Legislature(2001 - 2002)
02/07/2002 02:07 PM Senate JUD
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE JUDICIARY STANDING COMMITTEE
SENATE JUDICIARY STANDING COMMITTEE
February 7, 2002
2:07 p.m.
HOUSE MEMBERS PRESENT
Representative Norman Rokeberg, Chair
Representative John Coghill
Representative Kevin Meyer
HOUSE MEMBERS ABSENT
Representative Scott Ogan, Vice Chair
Representative Jeannette James
Representative Ethan Berkowitz
Representative Albert Kookesh
SENATE MEMBERS PRESENT
Senator Robin Taylor, Chair
Senator John Cowdery
Senator Johnny Ellis
SENATE MEMBERS ABSENT
Senator Dave Donley, Vice Chair
Senator Gene Therriault
OTHER LEGISLATORS PRESENT
Representative Lisa Murkowski
COMMITTEE CALENDAR
OVERVIEW AND UPDATE OF ALASKA TRUST LAW
PREVIOUS ACTION
No previous action to record
WITNESS REGISTER
DOUGLAS J. BLATTMACHR, President
Chief Executive Officer (CEO)
Alaska Trust Company
1029 West Third Avenue, Suite 601
Anchorage, Alaska 99501-1981
POSITION STATEMENT: Presented information regarding Alaska's
trust laws.
RICHARD S. THWAITES, JR., Attorney
733 West 4th Avenue, Suite 401
Anchorage, Alaska 99501
POSITION STATEMENT: Assisted with the presentation regarding
Alaska's trust laws.
ACTION NARRATIVE
TAPE 02-12, SIDE A [House JUD tape]
Number 00.01
CHAIR ROBIN TAYLOR called the joint meeting between the House
Judiciary Standing Committee and the Senate Judiciary Standing
Committee to order at 2:07 p.m. Present at the call to order
from the Senate Judiciary Standing Committee were Senators
Taylor, Cowdery, and Ellis. Present at the call to order from
the House Judiciary Standing Committee were Representatives
Rokeberg and Coghill. Representative Meyer arrived as the
meeting was in progress. Representative Murkowski was also in
attendance.
CHAIR TAYLOR announced that the committees would hear an
overview and update from the Alaska Trust Company regarding
Alaska's trust laws. He remarked that Alaska, via legislation
sponsored by various legislators over the last five or six
years, has gone through a transition of updating and modernizing
its trust laws, with the goal being to make Alaska a more
attractive community for securing and investing assets. He
noted that some of the issues to be discussed will include: the
effects of the various pieces of legislation, whether the
legislation is beneficial, whether it did anything for the
state, and "how is it going today in the real world - what
effect did we have."
Number 01.58
DOUGLAS J. BLATTMACHR, President, Chief Executive Officer (CEO),
Alaska Trust Company, thanked the committees for the opportunity
to present information regarding Alaska's trust laws. He said:
Starting in 1996, we first tried to get some
legislation through, and finally were successful in
1997 with your ... support, [which we] greatly
appreciate.... The two pieces of legislation really
revolutionized the trust industry throughout the
country. [A lot of states] started realizing that
[they] needed to modernize their trust laws, and a
number of states have tried to piggyback on what
Alaska has done. Particularly Delaware [has]
copycatted a number of things we did ...; [as did]
Rhode Island ...; [and] so has Nevada. So there's
more states doing similar things. Fortunately, Alaska
still is the preeminent jurisdiction; there's things
we can do that no other state allows, [and] we've done
a number of pieces of legislation. ...
Why did we first come to Alaska to change the rule?
Well, partly [it] was because [of] personal reasons:
I'd lived in Alaska and wanted to get back; my brother
- who practiced law in Alaska [as] a New York City
estate-planning attorney - ... loves Alaska, so we
really wanted to do it. We were familiar with Alaska
statutes and the professionals, and the professionals
kept indicating they wanted institutions to be more
focused on Alaska and [were asking], "How could we
modernize our laws." And also because Alaska had a
very favorable environment: it had no state income
tax on trusts or estates. So that was also positive.
Number 03.32
MR. BLATTMACHR continued:
The question has been [asked], "Has it been
successful," and we feel it has been very successful,
particularly since we've been doing this for less than
five years. And what we're going to give you is just
information [that] our small company knows about; we
know the other institutions have benefited directly,
but we really can't say exactly how much.... We're
just really talking about ours, [but] I think you can
[infer] that there's been a lot greater breadth of
[the] positive. One of the positive developments that
Alaska has really seen [is that it is viewed] as a
very innovative and progressive state [regarding] its
[trust and estate] laws, and it is considered by most
estate planning professionals as the leading
jurisdiction [in which] to consider setting up your
trusts or estates.
