Legislature(2019 - 2020)BELTZ 105 (TSBldg)

02/28/2020 01:30 PM JUDICIARY

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Audio Topic
01:32:47 PM Start
01:33:37 PM SB191
02:37:27 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 191 TRUSTS, TRUSTEES, COMMUNITY PROPERTY TELECONFERENCED
Heard & Held
+= SB 192 FIDUCIARY'S ALLOCATION OF CAPITAL GAINS TELECONFERENCED
Scheduled but Not Heard
-- Public Testimony --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE JUDICIARY STANDING COMMITTEE                                                                             
                       February 28, 2020                                                                                        
                           1:32 p.m.                                                                                            
                                                                                                                                
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator John Coghill, Chair                                                                                                     
Senator Peter Micciche, Vice Chair                                                                                              
Senator Shelley Hughes                                                                                                          
Senator Jesse Kiehl                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Lora Reinbold                                                                                                           
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
SENATE BILL NO. 191                                                                                                             
"An  Act  relating  to  trusts   and  trustees,  including  trust                                                               
division, the  powers of trustees,  delayed gifts to  trusts, and                                                               
community property trusts; and providing for an effective date."                                                                
                                                                                                                                
     - HEARD & HELD                                                                                                             
                                                                                                                                
SENATE BILL NO. 192                                                                                                             
"An Act relating to fiduciary discretion and the allocation of                                                                  
capital gains to income under the Alaska Principal and Income                                                                   
Act."                                                                                                                           
                                                                                                                                
     - SCHEDULED BUT NOT HEARD                                                                                                  
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: SB 191                                                                                                                  
SHORT TITLE: TRUSTS, TRUSTEES, COMMUNITY PROPERTY                                                                               
SPONSOR(s): SENATOR(s) COGHILL                                                                                                  
                                                                                                                                
02/14/20       (S)       READ THE FIRST TIME - REFERRALS                                                                        
02/14/20       (S)       JUD                                                                                                    
02/26/20       (S)       JUD AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
02/26/20       (S)       Heard & Held                                                                                           
02/26/20       (S)       MINUTE(JUD)                                                                                            
02/28/20       (S)       JUD AT 1:30 PM BELTZ 105 (TSBldg)                                                                      
                                                                                                                                
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MATTHEW BLATTMACHR, President & CEO                                                                                             
Peak Trust Company; President                                                                                                   
Alaska Trust & Estate Professionals                                                                                             
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions during the  hearing on SB
191.                                                                                                                            
                                                                                                                                
AIMEE BUSHNELL, Staff                                                                                                           
Senator John Coghill                                                                                                            
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Presented  a  white  paper   and  answered                                                             
questions during the hearing on SB 191.                                                                                         
                                                                                                                                
ABIGAIL O'CONNOR, Attorney                                                                                                      
O'Connor Law, LLC; Vice President                                                                                               
Alaska Trust & Estate Professionals                                                                                             
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions during the  hearing on SB
191.                                                                                                                            
                                                                                                                                
JAMIE DELMAN, Attorney                                                                                                          
Shaftel Delman LLC                                                                                                              
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered questions during the  hearing on SB
191.                                                                                                                            
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:32:47 PM                                                                                                                    
CHAIR  JOHN   COGHILL  called   the  Senate   Judiciary  Standing                                                             
Committee meeting  to order at 1:32  p.m. Present at the  call to                                                               
order were Senators Hughes, Micciche, Kiehl and Chair Coghill.                                                                  
                                                                                                                                
          SB 191-TRUSTS, TRUSTEES, COMMUNITY PROPERTY                                                                       
                                                                                                                                
1:33:37 PM                                                                                                                    
CHAIR  COGHILL announced  the consideration  of  SENATE BILL  NO.                                                               
191, "An  Act relating  to trusts  and trustees,  including trust                                                               
division, the  powers of trustees,  delayed gifts to  trusts, and                                                               
community property trusts; and providing for an effective date."                                                                
                                                                                                                                
CHAIR COGHILL said  the agenda for this hearing is  to respond to                                                               
the questions that  arose at the last hearing,  starting with Ms.                                                               
Bushnell who will review a white paper.                                                                                         
                                                                                                                                
1:34:49 PM                                                                                                                    
AIMEE  BUSHNELL,  Staff,  Senator   John  Coghill,  Alaska  State                                                               
Legislature, Juneau,  Alaska, explained that the  white paper the                                                               
Chair mentioned  relates to Alaska  Gift Trusts. It  was prepared                                                               
by the Alaska Trust and  Estate Professionals (ATEP), a nonprofit                                                               
organization  that works  to  present a  unified  voice for  many                                                               
trust and estate professionals in  Alaska. The white paper starts                                                               
with an  explanation that the  transfer tax system  is completely                                                               
separate from  income taxes  since these  gifts happen  after the                                                               
money has been earned and taxed.                                                                                                
                                                                                                                                
