02/04/2010 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB216 | |
| SB217 | |
| SB63 | |
| Adjourn |
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 217 | TELECONFERENCED | |
| *+ | SB 216 | TELECONFERENCED | |
| *+ | SB 63 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE STATE AFFAIRS STANDING COMMITTEE
February 4, 2010
9:01 a.m.
MEMBERS PRESENT
Senator Linda Menard, Chair
Senator Kevin Meyer, Vice Chair
Senator Hollis French
Senator Albert Kookesh
Senator Joe Paskvan
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 216
"An Act relating to grants to victims of a disaster in this
state; and providing for an effective date."
MOVED SB 216 OUT OF COMMITTEE
SENATE BILL NO. 217
"An Act relating to the issuance of state-guaranteed revenue
bonds by the Alaska Housing Finance Corporation to finance
mortgages for qualifying veterans; and providing for an
effective date."
MOVED SB 217 OUT OF COMMITTEE
SENATE BILL NO. 63
"An Act relating to transfer restrictions on trust interests."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 216
SHORT TITLE: GRANTS TO DISASTER VICTIMS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/10 (S) READ THE FIRST TIME - REFERRALS
01/19/10 (S) STA, FIN
02/04/10 (S) STA AT 9:00 AM BELTZ 105 (TSBldg)
BILL: SB 217
SHORT TITLE: GUARANTEED REVENUE BONDS FOR VETERANS
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
01/19/10 (S) READ THE FIRST TIME - REFERRALS
01/19/10 (S) STA, FIN
02/04/10 (S) STA AT 9:00 AM BELTZ 105 (TSBldg)
BILL: SB 63
SHORT TITLE: TRANSFER RESTRICTIONS ON TRUSTS
SPONSOR(s): SENATOR(s) MCGUIRE
01/21/09 (S) PREFILE RELEASED 1/16/09
01/21/09 (S) READ THE FIRST TIME - REFERRALS
01/21/09 (S) STA, JUD, FIN
02/04/10 (S) STA AT 9:00 AM BELTZ 105 (TSBldg)
WITNESS REGISTER
MCHUGH PIERRE, Deputy Commissioner
Department of Military and Veterans Affairs (DMVA)
Ft. Richardson, AK
POSITION STATEMENT: Provided information for SB 216.
MIKE O'HARE, Deputy Director
Division of Homeland Security and Emergency Management
Department of Military & Veterans Affairs (DMVA)
Ft. Richardson, AK
POSITION STATEMENT: Provided information for SB 216.
DAN FAUSKE, CEO
Alaska Housing Finance Corporation (AHFC)
Anchorage, AK
POSITION STATEMENT: Provided information for SB 217.
JOE DUBLER, CFO and Finance Director
Alaska Housing Finance Corporation (AHFC)
Anchorage, AK
POSITION STATEMENT: Provided information for SB 217.
BRYAN BUTCHER, Public Affairs Director
Alaska Housing Finance Corporation (AHFC)
Anchorage, AK
POSITION STATEMENT: Provided information for SB 217.
ESTHER CHA
Staff to Senator McGuire
Alaska State Legislature
Juneau, AK
POSITION STATEMENT: Presented SB 63.
DOUGLAS BLATTMACHR, President
Alaska Trust Company
Anchorage, AK
POSITION STATEMENT: Supported SB 63.
DAVID SHAFTEL
Shaftel Law Offices
Anchorage, AK
POSITION STATEMENT: Provided information for SB 63.
ACTION NARRATIVE
9:01:47 AM
CHAIR LINDA MENARD called the Senate State Affairs Standing
Committee meeting to order at 9:01 a.m.
Present at the call to order were Senators French, Meyer,
Paskvan, Kookesh and Menard.
SB 216-GRANTS TO DISASTER VICTIMS
9:02:33 AM
CHAIR MENARD announced the first order of business to come
before the committee would be SB 216.
MCHUGH PIERRE, Deputy Commissioner, Department of Military and
Veterans Affairs (DMVA), said that in addition to state
disasters, two presidential disasters were declared in 2009:
flooding on the Yukon and Kuskokwim Rivers and mudslides in
Kodiak. He explained that the Legislature implemented Individual
Assistance Grants in 1977 in the amount of $5,000 which go to
victims who have no other means of recovery, such as insurance
or savings. Mr. Pierre felt that $5,000 was an inadequate amount
to help people get back on their feet during the 2009 disasters.