Some of the positive have been that we have created
seven fulltime positions - five of them are born-and-
raised Alaskans; we pay a corporate income tax; we put
hundreds of thousands of dollars into the local
economy each year ...; and we have on deposit in local
institutions tens of millions of dollars that has come
from outside of Alaska that wouldn't have been
deposited [otherwise]. So local banks have
participated, and we have had over 700 clients come to
Alaska to use Alaska services.... That's just what
we've done; we know other trust companies and banks
have also got some [business], and some people have
gone to individuals instead of professionals. So it's
been, we think, successful.
The professionals in Alaska have benefited, both in
getting increased business from working with clients
from outside of Alaska but also bringing these
benefits to Alaskans. And I think it should be
important to realize that all the things that can get
done can benefit Alaskans also; they probably have the
biggest benefit. Although unfortunately our
population is small, ... on a practical basis they
really benefit as much as anybody who comes here from
California, New York, or Texas. [Certified public
accountants (CPAs)] have increased business; insurance
agents have; stockbrokers - they've gotten accounts
moved here from individuals who want to have some of
their assets here to take advantage of these great
trust laws.
Number 05.27
MR. BLATTMACHR:
As I said, Alaskans have benefited quite directly from
this legislation, and one of my colleagues, Mr.
Thwaites, will talk about some of the examples he has
[regarding] some of his clients [who] have really
benefited directly from this. With the changes we
made in the trust legislation, and combining that with
some modifications to the state premium tax, ... the
state [has] received ... at least $700,000 of the
traditional state premium tax on life insurance that
it wouldn't have received without these modifications.
So there's been an increase in corporate income tax;
there's been an increased revenue from people using
our LLCs [limited liability companies] and LPs
[limited partnerships] - so there's been increased
filing; and some of the insurance companies we've
dealt with are seriously looking at Alaska to set up
subsidiaries. We think all of these are positives.
We think it important that this has really [just]
happened within five years, with no financial outlay
from the state, ... except for your support and we
greatly do appreciate it. ... One of the questions we
hear sometimes is, "Gosh, we've passed so much
legislation and you guys are coming back again, why do
you need to come back?" ... Part of the reason is
that a number of these things we're doing are geared
towards [Internal Revenue Service (IRS)] rules and
regulations. So if [the] IRS makes a change, many
times we need to change the current legislation to
make sure that [it's] still effective.
Other states now are starting to realize that they've
got to modernize their rules and come into ... modern
society, and so they're changing rules. And sometimes
they come up with better ideas, so we're saying, "Gee,
if they've got a better idea, maybe we should
incorporate it to continue to have Alaska be
competitive if not the leading jurisdiction." And
then just sometimes fine-tuning the legislation;
sometimes we've done things and some of the other
lawyers will look and say, "Well, you know, I'm not
exactly sure if you've really accomplished what you
set out to do," or "It's not clear enough for me." So
many times we're coming back [saying], "Let's clarify
that this is what it was meant to do, so there's no
ambiguity about what the purpose of the legislation
was.
Number 07.19
MR. BLATTMACHR went on to say:
We think that the future is extremely bright for
Alaska; we think it's just a beginning for [a]
fledgling financial-services industry to attract more
and more business, and we think we're getting more
every year. We're getting more and more clients
coming here, [and] more and more attorneys [are] using
us throughout the country, because ... one of the
advantages Alaska has [is that] it has no current
state income tax on trusts in the state. So our
(indisc.--coughing) strongly recommend ..., if the
state decides to do an income tax, that you seriously
consider not taxing trusts and estates [of]
nonresidents, because what will happen is [that] they
will go to another jurisdiction that doesn't have a
tax on foreign trusts, such as New York, New Jersey,
Delaware, [or] South Dakota.
New York, New Jersey, and Delaware have an income tax,
but they exempt trusts from nonresidents because they
realize nobody's going to come to their state. So we
strongly recommend this because what will happen,
unfortunately, is that all this business - 99 percent
of all the business we've attracted - will leave the
state within one year because they're just going to
say, "We're not going to pay a state income tax; there
are other states that have many of the things that
Alaska has and [so] why should we do that." So,
that's just part of our concern, because we're just
starting ... to see all the fruits of all the hard
work. It has really been [within] the last two years
that we've really seen this influx and people starting
to use Alaska - and giving increased revenue directly
to the state and indirectly to residents of the state
and businesses.