The gift  and estate tax  exemptions are unified.  Currently, the                                                               
exemption  is $11,580,000  per individual,  and the  tax rate  on                                                               
gifts  or inheritances  that exceed  $11,580,000  is 40  percent.                                                               
This is  historically high. In  1995, the exemption limit  was at                                                               
$600,000 and anything  that exceeded that figure was  taxed at 55                                                               
percent. In 1976, the allowable  estate tax exemption was $60,000                                                               
and everything  beyond that was  taxed at 77 percent.  On January                                                               
1, 2026, the estate tax  exemption will be reduced to $5,000,000,                                                               
indexed for  inflation. Federal  legislation has  been introduced                                                               
to  reduce  the exemption  further  to  $3,500,000 or  less.  The                                                               
exemptions  on  estate taxes  could  also  be  reduced by  a  new                                                               
administration in Washington, D.C.                                                                                              
                                                                                                                                
MS. BUSHNELL  said that under SB  191, families who expect  to be                                                               
affected by the  estate tax can take advantage  of this exemption                                                               
now, to  save their  children and  grandchildren estate  taxes in                                                               
the  future. Saving  estate tax  can help  preserve family  owned                                                               
businesses  and  ensure  that  one  generation's  wealth  can  be                                                               
preserved  for  the  benefit of  future  generations.  The  paper                                                               
provides several  scenarios to better  explain how this  can help                                                               
families  with  their  estate  planning   and  caring  for  their                                                               
descendants.                                                                                                                    
                                                                                                                                
The concept  of the  Alaska Gift  Trust is  that someone  makes a                                                               
written promise  to gift money.  That promise is  enforceable and                                                               
irrevocable,  although plenty  of safeguards  are built  into the                                                               
statute to  make sure a  person does not inadvertently  make such                                                               
an  irrevocable promise.  The promise  must  be satisfied  within                                                               
nine months  of the promisor's death,  but it may also  be filled                                                               
while the person is still alive.                                                                                                
                                                                                                                                
1:36:48 PM                                                                                                                    
MS. BUSHNELL said the white  paper reiterates the requirements in                                                               
the bill that  a number of specific steps need  to be followed to                                                               
use these  provisions in statute.  First, a person would  need to                                                               
create an  Alaska Gift  Trust, which must  be a  written document                                                               
stating  that  the  trust  is  a gift  trust  created  under  the                                                               
statute. The  trust must  deposit at least  $10,000 in  an Alaska                                                               
bank  account,  and at  least  one  trustee  must be  an  Alaskan                                                               
resident,  bank,  or trust  company  with  its primary  place  of                                                               
business  in Alaska.  Second, the  person must  sign the  written                                                               
promise,  include  an  express  reference  to  the  statute,  and                                                               
include a statement that the  trustee intends to be legally bound                                                               
by the promise, both of  which are safeguards against inadvertent                                                               
usage of  the statute.  The promise  is for  a certain  amount of                                                               
money, and  the terms of  the promise  require that the  money be                                                               
delivered to the  trust within nine months of  the person's death                                                               
or sooner. Third, the person  must deliver the written promise to                                                               
the trustee  of the trust. Once  the promise is delivered  to the                                                               
trustee and has  passed 180 days it becomes a  promissory note or                                                               
negotiable instrument.                                                                                                          
                                                                                                                                
She said [Section  4] of SB 191  is a new concept  that makes the                                                               
promise  of a  gift  "a negotiable  instrument."  This will  give                                                               
trustors, trustees,  attorneys, and  courts existing  statutes to                                                               
reference for  its application. The  white paper  lists scenarios                                                               
and examples to illustrate how the Alaska Gift Trust would work.                                                                
                                                                                                                                
MS. BUSHNELL said  the white paper goes on to  discuss the impact                                                               
on a  promisor's estate  after death as  well as  potential risks                                                               
and resolutions.                                                                                                                
                                                                                                                                
1:38:14 PM                                                                                                                    
CHAIR COGHILL  said the promise  of a  gift is not  necessarily a                                                               
contract, but a promise to give.                                                                                                
                                                                                                                                
1:38:27 PM                                                                                                                    
MATTHEW  BLATTMACHR, President  & Chief  Executive Officer,  Peak                                                               
Trust Company;  President, Alaska  Trust &  Estate Professionals,                                                               
Anchorage,  Alaska, stated  that in  its initial  form, the  gift                                                               
provision  is  an enforceable  promise  that  is executed  via  a                                                               
contract.                                                                                                                       
                                                                                                                                
1:38:49 PM                                                                                                                    
CHAIR  COGHILL asked  what national  discussion  has occurred  on                                                               
this new gift trust concept.                                                                                                    
                                                                                                                                