He noted the purpose of the Individual Assistance Grant is not
to make disaster victims whole again, but to help them start to
recover. He felt the grant amount should be increased to half of
the federal amount which is adjusted annually by the consumer
price index; in 2009 it was $30,300 and in 2010 it dropped to
$29,900. The proposed amount [for the Individual Assistance
Grants] was thus $14,950 or half of the 2010 federal grant
amount. He pointed out that $14,950 would be a maximum and does
not mean that every person would get that amount.
SENATOR PASKVAN asked how much more money would have been
distributed in 2009 if the $14,950 grant amount was in place. He
asked what the rationale is for the 50 percent of the federal
standard.
MIKE O'HARE, Deputy Director, Division of Homeland Security and
Emergency Management, said that after the 2008 Tanana floods, a
multi-agency task force considered the Individual Grant Program
and modernization of disaster assistance according to the
current economy. The task force included Homeland Security and
Emergency Management, DMVA, Health and Social Services, Commerce
Community Economic Development, [Department of] Labor, and the
federal Department of Agriculture. The task force suggested
increasing the grant amount to half of the Federal Individual
Assistance amount, similarly allowing fluctuation with the
consumer price index and the economy. Mr. O'Hare pointed out
that the state is not an insurance company but does try to help
[disaster victims] get some normalcy back, such as heating
systems, subsistence tools or other appropriate, eligible costs.
He stressed that the grants are not issued lightly but involve
an intricate application process utilizing staff who go to the
affected communities, set up disaster assistance centers,
interview the victims and identify losses and proof of loss.
9:08:35 AM
MR. O'HARE said a mechanism is needed to increase the cap amount
of the grant while allowing it to fluctuate with the economy.
MR. PIERRE explained that a presidential disaster is much larger
than a state disaster and the grants should not be equal. He
reported that the majority [of last year's disaster victims]
were covered by, and received money from, the Federal Emergency
Management Association (FEMA). A disaster victim can only
receive money from either the federal or state program, not
both. Only about 30 people received state Individual Assistance
Grants during the Interior flooding.
MR. O'HARE said if all eligible state victims had been given the
proposed maximum amount, it would have equated to $600,000 to
$700,000. He felt that having provided eligible people with a
$5,000 check was nothing.
SENATOR KOOKESH asked how a person's eligibility for federal
versus state funding is determined.
MR. O'HARE replied that a federal disaster declaration,
requested by the Governor, considers the communities affected.
In the 2009 flooding, the communities along the Kuskokwim River
and other smaller communities with about 30 affected families
were identified. The federal government approved the disaster
declaration for the widespread Yukon Kuskokwim communities. Due
to the lack of widespread damage in the other, smaller
communities, those 30 individual affected families did not
qualify for federal aid.
9:10:51 AM
CHAIR MENARD said she appreciated that the amount [of the
Individual Assistance Grant] had not been looked at in 20 years
and that the increased amount would be the maximum allowable
grant.
SENATOR MEYER moved to report SB 216 from committee with
individual recommendations and attached fiscal note(s). There
being no objection, the motion carried.
At Ease from 9:12 a.m. to 9:14 a.m.
SB 217-GUARANTEED REVENUE BONDS FOR VETERANS
9:14:06 AM
CHAIR MENARD stated that SB 217 would be the next order of
business to come before the committee.
DAN FAUSKE, CEO, Alaska Housing Finance Corporation (AHFC,) said
Alaska is one of five states authorized to issue veteran's
mortgage bonds. These bonds are the only type that must be
guaranteed by the state of Alaska, meaning the state would stand
behind the bonds if any problems arose. These bonds must also be
approved by the voters. The last vote, in 2002, passed by 70 or
72 percent and resulted in a $500 million authorization, of
which $95 million is remaining. The veteran's mortgage bonds are
some of AHFC's highest performing bonds; one of the indentures
has a delinquency rate of 1.2 percent which is the lowest in the
United States. He pointed out that Alaska has the highest per
capita rate of veterans in the US. The bonds are federally tax
exempt meaning about 100 basis points difference or 1 percent of
interest. As of December, the veterans bonds were trading at
about three-eighths of a point of interest below the
conventional market. Bonds issued to date total $2.6 billion and
bonds outstanding equal $338 million and loans. All indentures
included, delinquency is at 3.11 percent, which is very good.
