the Alaska Court System it is
still a good ways away. Right now all court documents are filed in
paper form: a person brings them to the courthouse, and if the
document requires a filing fee, the person also brings a check.
Outside Alaska, several court systems - mostly very small county
courts or some low-volume federal courts - allow both filing
documents and paying filing fees electronically over the Internet.
Obviously, this is a tremendous convenience to lawyers and
litigants. If it works properly, it can also help the state
because it might reduce staffing requirements. In Alaska, however,
it will be a number of years before that can be done.
MR. CHRISTENSEN reminded members that the Alaska Court System has
been the last of the three branches to be computerized; in fact,
they are still attempting to do so, and they are seriously behind
the curve in many areas. This year, for the first time, they have
a capital budget request for a comprehensive case management
system, which will be the first piece needed to make electronic
filing a reality a few years in the future.
Number 1375
REPRESENTATIVE ROKEBERG expressed distress at hearing about the
lack of a management information system (MIS). He suggested it
might have been a blessing to have the system computerized late,
however, as perhaps they would get better equipment or systems. He
asked what type of system the court has now.
MR. CHRISTENSEN agreed it was certainly a blessing in terms of so-
called Y2K, because the court system had bought most of their
equipment in the last four years, making sure as they did so that
it was Y2K-compliant. Therefore, they spent $107,000 making the
court system completely Y2K-compliant, only a tiny fraction of what
other branches of government were forced to spend. He noted that
equipment purchased in the last few years includes networking
personal computers (PCs) and servers that allow hooking into the
state's system; it is not yet a complete system. The main problem
is lack of software to do a comprehensive case management system.
They have a 20-year-old statistics accounting program, modified
over the years to do some very limited case tracking. Mr.
Christensen clarified that when he says "comprehensive case
management system," he means taking most of the information in a
case - who filed it, what it is about, what the judgment was,
whether or not a fine has been paid, and so forth - and entering it
into a computer.
MR. CHRISTENSEN pointed out that now that information is only on
paper, causing the court system problems but also causing data
entry problems in other state entities such as the Child Support
Enforcement Division (CSED) or the Alaska State Troopers. The
courts provide paper judgments, then the other agencies enter the
information into their own computers. Instead, the courts need a
system whereby they can enter information into their own computers
and have it automatically transmitted. They have been working on
this for several years, and the hardware purchased over the last
few years will make this work. This year, as the court system's
capital request, they are asking for money to actually purchase the
software that will make all of this come together.
Number 1487
REPRESENTATIVE ROKEBERG asked whether that software can be an off-
the-shelf purchase or must be written for the court system.
MR. CHRISTENSEN said that is an excellent question. The court
system started this about five years ago, when no off-the-shelf
software was available. He pointed out that every court system is
different, including the way cases are counted, the statutes, and
so forth; no one system will work exactly for every court system
without modification. The Alaska Court System had attempted to
work with a contractor to take something that existed commercially
but was designed for a county court system; however, that didn't
come to fruition, as the contractor "spent millions of dollars of
their own money and then threw up their hands in disgust."
MR. CHRISTENSEN pointed out that in the last two years, however,
several large comprehensive software packages have become available
that the court system believes would require very little
modification. They have already done all the groundwork to know
exactly what modifications they need. The court system believes
that over a two-year period it would require about $2.75 million to
design the software and then have it up and running in 50 different
courts; they will talk about that with the finance committees this
year.
MR. CHRISTENSEN noted that this would benefit more than the court
system. It would also provide the legislature the kinds of crime
statistics and tort reform statistics that they request, for
example, which cannot be provided now. Furthermore, it would
enable other agencies to do away with many data entry people. It
would be a positive solution for the state. Mr. Christensen
believes the whole system could be up and running in about two
years if the funding were received.
Number 1578
REPRESENTATIVE MURKOWSKI asked whether the rise in caseload applies
only to the district court. She requested a breakdown.
MR. CHRISTENSEN specified that the overall caseload for all courts
was up 5.4 percent. He indicated there was no rise in the superior
court caseload this year, for the first time in about five years,
whereas the district court caseload was up substantially.
REPRESENTATIVE MURKOWSKI noted that the jurisdictional limit for
small claims court had been raised, then suggested that wouldn't
have much impact, as it is lumped under district court anyway. She
said she was looking to see where the movement or activity is.