Number 08.57
MR. BLATTMACHR concluded:
And, again, we greatly appreciate your support in the
past and hope we can count on it in the future. For
information [purposes], in [members' packets there is]
a little pamphlet that we put together that gives a
brief explanation of each piece of legislation and
what it does, kind of as a summary. And then we've
put together three articles that have been published
nationally that ... talk about the three major
functions of what legislation has been done. The
first one talks about the ... [Alaska Trust Act], then
we ... have one that talks about how the changes with
the limited partnership and LLC statute integrates
[with] this trust legislation, and then [there is] an
article about how the Alaska Community Property Trust
works and the advantages for both Alaskans and non-
Alaskans.
SENATOR COWDERY noted that Mr. Blattmachr had mentioned with
regard to the income tax that [it] would have an effect on the
attraction to Alaska and had explained why. He asked how much
revenue these trusts put into state coffers, and how much
revenue might be generated for state coffers over the next five
to ten years assuming that the state remains free of an income
tax.
MR. BLATTMACHR said that just from his company, he is aware of
at least $700,000 generated from life insurance premiums, but is
not sure how much revenue the state has gotten from increased
filing of limited partnerships and LLCs. He ventured a guess,
however, that the state has probably gotten $1 million of
additional revenue. He cited the fact that his company has a
lot of deposits in banks, which has probably increased their
profits and are thus they are paying higher state corporate
taxes, and noted again that his company also generates business
for other businesses in the state. He posited that his company
probably puts $700,000 a year into the local economy, and that
[this amount] will continue to grow. He opined that in five
years, there should be "a number of millions of dollars"
generated at minimal, if any, cost to the state.
Number 10.50
MR. BLATTMACHR, in response to a question regarding states that
exempt nonresidents from income tax on trusts, said that "South
Dakota is one of our competitors for some of this, and they
don't have a state income tax at all." But a number of states,
such as Delaware and New York, do have a state income tax but
don't tax nonresident trusts or estates, he added. He mentioned
that because it had the biggest trust industry, New York used to
get the majority of business in the '50s, '60s, and '70s, but
because it didn't modernize its trust laws, very little business
from nonresidents is now coming its way. He also mentioned that
now residents of New York are realizing that they can set up
trusts in New Jersey, Delaware, or Alaska and avoid paying a
state income tax; as a result New York is seriously considering
exempting its residents from income tax on trusts.
SENATOR COWDERY asked what would happen to trusts that had
already been established by residents should Alaska begin to tax
trusts.
MR. BLATTMACHR said that it would be hard to predict. He
surmised, however, that some people might decide to move the
situs of their trusts in order to avoid an income tax. He noted
that those with bigger trusts would have more of an incentive to
move their trusts and would probably be advised to do so by
their attorneys.
Number 13.48
RICHARD S. THWAITES, JR., Attorney, noting that he specializes
in estate and gift tax law, said that after passage of the
Community Property Act, he drafted a community property
agreement for one of his clients. He also noted that this is
not a complicated agreement for Alaskan residents - merely one
page - though it can result in a 40-50-page document for
nonresidents. In an effort to illustrate how a community
property agreement works, he recounted the following example:
We had a family that was in the Palmer area, [and]
they had a lot of property acquired - originally as
homesteaders - [and] the value of that property has
increased over ... time. In this situation, [the] mom
developed an illness and passed away last year, and as
a result of having done the community property
agreement, there was probably somewhere in the
vicinity of $3 [million] to $4 million of gain in the
two estates - between the two of them - that
disappeared, and they got a stepped up income tax
basis - [the] dad did - for the whole amount of the
property, thus eliminating the gain entirely. ...
That enabled him to liquidate ... some of the property
and [pass] it on to [his children and] grandchildren
... for education [and] other purposes, and still left
him with the other assets pretty much intact and
[with] the flexibility to ... deal with his estate
plan as he felt appropriate.