The veterans bonds have been very popular and very well
performing and AHFC needs the legislature's permission to ask
for voter approval, via the general election ballot in November,
of an additional $600 million of state guaranteed bonds to be
issued by AHFC for the purchase of mortgage loans made to
qualifying veterans.
9:17:32 AM
JOE DUBLER, CFO and Finance Director, AHFC, pointed out that SB
217 authorizes AHFC to go to the voters to obtain authorization;
it does not authorize AHFC to issue the bonds.
SENATOR MEYER asked if this would go into the general election
or the primary.
MR. FAUSKE replied the issue would go into the general election.
SENATOR PASKVAN asked if AHFC had done any analysis or had any
problems with upside-down mortgages, particularly with the
veterans program.
MR. FAUSKE said AHFC intentionally stayed out of mortgage-backed
securities, zero interest loans and adjustable rate arms. Alaska
did not experience a lot of spec buying and currently ranks 50th
or 49th in delinquencies. The state has seen a slight increase
in delinquencies and foreclosures but nothing causing great
alarm. He said he has seen a slowdown in the industry during the
last 14 months during the national financial crisis and
attributed this to the federal government's bolstering of Fannie
Mae and Freddy Mac, making money available for 1 and 2 percent
which inhibited AHFC from entering the market. AHFC has seen a
recovery and has been back in the market with one issuance
several months ago of $160 million, and now has an agreement on
a new issue bond program with Fannie Mae guaranteeing AHFC $193
million.
9:20:03 AM
MR. FAUSKE said the market in Alaska is very healthy; sales
values have stayed level. He explained that some other states
experienced worse financial crises followed by unemployment. The
people that use these veterans bonds are employed and are in the
military or retired with a pension. The delinquency and
foreclosure rates are below national and statewide averages.
MR. DUBLER said that analyzing an existing loan is difficult
because the current market value for every property in their
portfolio would have to be determined and compared with the loan
balance. Instead, AHFC keeps an eye on trends in the economy. He
explained that the Alaskan economy has not seen a rapid decline
in property values, which led to most of the lower 48 problems.
He said AHFC doesn't allow people to take a second out on a
mortgage loan where AHFC has the first, which would dilute it
and cause problems.
9:22:41 AM
SENATOR PASKVAN said he understood that they were not doing an
individual market analysis of a home.
SENATOR FRENCH asked if they loan 90 percent of the value of the
house, not 100 percent.
MR. DUBLER said it depends on the type of loan. For a
conventional loan it would be 80 percent. If a person has
Veteran's Affairs (VA) insurance, AHFC will go up to the VA
insurance limit of 95 percent. AHFC can go up to 97 percent on
Federal Housing Association (FHA) loans that have loan
guarantees that mitigate any loss AHFC could have on that
property.
MR. FAUSKE said the only loan that AHFC offers at 100 percent is
the Teacher Housing loan which has proven to be successful at
recruiting and retaining teachers.
SENATOR FRENCH confirmed that in 2002 AHFC started out with $500
million worth of bonds and has issued $400 million worth of
bonds. He asked how the bonds are parsed out in accordance with
the value of a home.
MR. DUBLER replied that if a person comes in to borrow money,
AHFC purchases that money from a bank, holds it in their
portfolio until enough is accrued to fund into a bond deal. When
AHFC runs out of bond funds, they would sell another bond and
get, for example, another $50 million and peck away at it until
it is all gone, then return to the market for another $50
million.
9:24:42 AM
SENATOR FRENCH asked if $500 million would be loaned for 500 $1
million dollar homes.
MR. DUBLER responded that is correct.
SENATOR FRENCH said a layman's understanding of this program
might be that the legislature gives AHFC the authority to issue
bonds and as the loans are made, the bonds are pledged or sold
and are slowly wrapped up or tied up in homes that veterans are
living in.
MR. DUBLER said that is correct.
MR. FAUSKE said AHFC will not go out the day after gaining voter
approval and issue $600 million worth of bonds. AHFC is capped
on an annual basis, but would get the authorization to move
freely within that market for the next four to six years and
then seek approval again, through the legislature and voters, to
continue the program. Depending on volume and activity within
the loan portfolio, AHFC will determine when to sell and how
much to sell.