MR. CHRISTENSEN responded that the small claims caseload hasn't
increased tremendously since that time, although perhaps there has
been a shift from district court to small claims court. When the
small claims jurisdiction was raised several years ago, the courts
went back through their records; although numbers of small claims
cases had repeatedly gone up and down, they couldn't pin it on
anything specific. Many things seem to affect small claims court,
and the court system isn't even sure what they all are. However,
they see a definite slow upward trend in everything over the last
decade, while budgets are going down. "We've made a number of
changes in the last two years to do things more efficiently, but
we're still treading water," he concluded.
CHAIRMAN KOTT asked if there were further questions, then thanked
Mr. Christensen. He called a brief at-ease at 1:45 p.m. [End of
Tape 00-1.]
HB 220 - COMMUNITY PROPERTY AGREEMENT/TRUSTS
TAPE 00-2, SIDE A
Number 0001
CHAIRMAN KOTT called the meeting back to order at 1:46 p.m.,
announcing that the next item of business would be HOUSE BILL NO.
220, "An Act relating to the amendment and revocation of spouses'
community property agreements and community property trusts; and
providing for an effective date." He noted that Representative
Croft had joined the meeting some time ago. He then called upon
Lesil McGuire to explain the bill.
Number 0078
LESIL McGUIRE, Legislative Assistant to Representative Pete Kott,
Alaska State Legislature, serving as Committee Aide to the House
Judiciary Standing Committee, elaborated on the written sponsor
statement for HB 220. She explained that the Alaska Community
Property Act (ACPA) is based on the Uniform Marital Property Act
(UMPA). Among many features shared by the two is a provision
enabling a married couple to make a non-testamentary disposition
under the community property agreement or trust. In addition, the
ACPA provides that such instruments may not be amended or revoked
unless the agreement or trust itself provides for revocation on a
particular date or upon the occurrence of a particular event, or
unless the agreement is amended or revoked by a later community
property agreement or trust. That is the language now.
MS. McGUIRE explained the problem: the provision may lead to an
argument that the spouses made a completed taxable gift to the
residual beneficiaries of the trust or agreement. This exact
scenario occurred in Pyle v. United States, a 7th Circuit case;
although Pyle isn't binding on Alaska, the concern is that it may
lead to a similar result in the 9th Circuit because Alaska's
language is based upon the UMPA as well. In Pyle, the court ruled
that because the surviving spouse could not change the will after
the death of her husband, she in effect made a taxable gift to the
residuary beneficiaries who would inherit after the surviving
spouse's death. As a result, federal [gift] tax was payable at the
death of the first spouse, which otherwise would have been deferred
to the time of the second spouse's death.
MS. McGUIRE advised members that because Pyle - an Illinois case -
was controlling in Wisconsin's 7th Circuit, the Wisconsin
legislature became concerned and amended its own community property
statute, which was almost identical to Alaska's. The amended
language created a default rule that enables a spouse to
unilaterally amend a community property agreement with respect to
property to be disposed of at the death of the surviving spouse.
MS. McGUIRE noted that the language in HB [220] is similar to that
enacted by Wisconsin. Together, the amendments ensure that if a
community property agreement or trust provides for the non-
testamentary disposition of property, without probate, at the death
of the second spouse, the surviving spouse may amend the community
property agreement or trust with respect to the property to be
disposed of at his or her death, unless the agreement or trust
specifically provides otherwise. Rather than being a bill of
policy, HB 220 is a bill of technicality, addressing possible
problems. Some legislatures are responding to cases that tend to
have a result in opposition to the policy of the UMPA. This
language just clarifies the intent that the property should not be
a taxable gift.
Number 0430
REPRESENTATIVE MURKOWSKI asked whether this has been brought before
the Alaska courts for interpretation.
MS. McGUIRE said no.
Number 0451
REPRESENTATIVE CROFT expressed his understanding that the ACPA was
a tax-avoidance or tax-planning scheme whereby one could designate
a piece of property as community property; therefore, when one
spouse died, there was a step up in basis without its being a
taxable event. He suggested its main advantage is there. He asked
what the catch of Pyle is.
MS. McGUIRE agreed with Representative Croft, saying that is the
goal. There wasn't meant to be any taxable consequence to this
language. In fact, it doesn't appear Pyle has been a major
controversy out there. The language in the UMPA remains the same,
identical to Alaska's language and to the language that was in
Wisconsin's statute. The question is: Does it leave the door
open?