MR. THWAITES also recounted another example:
[This was] a much smaller situation where [a] husband
and wife had some property - and we're only talking
about $35,000 to $40,000 worth of eliminated tax, but
that's still a significant number - and it was a ...
smaller estate in the $600,000 range, but yet, by the
time we got the large gains that they had in that
little estate, [the] mom was able to liquidate only
the assets that she needed to, ... to make the
transition into being sort of a single parent at the
age of 70. ... It was a smooth transition, and I
think it helped her a lot knowing that she wasn't
going to have a large, $40,000 tax bill at the end of
the year, thus requiring liquidation of other assets
that she didn't really need to liquidate at that time.
SENATOR COWDERY posited that liquidation of those assets would
probably have created another tax liability.
Number 16.37
MR. THWAITES clarified that in that example, "that would have
been the additional liability; that was taking that into
consideration, but it just was a smooth transition that helped
quite a bit." He said that what he has experienced over the
past couple of years is that in Alaska, there is a cadre of
estate-planning professionals who work in the area of financial
planning, such as accountants and attorneys, and they have
formed an organization consisting of about 200 individuals
statewide. They are all starting to have more involvement, he
noted, with this more fluid estate-planning statute, and
everybody recognizes now that Alaska is probably the preeminent
jurisdiction. He explained that even though the marketing
budget has not been very extensive, "we're still making an
impact ... because we're ... still a couple of steps ahead of
everybody else." [Alaska] has maintained that position because
of the legislature's continued cooperation. "You've helped us
put these things into place, [and] other people throughout the
country are recognizing that," he said.
MR. THWAITES noted that he is a fellow of the American College
of Trust and Estates Counsel (ACTEC), which is a group made up
exclusively of estate planning attorneys. He said that when he
attends ACTEC's meetings, other fellows have come to him and
inquired, "How are the Alaska trusts going," and every year he
gets several referrals from these fellows asking for assistance
in developing Alaska trusts for their clients who live in Texas,
Hawaii, North Carolina, and all over the country. He views this
as evidence that "we're getting the word out," it's just taking
a little longer. The first couple of years, there were perhaps
10 or 12 attorneys throughout the country that were really
"talking to us seriously," he remarked, whereas just this last
year, there were probably 50 to 60 attorneys that consistently
provided information on behalf of out-of-state clients. He also
mentioned that there is now a website that is readily available
to anyone wishing for information or access to forms, "and we
just try to get as much exposure out there as we can for Alaska;
we encourage them to come up, we encourage them to bring their
dollars up here and leave them in our local banks, because we've
found the local banks like that too.
MR. THWAITES said:
The tradition of the trust industry is that as your
trust grows and you develop that basis and it keeps
growing, you will then have the insurance trusts when
somebody passes away. The typical thing is [that]
that money stays in that trust for administration, and
[so] instead of getting a flat annual fee for just
doing the maintenance of the insurance trust, it
converts into a much larger fee for doing the
administration and taking care of the beneficiaries
and so forth.
Number 19.58
MR. BLATTMACHR added that of the insurance trusts that his
company has set up just this year, about $1.4 billion is in
death benefits, which, in theory, will ultimately come into
Alaska. So it's been quite successful from his company's point
of view, he said, particularly since his company is just a small
organization and these transactions have only transpired
recently. He opined that the outlook of the industry in Alaska
is very good and should continue to attract business and
continue to grow.
MR. THWAITES posited that when Mr. Blattmachr spoke of "the
$700,000 additional premium tax," he was referring to the tax
just in 2001.
MR. BLATTMACHR said, "Yes."
MR. THWAITES noted that "this" didn't come into existence until
1999, and then it took a while to get [the information] out. So
for a while no one thought much about it, but then all of a
sudden people started to recognize that some of their clients
could be saving several tens of thousands of dollars per year by
doing business in Alaska. That's why now, in 2001, there is
growth in that area, he explained.
MR. THWAITES said that as a lifelong Alaskan, he wants to see
the state flourish, but he is worried that when he goes down to
the next ACTEC meeting in March he is going to be asked about
the possibility of an income tax being imposed in Alaska. What
raises concerns, he explained, is the fact that Alaska's
legislature is now having discussions regarding adoption of an
income tax. He indicated that although 50 states are currently
having discussions regarding revenue shortfalls, should the
statement, "Yes, we're discussing revenue options in Alaska," be
coupled with a statement to the effect that, "This fledgling
industry in the finance and trust area is not something that we
want to impact or kill because of that," then it wouldn't have
quite the same chilling effect.