9:26:22 AM
SENATOR FRENCH said it seems AHFC has been careful and judicial
about issuing the bonds. He asked what happens to the debt and
how it comes back to the state of Alaska if a person defaults on
a loan and walks away from a house he or she owes $200,000 on.
MR. DUBLER replied that if a loan goes bad, the State would only
be responsible if all the corporation's reserves and the other
assets in the indenture were gone. He explained that once the
property is foreclosed, AHFC owns it, puts it back on the market
and sells it. AHFC would then go against VA, FHA or the Private
Mortgage Insurance (PMI) provider for any incurred losses. He
reported that in the late 1980's and early 1990's, AHFC had over
5,000 Real Estate Owned (REO) properties. To slow mortgage
decline, AHFC did not dump them back on the market but rather
held onto some properties which helped the market recover. That
is one of advantage of the corporation foreclosing as opposed to
a bank.
9:28:30 AM
SENATOR PASKVAN asked if acquired equity is available for
additional loans as a revolving loan fund.
MR. DUBLER said that is correct; it is called recycling and AHFC
does a lot of recycling in their programs. For example, a person
has borrowed money from AHFC and then moves, that person pays
off that loan and AHFC takes those proceeds and loans it out to
the next person. Because there is a cost associated with selling
bonds, this saves the corporation money.
SENATOR PASKVAN asked if the amount of cumulative loans is $3.1
million.
MR. DUBLER replied "not necessarily" because bonds that AHFC has
refunded are also included in the $2.6 million. For example, if
a $50 million bond deal is outstanding at 8 percent and current
rates drop to 6 percent, AHFC will pay those bonds off and
reissue at 6 percent to save additional money.
SENATOR PASKVAN asked what current cumulative monies are in the
market for veterans and for the program.
MR.DUBLER said $341 million in mortgage loans are currently
outstanding in the veterans program, in all of the indentures.
Currently $338 million in bonds, of the $2.6 billion, are
outstanding.
MR. FAUSKE stated that AHFC has issued $2.6 billion in veterans
bonds since 1982.
9:31:11 AM
SENATOR PASKVAN said if a veteran gets a loan, buys a home,
sells it 10 years later, AHFC gets the money back... He said he
thinks he understands the process.
MR. FAUSKE said the money could then be recycled for another
qualifying veteran. Mr. Fauske said AHFC cannot transfer the
money around and use it for other things; the money is
specifically for bond indentures for veterans. The money will
reside within qualifying veterans.
SENATOR MEYER asked if the loans are transferrable to someone
outside the family and if the family members assume the loan if
the borrower dies.
MR. DUBLER said the loans are qualifying assumable loans. A
secondary party would be able to assume the loan, including
descendents, only if the person was a veteran qualified to get a
loan under this program.
MR. FAUSKE explained that if a veteran dies the family does not
have to leave the house.
SENATOR MEYER said he understood that if the borrower is alive
and wants to sell to someone else, that person would have to be
a veteran; if not, the loan is not assumable.
MR. DUBLER replied that is correct.
SENATOR MEYER said he saw a current rate of 4.25 for a 15 year
conventional loan. He asked if AHFC's rates are about three-
eighths below that, under 4 percent.
MR. DUBLER said AHFC does not do a lot of 15 year loans, but the
30 year rate is 4.625 and typically the 15 year is three-eighths
of a point below that at 4.25.
SENATOR MEYER asked about the general activity for real estate
in Alaska.
9:34:18 AM
MR. FAUSKE said AHFC purchased 240 loans with a total principle
balance of approximately $47 million in the first 10 months of
2009. AHFC's interest rates became more competitive in
September, 2009 and in the last two months of 2009 AHFC
purchased 189 loans for a total principle balance of $40
million. He noted these last two months of activity almost
equaled the previous 10 months in 2009. Loan commitments for
January 2010 equal $106 million already. AHFC's rates are below
market in some areas and good activity should come in the coming
year. He said Alaska's market is strong but has still
experienced a slowing. Alaska got spoiled a couple of years ago;
now the Alaska real estate market is sluggish and slower but is
healthy.
9:37:03 AM
SENATOR FRENCH pointed out that the sectional analysis does not
have an author and seems to pertain to a different bill. He
suggested that it be replaced before SB 217 goes to Senate
Finance.