MS. McGUIRE explained that as Pyle is interpreted, when one spouse
dies and there is an automatic transfer to the surviving spouse, if
the language is not open to his or her amending it in any way, it
is making a concrete gift to those residual beneficiaries; that is
because there is nothing meaningful the spouse can do within his or
her lifetime to alter that. In effect, it vests, and there is a
gift taxation associated with that. Really all this does is add
language saying the surviving spouse can amend that community trust
or agreement if he or she so chooses. Consequently, a court
doesn't have room to say the gift has vested, because there is
always the chance that the surviving spouse might change that
language.
Number 0607
REPRESENTATIVE CROFT asked whether the surviving spouse could amend
it in any way - including beneficiaries, for example - if that
isn't prohibited in the trust agreement, and if it fits this
category.
MS. McGUIRE affirmed that as the language reads, there is room for
that; it doesn't put any categorical restrictions on it. However,
it does say "unless the community property agreement expressly
provides otherwise," a limiting device.
REPRESENTATIVE CROFT suggested that is within Pyle. [Comment
indiscernible because of overlapping speech.]
MS. McGUIRE replied, "To a degree." She noted that in Pyle, the
will itself was narrow, providing only for her [Pyle's] comfort,
enjoyment and health, a kind of provision where she really had no
room to invest or dispose of the property unless she went to the
court.
REPRESENTATIVE ROKEBERG suggested it was like a life estate.
MS. McGUIRE agreed, adding that even though it didn't start out
that way, the court said it was, in effect, a life estate. This
language just adds protection so a person won't be in a judicial
trap of having it interpreted as a life estate.
REPRESENTATIVE CROFT suggested the goal is to provide authority for
not just any amendments, but rather those that could fix the
problem. Here, however, the spouse could make any type of
amendment at all.
MS. McGUIRE pointed out that there are some qualifiers: it is a
community property agreement, it is a non-testamentary disposition
of property, probate is not provided, and it is at the death of the
first spouse. It is up to the committee if they want to narrow
that language further.
Number 0838
ERIC KUEFFNER, Attorney at Law, Faulkner Banfield, PC, came forward
on his own behalf. He agreed with Representative Croft that the
purpose of the ACPA was to give people certain options. This
amendment maintains those options against the possibility that they
might be foreclosed in a way that wasn't anticipated when the
statute was first passed.
Number 0866
REPRESENTATIVE ROKEBERG asked whether one of the concepts of
community property isn't to pass on property, with an accelerated
basis, to the spouse without restriction. He asked how it can be
community property if there are restrictions. He further asked
whether it is correct that people wanting restrictions would use
another type of trust agreement.
MR. KUEFFNER replied, "Yes and no." Although he hadn't actually
done one of these agreements yet, he added, he would advise a
client that if the client wants the advantages that other states
have of community property here, the client could declare certain
property as community property to get those advantages. Yes, there
are other methods to achieve some of these same ends, but it the
basis change that is really the best thing about the ACPA.
REPRESENTATIVE ROKEBERG suggested that notwithstanding the federal
spousal exemption, there would be a basis adjustment upon the death
of one's spouse but for a community property scenario.
MR. KUEFFNER concurred.
REPRESENTATIVE ROKEBERG referred to Ms. McGuire's testimony. He
asked whether, with a spousal exemption, there is a gift tax.
MR. KUEFFNER responded that at the risk of misinterpreting what Ms.
McGuire was suggesting, the gift tax in Pyle was imposed because
the gift was deemed to be made to the residual beneficiaries, not
to the spouse. The "middle man" - a woman in the case of Pyle -
has no say over that. Mr. Kueffner agreed there is a marital
exemption. He said he believed he had looked at Pyle, but not
recently.
Number 1052
REPRESENTATIVE CROFT suggested in Pyle it was so restricted to the
wife that it was, in effect, nothing but place holding - a life
estate. It was a completed gift to the ultimate beneficiaries.
MR. KUEFFNER specified that that is what the court said. To his
knowledge, no court in Alaska has interpreted it that way.
However, there is the risk that some might.
REPRESENTATIVE CROFT suggested it is created by people who try to
tie the hands of the spouse. If the agreement is a simple
community property designation, then the surviving spouse has what
was community property, a stepped-up basis, now as his or her sole
property. He said it is only this "string-tying thing" that causes
a problem.
MR. KUEFFNER agreed that is what got them in trouble in Pyle.