MR. M.  BLATTMACHR replied there  hasn't been much talk  about it                                                               
at  the state  or  national  level. While  there  is express  law                                                               
allowing it, no law expressly disallows it.                                                                                     
                                                                                                                                
CHAIR  COGHILL   summarized  that   this  structure   would  take                                                               
advantage of the  high tax limit on estate taxes.  There has been                                                               
a lot of  push back on inheritance taxes because  the money being                                                               
gifted  has  already been  earned  and  taxed. He  described  the                                                               
concept of gifting money to the next generation as reasonable.                                                                  
                                                                                                                                
1:40:28 PM                                                                                                                    
SENATOR HUGHES  asked if the concept  of a gift trust  started in                                                               
Alaska because it didn't sound  as though other states were doing                                                               
this.                                                                                                                           
                                                                                                                                
MR. M. BLATTMACHR agreed that the  promise of a gift provision is                                                               
not being done elsewhere. The  concept was created via the Alaska                                                               
Trust and Estates Professionals, so  it is an Alaskan concept. If                                                               
this  bill passes,  Alaska will  be the  only state  to expressly                                                               
allow this type of estate planning.                                                                                             
                                                                                                                                
SENATOR HUGHES commented  that she was pleased to  hear Alaska is                                                               
innovative.  She  asked if  this  provides  an advantage  to  the                                                               
state,  such that  people will  want to  set up  their trusts  in                                                               
Alaska.  She  further  asked  if  SB  191  will  help  the  state                                                               
economically.                                                                                                                   
                                                                                                                                
MR. M. BLATTMACHR  said he wished Alaska could  trademark some of                                                               
the  estate   and  trust  concepts   that  the   legislature  has                                                               
pioneered. Alaska is viewed as  an innovative state, particularly                                                               
in the trust and estate  industry. Competitor states watch Alaska                                                               
closely to  see what  estate laws are  introduced and  passed. He                                                               
offered his belief that other  states will copy Alaska's laws. In                                                               
further response, he  agreed there is definitely  an advantage in                                                               
passing SB 191 since it  will encourage Alaskans and non-Alaskans                                                               
to implement this type of estate planning in Alaska.                                                                            
                                                                                                                                
1:42:57 PM                                                                                                                    
SENATOR KIEHL  asked how the  IRS treats income  and appreciation                                                               
of community property.                                                                                                          
                                                                                                                                
MR.  M.  BLATTMACHR  replied  the   general  rule  for  community                                                               
property  is that  not only  the  principal, but  any income  and                                                               
interest  is community  property,  which was  the  intent of  the                                                               
original  community statute  passed  in Alaska.  It  is also  the                                                               
default  regime   [by  the  IRS]   and  all  other   states.  The                                                               
clarification in SB 191 to community  property is the result of a                                                               
court  decision  that the  Alaska  Trust  & Estate  Professionals                                                               
believes misinterprets the intent at  the state and federal level                                                               
because  it   separates  the  principal   from  the   income  and                                                               
appreciation. SB  191 would clarify  that the  principal, income,                                                               
and appreciation are all considered  community property. The bill                                                               
would give people the choice  to divide principal from income and                                                               
appreciation,   although  doing   so  is   not  common.   Several                                                               
practitioners in  the Alaska Trust  & Estate  Professionals group                                                               
have questioned  whether allowing that flexibility  might violate                                                               
the community  property regime. The  ultimate intent in  the bill                                                               
is  to  expressly  clarify  that  unless  a  person  specifically                                                               
declares that income and appreciation  is not community property,                                                               
the default rule is that it will be.                                                                                            
                                                                                                                                
1:45:33 PM                                                                                                                    
SENATOR KIEHL asked  if the IRS would allow a  person to make the                                                               
declaration  that  income  and   appreciation  is  not  community                                                               
property.                                                                                                                       
                                                                                                                                
MR. M.  BLATTMACHR said he was  unsure if the IRS  is "okay" with                                                               
that,  so  a person  would  want  to discuss  community  property                                                               
decisions  with his  or her  legal or  tax counsel.  However, the                                                               
bill currently provides an option to do so.                                                                                     
                                                                                                                                
1:46:19 PM                                                                                                                    
SENATOR  KIEHL  said  the  first paragraph  of  the  white  paper                                                               
indicates  the transfer  tax system  is completely  separate from                                                               
income  tax.  He  asked  if this  creates  any  implications  for                                                               
personal or corporate income taxes.                                                                                             
                                                                                                                                
MR. M. BLATTMACHR  answered no; the gift  provision allows people                                                               
to take  advantage of the  gift or  estate tax exemption,  but it                                                               
does not provide any particular personal income tax benefit.                                                                    
                                                                                                                                
