Legislature(1999 - 2000)
05/12/1999 02:42 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE JUDICIARY COMMITTEE May 12, 1999 2:42 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman dSenator Dave Donley Senator Johnny Ellis MEMBERS ABSENT Senator John Torgerson Senator Rick Halford, Vice-Chairman COMMITTEE CALENDAR SENATE BILL NO. 162 "An Act relating to the rule against perpetuities, nonvested property interests, and powers of appointment; and providing for an effective date." -MOVED CSSB 162(JUD) OUT OF COMMITTEE SENATE BILL NO. 163 "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." -HEARD AND HELD SENATE BILL NO. 165 "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 SB 165 OUT OF COMMITTEE SENATE BILL NO. 166 "An Act relating to the amendment and revocation of spouses' community property agreements and community property trusts; and providing for an effective date." -MOVED SB 166 OUT OF COMMITTEE CS FOR HOUSE BILL NO. 177(HES) "An Act relating to foster parents; relating to the right of foster parents to have notice of, and testify at, delinquency hearings and to the disclosure of minors' records to foster parents; and amending Rules 3, 7, 10, 12, 21, 23, and 25, Alaska Delinquency Rules." -MOVED CSHB 177(HES) OUT OF COMMITTEE PREVIOUS SENATE COMMITTEE ACTION SB 162 - See Judiciary Committee minutes dated 5-3-99 and 5-11-99. SB 163 - See Judiciary Committee minutes dated 5-3-99 and 5-11-99. SB 165 - See Judiciary Committee minutes dated 5-11-99. SB 166 - See Judiciary Committee minutes dated 5-11-99. HB 177 - No previous Senate action. WITNESS REGISTER Steve Noye Alaska Trust Company 1029 W 3rd Ave. Anchorage, AK POSITION STATEMENT: Supports SB 163 Mr. Rich Hompesch 119 N. Cushman Suite 400 Fairbanks, AK 99701 POSITION STATEMENT: Testified in support of SB 162 and SB 163 Mary Ellen Beardsley Assistant Attorney General Department of Law 1031 W 4th Ave., Suite 200 Anchorage, AK 99501-1994 POSITION STATEMENT: Answered questions regarding SB 166 Representative Fred Dyson Alaska State Capitol Juneau, AK 99801-1182 POSITION STATEMENT: Sponsor of HB 177 ACTION NARRATIVE TAPE 99-32, SIDE A Number 001 CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 2:42 p.m. Present were Senators Donley, Ellis, and Chairman Taylor. The first order of business to come before the committee was SB 163. SB 163-TRUSTS AND TRUSTEES STEVE NOYE, Director of, and lobbyist for, the Alaska Trust Company, made the following comments. SB 163 contains corrections to the Alaska Trust Act. Most of the corrections have been taken from the Uniform Trust Act, and deal with modification and termination of trusts. The issue of most concern to committee members is the requirement to inform beneficiaries of the trust's registration. The Uniform Trust Act addresses that issue by stating "the result of this limitation is that the information need not be furnished to beneficiaries with remote, remainder interests." That is why the term "current beneficiaries" was used to distinguish that beneficiaries who are immediately to receive funds must be notified. Beneficiaries with remote, remainder interests are any people that may receive funds in the future, i.e. children, grandchildren, great-grandchildren. If minors were required to be informed, the court could appoint a guardian ad litem to represent the minor for up to 21 years, at the expense of the trust. SENATOR DONLEY noted he disagrees with the concept that the requirement to notify future beneficiaries of trusts should be eliminated. He said he believes they deserve to be notified unless they are specifically excluded from notification in the trust document. Number 065 MR. NOYE said to Senator Donley the crux of the matter is how a trustee could go about notifying people who have not yet been born. SENATOR DONLEY remarked SB 163 changes current law which has been in existence for quite awhile. He asked when it was last changed. MR. NOYE said the law has not been changed, however when the Legislature enacted the Alaska Trust Act, the lifetime of a trust was affected by the elimination of the rule against perpetuities, which, in Alaska, was 90 years. CHAIRMAN TAYLOR clarified that under the old Alaska Trust Act, the trustee had to locate beneficiaries because it applied to 90 years plus lives in being. The grantor had to specify who those lives in being were to make the trust valid or it would fail in less time. Usually, a grantor would name the youngest grandchild to maximize the trust's duration; the trust could exist for 90 years after the youngest grandchild's death. Now, with the abolishment of the rule against perpetuities, the trust can last forever. SENATOR DONLEY noted he has no problem with SB 162, SB 165 and SB 166, but his concerns about SB 163 remain. He suggested putting SB 163 aside. CHAIRMAN TAYLOR agreed and announced SB 162 to be up for discussion. He informed committee members a proposed committee substitute had been prepared and explained the changes as follows. On page 2, language on lines 22-25 was rewritten for the purpose of clarification. SENATOR ELLIS moved to adopt the proposed committee substitute (work draft Bannister, 5/12/99) as the working document of the committee. There being no objection, the motion carried. Number 135 RICH HOMPESCH, a Fairbanks attorney, explained the language on page 2, which also appears on page 3, lines 1-3, was rewritten because it said, "a general power of appointment is invalid unless...." The new language clarifies that under existing law, powers of appointment that were created after January 1, 1996, up until the passage of this bill, cannot be changed. CHAIRMAN TAYLOR noted that provision applies to the window of opportunity in which trusts were created during that time period. MR. HOMPESCH indicated the same change appears on page 2, lines 12- 13. SENATOR DONLEY asked for a brief description of the contents of CSSB 