REPRESENTATIVE CROFT suggested what is needed, then, as far as the
ability to go back and amend, is to fix that. He proposed that Mr.
Kueffner could suggest language there that talked about what could
be amended.
MR. KUEFFNER said he isn't a bill drafter, then agreed this could
be made much more narrow, restricted to precisely what they are
talking about here. However, he would recommend against that,
because who knows what a court might think later on about something
done in the effort to avoid a completed tax upon creating this?
REPRESENTATIVE CROFT said that is a good point. He clarified that
he wasn't implying that Ms. McGuire or the drafter had done
anything wrong, but rather that there are other options to explore.
He asked why this includes the language "unless the community
property agreement expressly provides otherwise." He also asked
whether they shouldn't say instead, in essence, "notwithstanding
the community property agreement, you can."
MR. KUEFFNER returned to his basic point: The idea of the uniform
community property Act is to give people options, including the
opportunity to do an agreement that isn't going to be altered by
the surviving spouse.
Number 1196
REPRESENTATIVE CROFT asked whether the agreement in Pyle, in
addition to listing restrictions, said it couldn't be amended. He
further asked, "If it did, we wouldn't be solving the Pyle problem,
right?"
MR. KUEFFNER replied that he doesn't know whether Pyle had a
restrictive clause. It could well be that this wouldn't fix that
problem, he added.
REPRESENTATIVE CROFT suggested in that case it would seem better to
have it broader in the first part and more narrow in the second.
In other words, they would allow somebody the ability only in this
specific situation, regardless of what it said. He mentioned
removing the language "unless the community property agreement
expressly provides," but having the only cure be in this one narrow
area.
Number 1322
REPRESENTATIVE MURKOWSKI pointed out that Pyle was a 1985 case, and
that the Wisconsin legislature has subsequently enacted legislation
to deal with it. She asked if there have been further challenges
or tests to this, so Alaska's legislators can know whether the
proposed language is sufficient or needs to be narrowed further, as
Representative Croft is suggesting.
MR. KUEFFNER indicated he doesn't know but surmises there haven't
been, because otherwise he would have heard of them. To his way of
thinking, Pyle is somewhat of an aberration against which this
legislation is guarding. In response to Representative Murkowski's
suggestion that this is precautionary or prophylactic legislation,
then, Mr. Kueffner agreed it is prophylactic.
Number 1336
REPRESENTATIVE ROKEBERG suggested possibly nobody has died under a
community property device in Alaska because of the newness of these
agreements to the state. He expressed curiosity about the effect
elsewhere. He then asked whether it is possible, under a normal
community property situation, to will part of a title in a property
or estate to a party other than the surviving spouse.
MR. KUEFFNER said the simple answer is no. Community property is
for spouses. A person wanting to do an arrangement with someone
other than a spouse must use something else. However, there can be
a residual beneficiary of the community property; for example, in
Pyle, the wife was the primary beneficiary and the children were
the residual beneficiaries.
Number 1449
REPRESENTATIVE ROKEBERG posed a scenario in which someone comes to
Mr. Kueffner's office requesting that he do this type of estate
planning. He asked if the community property arrangement and
agreement would be part of that person's will, or if the wills
would be separate.
MR. KUEFFNER said it could be done in a variety of ways. However,
he himself would normally do the agreement and the will
separately. He would specify the property to be designated as
community property, then do an agreement regarding that, and so
forth. Although it could be part of the will, he wouldn't
recommend it because it could be confusing.
REPRESENTATIVE ROKEBERG asked if most trust-type estate plans
aren't within the will itself.
MR. KUEFFNER said no, then explained:
If I do a living trust, then the whole ball of wax is in
the trust. And then we do what's called a pour-over will
that says anything that I forgot goes into the trust.
So, you're right that most of the details and the nuts
and bolts will be in the trust, but it will not actually
be the will itself.
MR. KUEFFNER added that it is possible to put it all in one place.
Restating that he hasn't done one yet, although he has talked to
people about doing them, he said it is specialized, for someone
with a certain kind of property for which there is a desire to get
this basis straightened out. It is specific, not over-arching like
a trust, which would apply to everything a person owns.