1:47:25 PM                                                                                                                    
SENATOR  KIEHL  said  the statute  provides  that  the  surviving                                                               
spouse is entitled  to an elective share of the  estate, which is                                                               
about  one-third of  the augmented  estate. The  augmented estate                                                               
appears to include  the value of property  transferred through an                                                               
irrevocable    transfer.   He    read    [a    portion   of    AS                                                               
13.12.205(a)(2)(A)],  "an  irrevocable   transfer  in  which  the                                                               
decedent retained  the right to  the possession or  enjoyment of,                                                               
or  to the  income  from,  the property,?".  This  would seem  to                                                               
include  "the promise  of  a  gift." He  asked  if the  augmented                                                               
estate includes  the value of a  person's "promise of a  gift" to                                                               
include the  augmented estate  to which  the surviving  spouse is                                                               
entitled. If so,  he asked if the surviving  spouse would receive                                                               
this before or after the trust is paid.                                                                                         
                                                                                                                                
MR. M.  BLATTMACHR agreed that surviving  spouses receive special                                                               
protection  under  Alaska  law  related  to  the  estate  of  the                                                               
deceased spouse. He deferred further comment to Ms. O'Connor.                                                                   
                                                                                                                                
1:49:35 PM                                                                                                                    
ABIGAIL O'CONNOR,  Attorney, O'Connor  Law, LLC;  Vice President,                                                               
Alaska Trust  & Estate  Professionals (ATEP),  Anchorage, Alaska,                                                               
related  a  scenario  to  illustrate   how  she  and  Mr.  Delman                                                               
envisioned the  elective share  would work  once the  person dies                                                               
and the promise of a gift  becomes a claim against the estate. If                                                               
a person has assets of $10 million  in cash in his or her estate,                                                               
that cash is still part of  the augmented estate because it is an                                                               
asset of  the estate. However,  the net probate estate  that goes                                                               
into the augmented  estate is reduced by debts, so  it's almost a                                                               
wash. However, the white paper  cites another section of law that                                                               
says if the  transfer is made during the marriage  and within two                                                               
years preceding  death, [then the  spouse would be entitled  to a                                                               
portion of the  promised money if he or she  claimed the elective                                                               
share].                                                                                                                         
                                                                                                                                
CHAIR COGHILL asked her to cite the section.                                                                                    
                                                                                                                                
MS.  O'CONNOR replied  it is  AS  13.12.205(a)(3)(C). She  stated                                                               
that  the assets  that  the decedent  had would  be  part of  the                                                               
probate estate but  would be reduced by the promise  to arrive at                                                               
the  net probate  estate amount.  She  said it  is essentially  a                                                               
gift, but  it is also  a debt. The ATEP  does not think  that the                                                               
spouse would  be any worse off  than if the decedent  had made an                                                               
actual  transfer of  the cash  asset prior  to death.  Instead of                                                               
making  the promise  of  a gift,  if the  decedent  gave the  $10                                                               
million to  the trust  during his/her lifetime,  it would  not be                                                               
included in  the net probate  estate. If  it was made  within two                                                               
years  before death  it  would  come into  the  estate under  the                                                               
surviving spouse  provision. In response to  whether the decedent                                                               
enjoys the rights  of property, the answer is yes;  the assets in                                                               
the decedent's estate  are ones the decedent enjoys.  In terms of                                                               
the actual  promise of a gift,  the decedent does not  retain any                                                               
benefit since it is a debt, she said.                                                                                           
                                                                                                                                
SENATOR KIEHL  commented that the surviving  spouse provision did                                                               
not make him feel any more comfortable.                                                                                         
                                                                                                                                
1:53:10 PM                                                                                                                    
CHAIR COGHILL remarked  that a husband and wife  using the Alaska                                                               
Gift Trust should be cautious.                                                                                                  
                                                                                                                                
MR. M.  BLATTMACHR agreed.  He added  that if  one spouse  owns a                                                               
separate  asset, they  have the  ability to  gift it  by promise.                                                               
Under current  law, they  can gift the  asset in  actuality since                                                               
the surviving spouse has no right or claim.                                                                                     
                                                                                                                                
CHAIR  COGHILL  remarked  that  it  would  make  for  interesting                                                               
relationships.                                                                                                                  
                                                                                                                                
SENATOR KIEHL added that if the  gift was made while both spouses                                                               
were living, it might lead to interesting conversations.                                                                        
                                                                                                                                
CHAIR  COGHILL  asked  how a  surviving  spouse  would  currently                                                               
assert a  claim if the spouse  was excluded from a  large portion                                                               
of the estate or how the law would exclude the claim.                                                                           
                                                                                                                                