MR. FAUSKE agreed that the sectional analysis is for a different
bill.
SENATOR FRENCH also noted that the fiscal note refers to a
statewide public vote on $800 million in revenue bonds but
should reflect SB 217 which is for $600 million.
MR. FAUSKE said there was previous confusion between $800
million or $600 million; $600 million was put forward.
SENATOR MEYER asked if the committee should amend or modify the
fiscal note or just make note of it for the record and ensure a
new fiscal note is made and passed up to finance.
9:39:05 AM
BRYAN BUTCHER, Public Affairs Director, AHFC, said when AHFC was
working with the Governor's office, the number was $800 million.
Federal law caps AHFC at selling a maximum of $100 million worth
of bonds a year, so the overall amount simply determines how
often the program has to go back to the legislature and before
the voters. He explained that the program is back before the
voters this year because the program will run out of funds
sometime in 2011. Everything AHFC had turned into the Governor's
office was at $800 million and when the Governor's office
released the bill to the Legislature it said $600 million. AHFC
is fine with either amount and it is up to the Legislature.
Instead of going back to the voters in 2016, $800 million would
mean the program would not have to go back before the voters
until 2018.
SENATOR FRENCH said the decision is better left to the finance
committee; the state affairs committee is endorsing the general
concept. He just wanted to make sure everyone was aware of the
anomaly. He did not propose an amendment.
SENATOR PASKVAN pointed out that the fiscal note is not about
distributing $600 million or $800 million; the fiscal note is
for $150,000 to put it before voters.
SENATOR MEYER said he did not think the $150,000 amount of the
fiscal note would change whether the authorization is for $600
or $800 million.
MR. BUTCHER said that is correct. The $150,000 is to make sure
Alaskans understand what they are voting on. In 2002, $200,000
was spent on educating voters through mailers explaining that
this is not spending $600 million but investing in veterans and
mortgages.
MR. DUBLER said AHFC has to be careful not to be seen as
promoting SB 217, but has to provide information.
9:42:03 AM
SENATOR MEYER expressed the opinion that it would be better to
fix SB 217 before it leaves committee, but the question of $600
or $800 million is a decision for the finance committee. The
state affairs committee should support the program at either
amount. He felt it was important for the record to reflect that
the analysis needed to be changed to reflect the amount that the
finance committee comes up with.
MR. BUTCHER said he would certainly do that.
9:43:00 AM
SENATOR MEYER moved to report SB 217 from committee with
individual recommendations and attached fiscal note(s). There
being no objection, the motion carried.
At Ease from 9:43 a.m. to 9:45 a.m.
SB 63-TRANSFER RESTRICTIONS ON TRUSTS
9:45:46 AM
CHAIR MENARD announced the next matter to come before the
committee would be SB 63.
SENATOR MEYER moved to adopt the proposed committee substitute
CS for SB 63, labeled 26-LS0317\R, as the working document of
the committee. There being no objection, version R was before
the committee.
ESTHER CHA, staff to Senator McGuire, sponsor of SB 63, read the
following statement:
The climate for trust and estate planning is highly
competitive, and the trust business is a multi-billion
dollar sector that often crosses state lines in order
to take advantage of more attractive state trust laws.
In 1997, Alaska became the first state to establish a
law that allows a person to form an irrevocable trust,
be a discretionary beneficiary of the trust and, if
the trust has a spendthrift clause, protect the trust
assets from the settlor's creditors.
9:47:21 AM
To give a little background, I'll summarize the aspect
of trusts to which this bill refers. In trusts, there
are three parties: a settlor also known as a trust-
maker, grantor, or testator; the trustee, which can be
an individual or an institution; and beneficiaries.
The settlor designates whether or not a beneficiary is
discretionary, which means that payment of
distributions is determined based on the discretion of
the trustee instead of the settlor stating how much
and how often payments will be distributed. With
discretionary beneficiaries, trustees may be given
standards by which to exercise discretion e.g. the
HEMS or Health, Education, Management, and Support
standard. If the trust has a spendthrift provision, a
creditor cannot force the trustee to pay money
directly to the creditor. Instead, the creditor must
wait until the trustee pays out the distribution to a
beneficiary, at which time the creditor can seize the
assets.