Number 1607
STEPHEN GREER, Attorney at Law, testified via teleconference from
Anchorage, noting that Dave Shaftel was responsible for drafting
this. Approximately a year ago, he and Mr. Shaftel had spent
months writing a definitive article on the Alaska Community
Property Act, which was published in the most prominent estate
planning journal nationwide; Mr. Greer suggested they could
therefore answer members' questions and resolve some of the
confusion. He emphasized that HB 220 is really just a technical
amendment. The problem in Pyle won't occur in 99.9 percent of
trusts drawn. However, Mr. Shaftel had anticipated a problem if,
for some reason, a practitioner were to draft some strange sort of
trust. Mr. Greer deferred to Mr. Shaftel for further discussion.
Number 1691
DAVID SHAFTEL, Attorney at Law, testified via teleconference from
Anchorage, noting that he practices estate planning in Anchorage,
where a group of attorneys have been working on proposed
legislation that they believe would help both Alaska residents and
nonresidents who desire to use various types of Alaska trusts. He
explained that the ACPA is implemented by either a community
property agreement - which only can be entered into by Alaska
residents - or by a community property trust, which can be entered
into by Alaska residents or nonresidents.
MR. SHAFTEL noted that community property is owned half-and-half,
under a sharing system where each spouse has equal ownership and
often equal rights. While both spouses live, if a community
property trust is used, they can amend that trust at any time.
"That's what you want to allow," he told members. Mr. Shaftel
explained that the other nine states with community property
systems use community property trusts, called joint revocable
trusts. The two spouses, together, can amend those trusts anytime
they want. If they are using wills, after one dies, the property
of the first spouse to die is controlled by that spouse's will. If
they are using a community property trust that is a joint revocable
trust, there will be a dispositive plan for the one-half of the
community property that belonged to the first spouse to die; often
that goes into a bypass trust and a so-called Q-TIP trust [a trust
to which qualified terminable interest property is transferred for
purposes of taking a marital deduction].
MR. SHAFTEL explained that the surviving spouse's one-half of the
property continues to be that spouse's property. That is where
attorneys want the surviving spouse to have the ability to amend
that trust, anytime he or she wants. That is allowed in every
other community property state. The UMPA has only been enacted in
one other state, he noted, which is Wisconsin. Unfortunately, it
has a glitch, this language that says the agreement can only be
amended on a particular date, or upon the occurrence of a
particular event.
MR. SHAFTEL reported that typically agreements drafted by most
practitioners would include the following: "When both spouses are
alive, they both can amend the agreement. When one spouse has
died, ... the surviving spouse can amend it as to his or her one-
half of the community property." That wouldn't apply to the
decedent's one-half of the property, Mr. Shaftel pointed out.
Unfortunately, with this awkward language about a particular date
or on the occurrence of a particular event, an argument can be made
that the surviving spouse could not amend the agreement, if the
agreement provided power to amend but didn't key it to a particular
date or the occurrence of a particular event. Similarly, when both
spouses are alive, that same awkward, overly restrictive language
should not be in there because an argument could be made that the
spouses couldn't amend the agreement.
Number 1865
MR. SHAFTEL advised members that this has broader implications
beyond just the Pyle case. It reflects on whether there is
community property in Alaska, because typically either spouse -
when both are alive - can withdraw any or all property from a
community property trust. Although it remains community property
in that spouse's hands, either spouse can do that. That is one
requirement for a valid community property trust under the Internal
Revenue Service (IRS) procedures.
REPRESENTATIVE CROFT told Mr. Shaftel, "Okay, Dave, I give up."
MR. SHAFTEL continued, however. Similarly, he said, this overly
restrictive language could create the argument that when the first
spouse died, that surviving spouse could not change the disposition
of his or her property. He stated:
And if they're locked in, then what that means is they've
made a completed gift at that time, which really the
surviving spouse doesn't want to do. The surviving
spouse wants to have the ability to change that
dispositive plan for his or her property until he or she
dies, because her children, her grandchildren, the whole
situation - she may remarry and may well want to change
the disposition, or the dispositive plans, for her half
of that property.
We are following here, exactly, the amendment that
Wisconsin came in, in 1985, and enacted in their statute,
which is our model. ... When we enacted this in 1997 -
and the practitioners like myself have to take the blame
for this - we did not catch this glitch. And since then,
when Steve [Greer] mentioned, when we were researching
for the article that we wrote, I researched the treatise
put out by the State of Wisconsin, their continuing legal
education program. And they describe, very specifically,
how they had come across this glitch, how they had
corrected it. ... And that's what we're doing here. So,
it really is a technical amendment, ... but it's more
than that, in that it has some broad ramifications that
if we don't do it, we really are leaving a flaw in our
community property statute that the nine other states do
not have.