MS.  O'CONNOR  answered  that  it would  depend  on  whether  the                                                               
decedent retained any  interest. She related a  scenario in which                                                               
the decedent made  a gift to a trust for  children from his first                                                               
marriage and the  decedent retained no interest. If  it is within                                                               
two years prior  to his death, the gift would  become part of the                                                               
augmented estate. She didn't believe  the gift would go back into                                                               
the  estate  if  the  decedent  created the  gift  prior  to  the                                                               
marriage or  five years  prior to  his or  her death.  That's why                                                               
they're  saying the  spouse would  not be  in any  worse position                                                               
under the bill, she said.                                                                                                       
                                                                                                                                
1:55:59 PM                                                                                                                    
MS.  O'CONNOR advised  that estate  planners always  look at  the                                                               
effect on the  surviving spouse when gifting  strategies are part                                                               
of  the estate  plan. If  counsel represents  one party  and that                                                               
spouse gives  away assets to  his or  her children, but  does not                                                               
tell the  other spouse, it will  be a red flag  regardless of the                                                               
mechanism used  in the  estate planning. She  said the  bill does                                                               
not create any  more dangerous situation than  under current law.                                                               
If  counsel is  trying to  protect assets  from a  spouse, it  is                                                               
usually  done via  a post-nuptial  agreement and  each spouse  is                                                               
represented by counsel.                                                                                                         
                                                                                                                                
1:57:29 PM                                                                                                                    
CHAIR COGHILL  said the committee  members are  not practitioners                                                               
so they want  to be sure that community property  is managed such                                                               
that surviving spouses  are not left high and  dry by potentially                                                               
unscrupulous tactics.                                                                                                           
                                                                                                                                
1:58:12 PM                                                                                                                    
MS. O'CONNOR  clarified two points.  In response to  the question                                                               
about  whether the  Gift  Trust is  a contract,  she  said it  is                                                               
because it is  fully enforceable, but it is  different because in                                                               
a contract  each party  has usually given  something up.  This is                                                               
different; this trust does not  give anything in exchange for the                                                               
promise of  a gift,  but the  person making the  gift is  held to                                                               
that contract.                                                                                                                  
                                                                                                                                
1:59:30 PM                                                                                                                    
CHAIR COGHILL  said his  understanding is that  the promise  of a                                                               
gift turns into a debt to the estate once the person dies.                                                                      
                                                                                                                                
MS. O'CONNOR  replied the promise  of a  gift will become  a debt                                                               
immediately.  After 180  days, it  is treated  like a  promissory                                                               
note. She suggested  members think of the promise of  a gift to a                                                               
trust as an atypical contract.                                                                                                  
                                                                                                                                
2:00:04 PM                                                                                                                    
MS. O'CONNOR  turned to the  national discussion and  whether the                                                               
Alaska Gift  Trust is unique. She  said she was not  aware of any                                                               
other state  using this concept.  The theoretical concept  of the                                                               
promise of a  trust was first raised in an  article several years                                                               
ago by Austin  Bramwell [an adjunct professor of law  at New York                                                               
University  School  of  Law, attorney  at  Law,  Milbank,  Tweed,                                                               
Hadley  &  McCloy  LLP].  She   related  her  understanding  that                                                               
Pennsylvania may  have common  law that such  a promise  could be                                                               
enforceable, but  she did not  have any details. That  state does                                                               
not have  a gift trust provision  in law, she said.  Further, the                                                               
idea  of a  promise of  a gift  can also  be found  in charitable                                                               
giving pledges.  Mr. Delman  can elaborate  on this  further, she                                                               
said.                                                                                                                           
                                                                                                                                
She said the  Alaska Gift Trust provision is unique,  but some of                                                               
the  underlying  theories  have been  discussed  nationally.  She                                                               
offered  her  belief that  this  will  gain national  recognition                                                               
since the buzz  in the national estate planning  community is how                                                               
to use exemptions. She anticipated  that the Alaska Gift Trust in                                                               
SB  191  would  be  very  helpful and  that  Alaska  would  be  a                                                               
trailblazer.                                                                                                                    
                                                                                                                                
2:01:59 PM                                                                                                                    
CHAIR COGHILL asked for the reason for using 180 days.                                                                          
                                                                                                                                
MS. O'CONNOR deferred to Mr. Delman to respond.                                                                                 
                                                                                                                                
2:02:41 PM                                                                                                                    
JAMIE DELMAN,  Attorney, Shaftel  Delman LLC,  Anchorage, Alaska,                                                               
answered that the  intent of the 180 day period  was to encourage                                                               
a continuing  nexus with  the State of  Alaska. This  would allow                                                               
people to  form a  trust and  contribute the  promise of  a gift,                                                               
which has to stay with the trustee  for a period of time. He said                                                               
180 days was selected, but it could be shorter.                                                                                 
                                                                                                                                
2:04:05 PM                                                                                                                    
CHAIR  COGHILL  asked what  has  to  happen during  that  180-day                                                               
period of time.                                                                                                                 
                                                                                                                                