MR. THWAITES said that "when we first did this trust work, we
were" a little shocked that the offshore jurisdictions - the
Cayman Islands, the Cook Islands, for example - mounted an
advertising campaign against the Alaska trusts. Basically what
these advertisements were saying is that Alaska trusts don't
work because the IRS will find out about the revenue. He noted
that there was never any intention to shelter anything from the
IRS; "we always said we would report whatever was appropriate,
but there are enough estate planning benefits, in all this stuff
that we've drawn up, to encourage people to come here." He
pointed out the federal government now has huge penalties for
people who went offshore and didn't report income.
Number 22.50
MR. BLATTMACHR added that his company has had a number of
individuals bring their offshore trusts back to the United
States - to Alaska - because they now realize that they can do
the same thing they were doing offshore but be under U.S.
jurisdiction.
CHAIR TAYLOR remarked that at one point the IRS had been talking
about federal legislation that would allow those offshore monies
to "come home for free," but then once the money is back in the
U.S., it would have to stay. He asked whether any of that
federal legislation has been adopted.
MR. THWAITES said not that he is aware of. He acknowledged,
however, that "there is quite an effort by [the U.S. Department
of the Treasury] to do that." Notwithstanding this, [the IRS]
does impose a $7,500 penalty on people who fail to state on
their tax return that they have an offshore trust. He observed
that the IRS and the [U.S. Department of the Treasury] have not
resolved, in their own minds, what they want to do; on the one
hand, they want to bring the money back, but on the other hand,
they are not willing to say, "Yes, all this stuff works." Mr.
Thwaites pointed out that there is a treatise that is put out
nationally that is called the "Restatement of Trusts" in which,
every so often, the college professors and the professionals in
the industry redraw a summary of what the law of the land ought
to be with regard to trusts. In the most recent version, he
noted, it is acknowledged that there is a place in the law of
the land for the Alaska and Delaware trusts, although it is not
recommended that all states follow suit, because not everybody
is going to want an asset-protection trust and it would not be
competitive for the states that do offer it.
MR. THWAITES said:
We're not trying to focus exclusively on asset-
protection trusts. We're talking about community
property trusts, asset-protection trusts; we're
talking about irrevocable insurance trusts, and all of
those kinds of vehicles. It is a comprehensive plan;
it is probably the best estate-planning jurisdiction
in the entire United States, maybe even in the world,
other than perhaps having your own island and not
having any jurisdiction [under] anybody else. So I
think we're on the right track. ... We don't have a
lot of marketing money to do this yet, [though] that
would certainly enhance [efforts]; we're having to pay
for that out of the revenues gained from the trusts
that we have right now. I'm very, very positive about
the future, I really am. The federal estate tax is
probably going to impact it somewhat if it stays the
way it's currently rendered, but we're trying to deal
with those issues as well.
Number 26.02
REPRESENTATIVE LISA MURKOWSKI, referring to the marketing
issues, said that she would be glad to discuss how to assist in
getting the word out to other trust attorneys across the
country. After noting that earlier testimony indicated that
banks are benefiting from this industry, she asked whether there
is any way to "piggyback with the marketing efforts that the
banking institutions have," or whether the trust industry is at
odds with the banking industry.
MR. BLATTMACHR indicated that he would not characterize the two
industries as being at odds with one another, since the trust
industry does not provide any banking services. Perhaps rather
it is just that the banking industry has not seen enough
benefits; some institutions, he noted, haven't gone into it as
aggressively as others. National Bank of Alaska (NBA) has
started to take advantage of the possible benefits, but Wells
Fargo has not. Key Bank did some in the beginning but has not
done any recently, and so perhaps the other institutions have
taken a wait-and-see-how-it-works kind of attitude. He remarked
that his company feels that the more people there are that know
about the various options provided by this Alaskan industry, the
better. He noted that banks in other states, particularly in
Delaware, are attracting more business because they are saying
that their states can do what Alaska does, only better, and that
it would be difficult to simply go to those institutions and
confront them with counter arguments. At estate planning
conventions, however, he said that he is able to explain to
people that Alaska can do all of the things that other states
can do plus some things that can't be done elsewhere.
MR. THWAITES noted that many financial institutions do not focus
on the things that the trust industry specializes in, although
some, such as "First of Alaska," now have trust departments that
offer services to their clients. But [these financial
institutions] are relatively conservative in their approach and
are not marketing that service as a way of bringing in profits.