REPRESENTATIVE CROFT restated that he was giving up.
Number 1991
REPRESENTATIVE ROKEBERG asked Mr. Shaftel and Mr. Greer whether
they had had an opportunity to utilize the recently passed law to
enter into these types of community property agreements.
MR. SHAFTEL answered that a majority of his clients, who are either
reviewing their existing estate plans or creating new ones, are
adopting community property for part of their property. He said
they see the benefits, from not only the standpoint of income tax
but also the aspects of sharing and equality.
MR. GREER concurred, calling it a very important vehicle. He said
the fear here is that other states will become envious and try to
do the same thing. He concluded by saying it is a wonderful thing
for married couples to do.
REPRESENTATIVE ROKEBERG requested that Mr. Greer or Mr. Shaftel
provide the committee with copies of their law review article.
Number 2061
DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska
Trust Company, testified via teleconference from Anchorage in
support of HB 220, calling it a technical amendment and indicating
the desire to keep Alaska in the forefront for estate planning. He
referred to the Phillip E. Heckerling Institute on Estate Planning,
an annual conference held in Miami, Florida. Indicating that more
than 2,700 participants had attended recently, and that a program
there had drawn a lot of interest from nonresidents, he suggested
it is important to clarify any possible ambiguities in order to
receive substantial business. "We've received hundreds of Alaska
trusts from outside of Alaska the last couple of years," Mr.
Blattmachr stated, "and we think we'll receive as many community
property trusts if the law is clarified and there isn't this
concern."
Number 2101
REPRESENTATIVE ROKEBERG asked Mr. Blattmachr how business activity
in the legal community has been affected by the series of trust
bills enacted by the legislature over the last few years.
MR. BLATTMACHR indicated response has been positive from both the
trust company community and the legal community. So far, about 300
trusts have been set up in the last two years, the bulk of which
came from outside of Alaska. He told members:
We've received substantial business, and a lot of
attorneys have reviewed those trusts or had relationships
with outside counsel. So, it's been very positive, and
it just continues to build all the time. We were at that
conference, had a booth, and more and more people are
coming up and looking at Alaska as the premier
jurisdiction.
Just one of our problems is the fact that Delaware has
adopted similar legislation. It's not quite as clean as
Alaska's. But there's a tendency to want it to ... go to
Delaware, but we've been able to convince most of them
that Alaska is a better jurisdiction. And so, we think
this is going to develop into ... good business
opportunities for both lawyers, accountants, life
insurance agents, and a lot of life insurance sold to be
going to these Alaska trusts. It's been very positive.
Number 2174
CHAIRMAN KOTT asked if there were further questions, then closed
public testimony. He asked if there were comments from the
committee; there were none.
Number 2191
REPRESENTATIVE CROFT made a motion to move HB 220 from the
committee with individual recommendations and the attached zero
fiscal note. There being no objection, HB 220 was moved from the
House Judiciary Standing Committee.
HB 222 - LTD. PARTNERSHIPS AND LTD. LIAB. COMPANIES
CHAIRMAN KOTT announced the final item of business would be HOUSE
BILL NO. 222, "An Act relating to the remedies available to
judgment creditors against limited liability company members and
their assignees and against limited partnership general and limited
partners and their assignees; and providing for an effective date."
Number 2216
LESIL McGUIRE, Legislative Assistant to Representative Pete Kott,
Alaska State Legislature, serving as Committee Aide to the House
Judiciary Standing Committee, presented an overview based on the
sponsor statement for HB 222. She explained that limited
partnerships and limited liability companies are often used for
closely held businesses or investment activities. One key
advantage for structuring businesses under one of these forums is
that a partner can choose who will be his or her partner, and can
be certain that the venture will continue for the time period
agreed upon by the partners. If a creditor obtains a judgment
against a partner or member of the limited partnership or limited
liability company, the statutes provide that a creditor can obtain
a so-called charging order against the debtor's interests in that
business. This remedy allows the creditor to receive the
distributions to which the partner or member would be entitled.
MS. McGUIRE continued. The Alaska Statutes don't expressly provide
for any other remedy, she noted, a concept consistent with the
purposes behind these limited liability business formats. The
policy is to prohibit active disruption of other partners' business
interests, and to prevent partners or members from being forced
into taking on that judgment creditor as an unanticipated partner
or member. Alaska Statutes, with respect to the judgment debtor
remedies, have been clear and are consistent with the Uniform
Limited Partnership Act (ULPA). In fact, the ULPA charging order
codification attempted to remedy the uncertainty evident at common
law by protecting the integrity of the partnership itself, while
providing the creditor with some interest in the partnership and
some remedy.