MR. DELMAN responded that the  typical process before the 180-day                                                               
point  would be  that someone  would create,  draft and  sign the                                                               
trust,  the  trustee  would  sign the  trust  document,  and  the                                                               
promisor would create  the written promise and deliver  it to the                                                               
trustee. He envisioned  the 180 days as "a  holding period," with                                                               
no expectation  that the written  promise would change  hands. If                                                               
the trustee  needed to make  a distribution to a  beneficiary, he                                                               
or  she might  need to  sell  property, which  could include  the                                                               
obligation.                                                                                                                     
                                                                                                                                
2:06:11 PM                                                                                                                    
CHAIR COGHILL  asked what the "notwithstanding  the provisions of                                                               
AS 45.03,?" language related to the 180 days means.                                                                             
                                                                                                                                
MR. DELMAN responded that this  provision relates to a promissory                                                               
note typically being issued for value.                                                                                          
                                                                                                                                
CHAIR COGHILL asked Mr. M. Blattmachr to weigh in.                                                                              
                                                                                                                                
MR.   M.  BLATTMACHR   said  that   was  his   understanding;  no                                                               
consideration is given to the provisions of AS 45.03.                                                                           
                                                                                                                                
2:07:29 PM                                                                                                                    
SENATOR KIEHL said it would  be helpful to understand the benefit                                                               
to having the promise of a gift be a negotiable instrument.                                                                     
                                                                                                                                
2:08:13 PM                                                                                                                    
MR. DELMAN responded that there are  two reasons to do so. First,                                                               
in order for the person creating  this written promise to use the                                                               
exemption, that person must file  a gift tax return reporting the                                                               
value  of the  written  promise.  If the  written  promise is  so                                                               
restrictive that it cannot be  sold by the trustee or transferred                                                               
in any way, the value of  the written promise would be much lower                                                               
than a  standard promissory note.  He highlighted  the importance                                                               
that the type of asset that  this bill would create is like other                                                               
assets and is saleable and transferable.                                                                                        
                                                                                                                                
He said  a second and  more compelling  reason is to  think about                                                               
the written promise  as a whole rather than thinking  about it in                                                               
a  vacuum. He  related  a  scenario in  which  a  trustee owns  a                                                               
written promise and  they also own a commercial  building that is                                                               
subsequently damaged in  an earthquake. The estate  consists of a                                                               
$1 million  written promise and  a $500,000 building  that incurs                                                               
$200,000 in  damages. The trustee  should always be able  to sell                                                               
trust property in  order to meet his or her  fiduciary duties. To                                                               
repair the  earthquake-damaged building, the trustee  may need to                                                               
sell its  other asset. Certainly,  sitting on an  unsalable asset                                                               
is not a good position for a trustee.                                                                                           
                                                                                                                                
MR.  DELMAN explained  that if  a trust  only owns  a $1  million                                                               
promise to pay  and the trustee has the fiduciary  duty to make a                                                               
distribution to a beneficiary in  need, the trustee might need to                                                               
sell the note.                                                                                                                  
                                                                                                                                
CHAIR COGHILL commented that he  better understands this since he                                                               
has been an executor of two different estates.                                                                                  
                                                                                                                                
2:11:55 PM                                                                                                                    
SENATOR KIEHL expressed  concern that this would  be a negotiable                                                               
instrument  that does  not need  to have  any value  attached. He                                                               
said a person  who is less than honorable and  is at death's door                                                               
could  write 1,100  $10,000 promises  and proceed  to sell  those                                                               
$10,000 notes without any funds to support the promises.                                                                        
                                                                                                                                
2:13:19 PM                                                                                                                    
SENATOR  MICCICHE  said  the  $10,000  notes  would  be  worth  a                                                               
fraction of the  value to someone who is willing  to negotiate on                                                               
that debt. He  offered his view that this type  of opportunity is                                                               
available in  any law that  pertains to debt  and he did  not see                                                               
this as an issue in SB 191.                                                                                                     
                                                                                                                                
MR. DELMAN  agreed that  the value  of the note  is based  on the                                                               
person  who is  making the  promise. He  said a  dishonest person                                                               
could  also sell  his or  her own  promissory note  under current                                                               
law.  If  a  person  has  an estate  worth  $1  million  and  the                                                               
individual tries  to sell a $2  million debt, it would  be a case                                                               
of buyer beware. The person's  ability to pay would determine the                                                               
value of the note.                                                                                                              
                                                                                                                                
MR.  BLATTMACHER said  nothing stops  a  "bad actor"  and in  any                                                               
investment it is  buyer beware. He added that while  it would not                                                               
be common to sell the  note outside of an inter-family situation,                                                               
it could happen.                                                                                                                
                                                                                                                                