For the most part, financial institutions like Wells Fargo, for
example, look to their general banking services as the way to
make money, "not this new niche/trust stuff," he added. Key
Bank started out providing trust services but then moved
everything to Cleveland, he said, "and that doesn't match the
Alaska law," and so that institution might now be doing trusts
out of Rhode Island or Delaware.
Number 29.35
MR. THWAITES said:
We have an education program - the 529 plans - and
[recently] the state put those out for bid for people
putting money aside for their children's education,
and T. Rowe Price is the operator of that. And I just
saw an article in Kiplinger's [Personal Finance]
magazine, a full-page ad, that advertises [a]
University of Alaska Fairbanks school-savings plan,
because you can put money into that and still go to a
different college or university....
The advantage of Alaska's [program] is that you can
put up to $250,000 into this plan, with a very
favorable estate-planning result. In other states,
you can only put $100,000 in - per child - so they're
promoting Alaska as having a larger ceiling for doing
this. But I noticed in their article, and I'm not
quite sure what it means, but it says, "We can do the
529 plans," and then it has two words, "and, oh, by
the way, 'Alaska Trust,'" and I don't know what that
means in the ad, because I'm not sure that they're
doing Alaska trusts. So I thought maybe I should call
them up and find out exactly what that refers to.
MR. BLATTMACHR posited that, to some extent, the reason some of
the other institutions aren't marketing trust services as much
as companies like his do is because "it's just kind of a
department in their bank." Trust companies, on the other hand,
can focus all of their marketing dollars on attracting trust
business and investment management business.
Number 31.03
MR. THWAITES explained that historically, the investment
management business is one that builds cumulatively over time,
which New York and similar other jurisdictions have done, and
his hope is that given the time, and given the strength and
fortitude of proceeding with this on a fairly determined basis,
Alaska can become one of those jurisdictions. "Certainly on the
west coast we're having a lot of interest," he added. A lot of
the [financial] planning going on right now won't show results
until people are deceased; so as a planner, he doesn't tell his
clients, "You better get this done this Wednesday because on
Friday you're not going to be here any longer." "That would
certainly make our estate planning easy if we knew exactly when
they were going to die, but for many of these things, ... five
years is just way too soon," he said, adding that it is more
likely that the impact will be [felt] "twenty years out as far
the volume goes." So it's more of a long-term plan than a
short-term plan; "we're sort of in there for that long-term
goal, and we think that the state of Alaska could realize a lot
of additional revenues as a result of the spin-off from these
planning goals."
REPRESENTATIVE MURKOWSKI commented: "You know you've finally
arrived when they start advertising against you, so you must be
doing a great job."
CHAIR TAYLOR thanked Mr. Blattmachr and Mr. Thwaites for their
presentation. He said:
Some of us have long waited to see what the results
might be; John was there with me when we started this
whole process, and the questions we constantly heard
on each of these bills going through is, "What does
this thing do?" And we would try our best in [the
Senate Judiciary Standing Committee] and other places
to explain some of these rather sophisticated concepts
and tax ramifications and so on. I don't think we
educated very many people, but there was a wonderful
trusting attitude throughout the legislative process,
both on the House side and the Senate. [And] we all
hoped that by making some of these modifications, ...
it would result in some additional benefits flowing to
the state of Alaska, to our banking institutions and
others, and to Alaskans in general as they would have
more flexibility in the way they [could] ... establish
their estates.
Number 33.75
And so it's very fulfilling today ... to have this
wonderful report come in. I still dream of the day
when our [U.S. Department of the Treasury] is able to
get together with the IRS and ... cut a deal
[regarding] ... what is estimated to be well over a
trillion dollars of U.S. income that is sitting
offshore in banks right now, because when that
happens, there will be a flood to return to home.
They want to be under our laws, not some dictatorship
[on] some Cayman Island, ... and they would like to
come home and be able to set up a very stable trust
that their family - for future generations - can count
upon. And when that happens, Alaska should be in the
catbird seat to take advantage of at least a good
percentage of that.
CHAIR TAYLOR continued:
And if I remember correctly, it's actually something
that Governor Steve Cowper at one time had talked
seriously about, and that was that Alaska - and
Anchorage, because of its location, in particular -
could become somewhat of a financial trade center.
You can't become that financial trade center if you
don't have a bank where somebody can put their money
and ... rely on it being there, rely on that trust
being properly handled, and rely on it being stable.