MS. McGUIRE reported that recently, however, a Connecticut court
ruled that a judgment creditor of a limited liability partnership
interest could strictly foreclose on the partnership interest and
become an actual partner. Depending on the provisions of the
partnership agreement, a judgment creditor could then force a
dissolution of the entity or sale of its assets. Obviously, this
kind of result would be harmful to other partners, and it isn't
what was intended by the formation of a limited liability entity.
The proposed amendments in HB 222 clarify that a judgment creditor
has only the remedy of a charging order, and not that of a
foreclosure. The creditor will have the right to receive all
distributions to which the debtor or partner is entitled, but won't
be entitled to any other remedies. This clarification will serve
to insulate the law from judicial misinterpretation.
MS. McGUIRE noted that HB 222 is a technical modification, not one
of policy. The language clearly states that a judgment creditor
has only the rights of an assignee of the members' interests.
However, in light of concern about this Connecticut case - as well
as the potential for judicial misinterpretation - HB 222 emphasizes
and clarifies that the only judicial remedy that will be allowed is
a charging order. Ms. McGuire pointed out that the judicial
creditor has the remedy of any of the revenue due to that partner
or debtor. Such a creditor would not have the ability to foreclose
and then, in fact, become a partner.
Number 2362
REPRESENTATIVE MURKOWSKI expressed her understanding that this
issue has not yet been tested in Alaska's courts.
MS. McGUIRE affirmed that, adding that it is preventive or
proactive.
REPRESENTATIVE ROKEBERG asked Representative Murkowski whether this
is consistent with other, unspecified, legislation regarding the
Uniform Commercial Code (UCC).
REPRESENTATIVE MURKOWSKI said this is good, and it is consistent
with what they are doing.
Number 2394
ERIC KUEFFNER, Attorney at Law, Faulkner Banfield, PC, came forward
again to express support for HB 222. He said nobody ever thought
one could get anything more than a charging order from a limited
partnership, and this bill is intended to make sure that is clear.
Number 2408
DAVID SHAFTEL, Attorney at Law, testified again via teleconference
from Anchorage, saying he had worked on drafting language for HB
222, in consultation with a nationally known expert on limited
liability companies and limited partnerships who had recommended
the proposed language. Mr. Shaftel asked that members consider
passing this provision. He believes all practitioners have the
following expectation, and so advise their clients: when forming
these small business entities for their family businesses or their
closely held businesses, they can expect to choose with whom they
will do business, without being forced to dissolve the business or
to take in a partner or member - whom they hadn't contemplated -
because one of their partners has a creditor problem.
MR. SHAFTEL noted that it was a surprise nationally to see that
Connecticut case come out, and a very unexpected result. This
amendment says that kind of result cannot occur in Alaska; rather,
the expectations of the practitioners and the clients will be
preserved. He believes it is an excellent amendment that will
strengthen Alaska's law. It is also important from a business
standpoint, because many nonresidents who set up Alaska trusts will
also set up Alaska limited liability companies or limited
partnerships; they will expect the normal rules to apply, and this
will support that expectation.
Number 2460
STEPHEN GREER, Attorney at Law, testified again via teleconference
from Anchorage, saying he is in full accord with HB 222, which he
believes is very good legislation.
TAPE 00-2, SIDE B
Number 0001
DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska
Trust Company, testified again via teleconference from Anchorage,
in support of HB 222. He said it is an excellent amendment. It
will strengthen Alaska law and encourage people to use Alaska's
trust jurisdiction, which most practitioners throughout the country
are starting to realize is the premier jurisdiction.
Number 0049
CHAIRMAN KOTT, noting that no one else was on teleconference,
closed public testimony. He called an at-ease at 2:33 p.m., then
called the meeting back to order at 2:36 p.m.
Number 0058
REPRESENTATIVE ROKEBERG made a motion to move HB 222 from the
committee with individual recommendations and the attached zero
fiscal note(s). There being no objection, HB 222 moved from the
House Judiciary Standing Committee.
ADJOURNMENT
Number 0079
There being no further business before the committee, the House
Judiciary Standing Committee meeting was adjourned at 2:37 p.m.
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