CHAIR COGHILL  related three  benefits: a  person gets  to decide                                                               
how  their assets  are  distributed,  the intended  beneficiaries                                                               
would obtain  the real value of  the asset, and the  IRS does not                                                               
tax the gift. He asked if his understanding was correct.                                                                        
                                                                                                                                
MR. M. BLATTMACHR answered yes.                                                                                                 
                                                                                                                                
CHAIR COGHILL  asked for an  explanation of how tax  lawyers will                                                               
view this given that the rules may change.                                                                                      
                                                                                                                                
2:17:27 PM                                                                                                                    
MR. M.  BLATTMACHR answered that  typically if laws  change there                                                               
is not a  claw back or retroactivity. However, if  a person takes                                                               
action today  and tomorrow's rules  are less favorable, it  is to                                                               
that person's advantage.                                                                                                        
                                                                                                                                
CHAIR COGHILL asked if the full  value of the asset would flow to                                                               
the beneficiaries if the value were to increase.                                                                                
                                                                                                                                
MR. M. BLATTMACHR answered yes.                                                                                                 
                                                                                                                                
2:18:28 PM                                                                                                                    
SENATOR HUGHES asked  if any laws would protect a  senior who got                                                               
scammed by a bad actor.                                                                                                         
                                                                                                                                
MR.  M. BLATTMACHR  answered  that  if the  seller  made a  gross                                                               
misrepresentation, that person could  potentially be convicted of                                                               
fraud. If  there was no  misrepresentation, he said he  hoped the                                                               
seller would realize  the buyer was unknowing and  would not sell                                                               
the asset for more than it was worth.                                                                                           
                                                                                                                                
2:19:46 PM                                                                                                                    
MR. DELMAN  reminded members  that under  the Alaska  Gift Trust,                                                               
the party  selling the instrument  is the person who  creates the                                                               
trust and transfers  the written promise. After  180 days lapses,                                                               
if the trustee  determines a need for cash, the  trustee can sell                                                               
the instrument. An  entire body of trust law  guides the trustee.                                                               
The person who  creates the promise "quite  literally" trusts the                                                               
trustee, he said.  The trustee has a fiduciary duty  to the trust                                                               
beneficiaries, and the  likelihood of a trustee trying  to scam a                                                               
third party  would be  less than  a random  person on  the street                                                               
trying to sell something to an unsuspecting party.                                                                              
                                                                                                                                
2:21:27 PM                                                                                                                    
SENATOR HUGHES asked  whether something in the body  of trust law                                                               
would  allow  the  trustee  to  be sued  if  they  did  something                                                               
fraudulent or acted in bad faith.                                                                                               
                                                                                                                                
MR. DELMAN answered absolutely.                                                                                                 
                                                                                                                                
SENATOR  HUGHES asked  whether any  advertising will  be done  to                                                               
bring in investment  business to the state or if  any active word                                                               
of mouth efforts will be made.                                                                                                  
                                                                                                                                
MR. DELMAN said  estate planners throughout the  country are very                                                               
connected in  terms of developing  law, but  he was not  aware of                                                               
any campaigns to advertise this innovative law.                                                                                 
                                                                                                                                
2:24:09 PM                                                                                                                    
MS. O'CONNOR  said it  is unlikely  any direct  advertising would                                                               
occur since  it typically is  not done  in the industry,  but the                                                               
Alaska  Trust  & Estate  Professionals  were  likely to  actively                                                               
promote   it  through   the   existing   national  network.   She                                                               
anticipated  that  the  Alaska Gift  Trust  would  gain  momentum                                                               
because people  are eager to  find ways  to use the  federal gift                                                               
tax exemption.                                                                                                                  
                                                                                                                                
CHAIR COGHILL commented  that businesses in Alaska  would be more                                                               
excited than everyone else.                                                                                                     
                                                                                                                                
2:25:47 PM                                                                                                                    
SENATOR MICCICHE related his understanding  of the overall effect                                                               
of SB 191. Currently,  the promise of a gift to  a trust allows a                                                               
$11.5 million  gift tax  exemption. If the  person waits  and the                                                               
actual gift is  given after January 1, 2026,  the exemption would                                                               
be  reduced  to $5  million.  But  because  the $6.5  million  is                                                               
subject  to a  40 percent  tax rate,  the trust  will receive  $4                                                               
million.                                                                                                                        
                                                                                                                                
He offered his view that the  only potential for abuse is already                                                               
covered  in the  bill. He  related  a scenario  in which  someone                                                               
would offer to  "give the trust 'x' amount someday  if the person                                                               
pays  him  or her  'x'  amount  today."  That scenario  would  be                                                               
covered  in SB  191 because  the Alaska  Gift Trust  provision is                                                               
created for  promises without consideration. That  scenario would                                                               
result in something in return, which is not allowed.                                                                            
                                                                                                                                