And probably stability is most important thing, but
it's been with the help of a wonderful group [of
people] within this legislature, over a lengthy period
of time, that [we] have created this opportunity now.
And I'm just so pleased to hear your report, and I
thank you for taking your time and money to come down
here and provide us with this.
Number 35.56
I know we have another piece of legislation going
through this year on the regulation. We haven't got
down to how we're going to regulate trust companies
yet; none of those laws have been changed for a long
time. I had the privilege of meeting with a young
lawyer here in town that used to work [for] me ... on
the [Senate Judiciary Standing Committee]; he now has
a fine practice and a couple [of] partners, and
they're doing significant amounts of work in estate
planning.
Normally, [with regard to] estate planning among the
bar here in Southeast, no one could maintain that ...
level of expertise because there wasn't a lot of it
going on. It was being done in Seattle and it was
being done in Portland and San Francisco, and so a
client that needed estate help was often referred to
one of the larger firms down there. That's not
occurring now; that work is staying here in Alaska,
and I'm just so pleased to see that happening and it's
literally because this legislature took the time to go
through some rather complex things and to trust that
it would work out.
REPRESENTATIVE ROKEBERG, Chair, House Judiciary Standing
Committee, referring to states that exempt nonresidents but tax
residents for their trust income, asked whether this was due to
concerns that residents only establish trusts as a subterfuge to
avoid paying state taxes.
MR. BLATTMACHR opined that it has more to do with political
reasons; "I think the perception is that if you ... use the word
'trust,' it has to be a lot of money and it's for the wealthy."
New York, he reiterated, is seriously considering not taxing its
resident trusts because of the realization that "residents are
leaving the state." Up until 15 years ago, he noted, people
were pretty much staying within their states, but as other
states started to do certain things, people realized that some
states, like South Dakota, allowed people to have perpetual
trusts and to take advantage of having a trust that doesn't
terminate within a fixed number of years. South Dakota was
seeing hundreds and hundreds of trusts being transferred there,
each year, by people from all over the country who did not want
to set up a trust that terminates within 80 years.
MR. BLATTMACHR said that at the same time, people were realizing
that they did not want to subject such perpetual trusts to a
state income tax if it wasn't absolutely necessary. Therefore,
although states felt that they wouldn't be able to attract
business if they taxed nonresident trusts, they had not thought
that residents would move their trusts to other jurisdictions to
avoid that same tax. This has not proven to be the case,
however, and now practitioners are feeling obligated to inform
their clients that there are other alternatives than just "doing
something within their borders."
Number 38.48
MR. THWAITES added that one of the common estate-planning
vehicles is the "idea of a living trust," and the IRS has
created a special category for that called a grantor trust,
where everything is taxed to the individual on his/her own "1040
return." That's the one area, he opined, that most of those
states are worried about: that that grantor trust would be such
that people could just put the name "trust" on their checking
account and then anything that went into that checking account
would avoid the tax. But the IRS has taken the position that it
is a grantor trust, as opposed to a simple or complex trust, and
as such, it really is money that belongs to that individual -
that that individual has earned - and therefore is subject to
his/her income tax. That's a pretty common probate-avoidance
device, he noted, that is not significantly used in Alaska
because its probate system is pretty streamlined, whereas New
York and, especially, California "would be extremely concerned
about that because that is the main planning device" for those
states.
REPRESENTATIVE ROKEBERG sought confirmation that it is atypical
for a trust to be "set up to avoid current income." He asked
whether there is a way, under current Alaska statutes, to "avoid
current income taxation."
MR. BLATTMACHR said, "Not federal income tax." It would be very
difficult, he added, for somebody to set up a trust that avoids
income tax, particularly Alaskan residents. For one thing,
trusts are taxed at the highest rate: after about $8,000 they
go to the 39.9-percent [tax] bracket. So one would really have
to have a large trust for it to be worthwhile to try to avoid a
state income tax, because the income would instead be subject to
the 39.9-percent tax bracket. He said that most trusts that are
set up "as a beneficiary," are considered by the IRS to be
grantor trusts and are thus disregarded for tax purposes, "and
all that income is put on their tax returns, so there would be
no way for them to avoid it ... from an individual perspective."
REPRESENTATIVE ROKEBERG, referring to the possibility of
offering a state income-tax exemption on trusts to both
nonresidents and residents, asked, "What would the harm be if we
did, in fact, exempt residents from that."