162(JUD). MR. HOMPESCH stated prior to the Alaska Trust Act, Alaska law limited the duration of a trust to a life in being plus 21 years, which was eventually changed to 90 years. The Alaska Trust Act provides that if a trustee pays the income or principal to a living person when the trust is created, the duration can be forever. This bill eliminates the requirement that the income or principal be paid out to a living person when the trust is created before the trust can be perpetual so that charitable lead trusts, in which the income of the trust is paid to a charitable organization rather than a live person, can exist in perpetuity. Number 197 SENATOR ELLIS moved CSSB 162(JUD) from committee with individual recommendations. There being no objection, the motion carried. Number 208 SB 165-LTD PARTNERSHIPS AND LTD. LIAB. COMPANIES MR. RICH HOMPESCH, a Fairbanks attorney, explained SB 165 provides that creditors of a limited partnership, or creditors of a member of an LLC, have only one remedy when seeking to attach the member or the limited partner's interest in the entity. That remedy is a charging order. Most people interpreted the law that way, however, a recent Connecticut court decision allowed a creditor to foreclose on the member's, or the limited partner's, interest. That creates a hardship to the other members of the limited liability company or the limited partnership because they suddenly have a new partner, which in most cases is very detrimental to the business. SENATOR DONLEY asked what a charging order is. MR. HOMPESCH replied a charging order gives the judgment creditor the right to receive all of the distributions that would have otherwise been paid to the member or the limited partner. SENATOR DONLEY said it sounds like an assignment of interest. CHAIRMAN TAYLOR indicated it is the same thing. CHAIRMAN TAYLOR asked what rights the change in the law would give to the creditor. MR. HOMPESCH answered the creditor will receive all of the distributions from the limited liability company or the limited partnership. CHAIRMAN TAYLOR asked if the creditor would be able to force a sale or liquidation. MR. HOMPESCH said that is correct. SENATOR DONLEY asked if all distributions go to the creditor. MR. HOMPESCH explained if each of four partners had a 25 percent interest, and one partner had a creditor with a charging order, 25 percent of the distributions would be paid to the creditor. SENATOR DONLEY moved SB 165 from committee with individual recommendations. There being no objection, the motion carried. SB 166-COMMUNITY PROPERTY AGREEMENT/TRUSTS CHAIRMAN TAYLOR informed committee members the Legislature passed legislation two years ago that gave spouses the right to elect to enter into a community property agreement for their trusts or estates. MR. STEVE NOYE, director of, and lobbyist for, the Alaska Action Trust, told committee members a Wisconsin court recently claimed the transfer was a gift, as opposed to allowing the double step-up in basis, which is a tax free exchange. SB 166 will prevent a court from claiming that a transfer is a gift as opposed to a non- taxable transfer. SENATOR DONLEY asked Mr. Noye what transfer he was referring to. CHAIRMAN TAYLOR noted the bill refers to a transfer of property upon death. MR. NOYE stated community property states have a double step-up in basis, meaning when one spouse dies, the whole estate is revalued at current market value in a separate property estate, only the decedent's part of the estate is stepped up to current market value and the surviving spouse pays whatever the original basis was. SENATOR DONLEY questioned whether that is determined by federal tax law. MR. NOYE said that is correct. CHAIRMAN TAYLOR asked if the federal tax law is controlled by the state's interpretation of the definition of the property. MR. NOYE said that is correct. CHAIRMAN TAYLOR asked if, under Alaska law, the deceased partner's portion of the estate is evaluated at the date of death at the stepped up basis and then is conveyed to the spouse; the spouse's basis remains the same until she dies, at which time the basis is stepped up before it is conveyed, resulting in a higher tax rate for the heir. Number 303 MARY ELLEN BEARDSLEY, Department of Law, said that is correct, assuming the party held on to the property all of this time. CHAIRMAN TAYLOR noted if the surviving spouse sold the property, he/she would not have to pay a lot of capital gains taxes. MS. BEARDSLEY indicated that SB 166 will allow the surviving spouse to amend the community property agreement only as it pertains to the property she placed into the agreement. MR. HOMPESCH agreed with Ms. Beardsley and said SB 166 does allow the surviving spouse to make changes to her half of the trust or the community property agreement. CHAIRMAN TAYLOR said he thought that if the spouse did not have that ability, he/she would be violative of the holding in the tax court. SENATOR DONLEY moved SB 166 from committee with individual recommendations. There being no objection, the motion carried. Number 371 HB 177-FOSTER CARE & DELINQUENT MINORS REPRESENTATIVE FRED DYSON, sponsor of HB 177, informed committee members HB 375 passed the Legislature in the last hours of the session. An amendment to HB 375 to allow foster parents access to the criminal and behavior records of foster children, a place at the table when treatment plans are being developed, and a voice in court was adopted but inadvertently applies to Child In Need of Aid children only, not to delinquent children. CHAIRMAN TAYLOR asked Representative Dyson if there is anything he dislikes about the bill. REPRESENTATIVE DYSON said no. SENATOR ELLIS moved CSHB 177(HES) from committee with individual recommendations. There being no objection, the motion carried. There being no further business to come before the committee, CHAIRMAN TAYLOR adjourned the meeting at 2:05 p.m.