2:27:22 PM                                                                                                                    
SENATOR KIEHL  said his concern  was that despite  the discussion                                                               
about  fraud  or  misrepresentation,   this  bill,  as  currently                                                               
written, does not require any  fraud or misrepresentation to sell                                                               
something   with  no   value   behind  it.   That   is  why   the                                                               
"notwithstanding  language" is  required. He  said it  seems that                                                               
there  are protections  for things  that people  want to  buy and                                                               
sell, but only for sophisticated  buyers. He wondered if limiting                                                               
who could trade in the  negotiable promissory notes would provide                                                               
some safeguards without opening up an opportunity for abuse.                                                                    
                                                                                                                                
CHAIR COGHILL  said he represented  two families as  executor for                                                               
the  estates  because  the  parties  trusted  him  to  handle  it                                                               
appropriately.  People use  estate  and trust  companies to  have                                                               
their estates  properly managed.  He asked  Mr. M.  Blattmachr to                                                               
address potential mismanagement.                                                                                                
                                                                                                                                
2:30:36 PM                                                                                                                    
MR.  M.  BLATTMACHR responded  that  while  nothing is  given  up                                                               
front,  the asset  has  value.  He related  a  scenario in  which                                                               
during dinner  his grandfather  promises to  give him  $5 million                                                               
upon  his death.  However, that  is not  an enforceable  promise.                                                               
This  Alaska Gift  Trust provision  in SB  191 changes  that such                                                               
that the promise of a gift is enforceable and thus has value.                                                                   
                                                                                                                                
SENATOR  KIEHL  suggested  that  a  chronic  inebriate  could  be                                                               
sobered up and sign a promise, but there would not be any value.                                                                
                                                                                                                                
CHAIR COGHILL pointed out that the  person must be able to make a                                                               
minimum $10,000 deposit to an account in the state.                                                                             
                                                                                                                                
2:32:41 PM                                                                                                                    
SENATOR  MICCICHE applauded  the creativity  of delayed  gifts to                                                               
trusts.  He  recommended that  people  read  the Alaska  Trust  &                                                               
Estate  Professionals' white  paper "Alaska  Gift Trusts"  [dated                                                               
February 27, 2020].  He noted that it answered  his questions. It                                                               
explains the  statutory hierarchy  when the trust  cannot satisfy                                                               
its obligations. For  example, a person may promise a  gift of $2                                                               
million in  Tupperware stock worth $74  per share, but it  is now                                                               
worth $7 per share.                                                                                                             
                                                                                                                                
2:33:44 PM                                                                                                                    
CHAIR COGHILL expressed appreciation for the white paper.                                                                       
                                                                                                                                
2:34:11 PM                                                                                                                    
CHAIR COGHILL stated that SB 191 will be held in committee.                                                                     
                                                                                                                                
2:34:29 PM                                                                                                                    
SENATOR HUGHES complimented the sponsor's staff.                                                                                
                                                                                                                                
SENATOR  MICCICHE reiterated  that  the white  paper explained  a                                                               
lot.  He did  not think  amendments were  necessary, but  further                                                               
explaining  the risks  of trust  law and  the assets  included in                                                               
trusts could help members feel  more comfortable with the current                                                               
structure in the bill.                                                                                                          
                                                                                                                                
CHAIR COGHILL  said the bill  has been thoroughly vetted  by [the                                                               
Alaska Trust &  Estate Professionals group]. He  commented on the                                                               
value  of  examining what  could  go  wrong  for the  benefit  of                                                               
Alaskans  and for  those who  manage trusts,  who are  subject to                                                               
legal requirements. He suggested that  the new concept in Section                                                               
4, related to  Alaska Gift Trusts is something  members are still                                                               
contemplating to obtain a full understanding.                                                                                   
                                                                                                                                
[SB 191 was held in committee.]                                                                                                 
                                                                                                                                
2:37:27 PM                                                                                                                    
There being  no further  business to  come before  the committee,                                                               
Chair Coghill  adjourned the Senate Judiciary  Standing Committee                                                               
meeting at 2:37 p.m.                                                                                                            

Document Name Date/Time Subjects
SB 191 Sponsor Statement 2.24.2020.pdf SJUD 2/28/2020 1:30:00 PM
SB 191
SB 191 Sectional Analysis 2.24.2020.pdf SJUD 2/28/2020 1:30:00 PM
SB 191
SB 191 Fiscal Note - Law 2.21.2020.pdf SJUD 2/28/2020 1:30:00 PM
SB 191
SB 191 Letters of Support 2.28.2020.pdf SJUD 2/28/2020 1:30:00 PM
SB 191
SB 191 ATEP White Paper on Alaska Gift Trusts 2.27.2020.pdf SJUD 2/28/2020 1:30:00 PM
SB 191