Number 42.16
MR. BLATTMACHR said that the only time it would have an impact
would be when someone sets up a trust for somebody else and the
trust does not mandate payment of income, and that's called a
complex trust. A simple trust is where the document says, "All
income earned has to be paid out to the beneficiary"; in that
case, if an Alaskan is the beneficiary, that trust is going to
distribute that income to that beneficiary, and that beneficiary
is going to report that income on his/her federal income tax
return. The only time there would be nonpayment of a state
income tax, he explained, would be if the trust kept all the
income.
MR. BLATTMACHR said that what happens then is that the trust is
considered a taxable entity and would therefore pay federal tax,
and if the state did tax it, it would be on the income of the
trust. "But again, when the trust makes a distribution, the
trust gets a deduction and the beneficiary picks it up," he
reiterated. Most of the time, some or all of the income, and
sometimes part of the principal, is distributed even though it
is not required. The only time that it could be said that the
state might lose a little bit of revenue, he posited, is when
the trust didn't pay out any of the income.
MR. THWAITES added that most of the individuals that one would
deal with in the area of estate planning are the kind of people
who want to hang on to their money until they're done with it,
so it's rare for complex trusts to be set up. He noted that
lately he is often setting up special-needs trusts for disabled
parents or disabled children, but these are not usually large
trusts. In those instances, there are discretionary
distributions and so they do become complex trusts. He pointed
out that with complex trusts, the income is subject to an
immediate increase with regard to the federal income tax
bracket, and so for most people, it doesn't make any sense to go
that route until a trust is producing upwards of $200,000 in
income.
Number 45.07
REPRESENTATIVE ROKEBERG sought confirmation that there would be
no real harm done to Alaska's income stream by exempting
residents from income taxes on their trusts.
MR. BLATTMACHR said no, the [number of] exemptions would be very
minimal.
REPRESENTATIVE ROKEBERG, referring to the special-needs trusts
that Mr. Thwaites mentioned, asked whether there was anything
specific that the legislature could do to help with regard to
the mental health trust.
MR. THWAITES mentioned that the Omnibus Reconciliation Act of
1993 - referred to as OBRA '93 - established four federal
special-needs trusts and two other types of trusts -
testamentary special-needs trusts and third-party special-needs
trusts. The federal government basically exempted these
specialized trusts from consideration as a resource for
determining eligibility for Medicaid, as did some of the Social
Security Supplemental Security Income (SSI) rules. He added
that the federal government has recognized that the more
Medicaid eligibility criteria is restricted, the more often co-
payments, dental and vision services, and a lot of other
services are not covered. Therefore, a parent who has a
disabled child, for example, might be better served by setting
up a testamentary or third-party special-needs trust for that
child if that property and money will be available to supplement
the child's care and needs after the parents are deceased. The
other choice for parents, he noted, would be to give the money
to the other kids and leave the disabled child in the Welfare
system, otherwise the money "just goes away quickly and isn't
available if it is counted as a resource."
TAPE 02-12, SIDE B [House JUD tape]
Number 46.42
MR. THWAITES mentioned that it was in 1993 that the federal
government provided more definitions for "those types of
trusts," and encouraged their use as estate-planning devices for
the elderly and the disabled, and as supplements to Medicare
benefits. He noted that "most of that stuff" is found under
Title 42 of the U.S. Code, which is very strict. He said:
Once you see one of those and recognize that it's
under that criteria, basically everybody just says,
"Okay, we know what that is, it's sacrosanct under the
federal rules, we're not going to mess with it." And
that's what it is: it's a personal injury settlement
for a disabled person that enables them to have a
home, to have a car, and to have payments for things
that are not going to be covered by Medicaid, without
disqualifying them.
REPRESENTATIVE ROKEBERG asked whether Mr. Thwaites could
administer those types of trusts and still make a profit without
it being too burdensome.
MR. THWAITES said, "We could do that." He mentioned that he is
currently having discussions with the Mental Health Trust
Authority regarding administering some of the "pooled income
trust monies." In this way, he noted, the corpus of those
pooled income trusts could be paid back to the Mental Health
Trust Authority when the beneficiary dies.
CHAIR TAYLOR, after noting that there were no more questions,
again thanked Mr. Blattmachr and Mr. Thwaites for their
presentation.
ADJOURNMENT
Number 43.49
There being no further business before the committees, the joint
meeting between the Senate Judiciary Standing Committee and the
House Judiciary Standing Committee was adjourned at 2:59 p.m.
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