Alaska established in 1997 that assets in a trust
would be protected from a settlor's creditors if he
designates himself as a discretionary beneficiary,
provided that he has no current claims pending. Since
Alaska enacted this statute, numerous other states
have enacted similar statutes. At present, twelve
states allow this type of trust. SB 63 upgrades
Alaska's trust statute by adopting provisions that
have been adopted by other states. Therefore, without
changes in legislation, Alaska would not be able to
maintain its position at the forefront.
This bill provides the following amendments:
· It clarifies the burden of proof which a creditor
must meet to establish that a transfer in trust
was done with the intent to defraud a creditor
· Clarifies that a spendthrift provision will apply
to a trust if distributions are made under the
exercise of discretion by a trustee who is not
the settler, whether or not the exercise of the
discretion is governed by the standard
· Provides that the spendthrift provision in a
trust will apply even though the trustee may
distribute income or principal to the settlor to
pay income taxes
· Clarifies that a beneficiary's interest in a
trust, whether or not vested, is not considered a
factor or economic circumstance in the division
of property subject to divorce
These changes in SB 63 were brought to our office's
attention by experts in the probate and trust field.
SB 63 is part of an ongoing effort to modernize our
trust laws and by doing so (1) to create jobs and
revenue, (2) to diversify our economy, and (3) to
continue making Alaska attractive to trust business
and investment.
9:50:35 AM
DOUGLAS BLATTMACHR, President, Alaska Trust Company, spoke in
support of SB 63. He said Alaska Trust Company is constantly
trying to update trust laws to keep them the best in the
country, bringing substantial assets and employment
opportunities to Alaskans.
9:52:04 AM
SENATOR PASKVAN said he wanted to make sure he understood the
difference between the original bill and committee substitute:
(3)(F) was removed from Section 1 of the original bill [Version
A] so that in the committee substitute [Version E] what was
section (3)(G) is now section (3)(F). He asked for the reason
for the removal of 3(F) from [Version A].
CHAIR MENARD pointed out that section (3) is on page 3.
MS. CHA pointed out that a house companion bill moved out of
judiciary yesterday. She explained that some of the committee
substitute is a reflection of changes made in the house.
DAVID SHAFTEL, Shaftel Law Offices, said he is a private
attorney and a member of an informal group of attorneys and
trust officers that has been working with the Legislature since
the late 1990's on state and trust legislation. He said the
Alaska Legislature has passed a number of bills that have
improved this area of law for Alaska residents and that the
statutes are often used by non-residents who want to take
advantage of Alaska's improved law in this area.
9:55:26 AM
MR. SHAFTEL said he does not have a copy of the committee
substitute [Version E].
SENATOR PASKVAN said the provision labeled as [Section (3)(F),
subparagraph (i) in Version A] addressed the "reasonable
definite standard as described in 26 CFR1.674(b)-1(b)(5)" and
[Section (3)(F), subparagraph (ii) in Version A] read "an
ascertainable standard relating to health, education, support,
or maintenance as described in 26 U.S.C. 2041(b)." He said he is
wondering why this section [Section 1(3)(F)(i)and (ii) in
Version A] is no longer in committee substitute [Version E].
MR. SHAFTEL said the house bill combines [Section 1(3)(E) and
(F) from Version A] into a simpler statement. He said people
who have worked on SB 63, including himself, must have decided
it would be simpler to use this language rather than the
references to the federal regulations and code.
9:57:45 AM
SENATOR PASKVAN said [Section 1(3)(E) of Version A] reads "the
exercise of discretion by a trustee who is not a settlor and
that are not governed by a standard". The committee substitute
removes the conjunctive term "and" and says, "whether or not the
exercise of discretion is governed by a standard". He asked why
"and" was changed to "whether or not it is governed by a
standard."
MR. SHAFTEL asked for clarification.
SENATOR PASKVAN said that on page 3, line 2 of the original bill
[Version A], it says, "and that are not governed by a standard."
He said he assumed the phrase is addressing the exercise of a
trustee who is not a settlor "and that are not governed by a
standard" as to the exercise of discretion.
MR. SHAFTEL replied, "Correct."
SENATOR PASKVAN said the committee substitute [Version E]
eliminates the conjunctive ["and"] and says "whether or not the
exercise of discretion is governed by a standard."
MR. SHAFTEL said [Section 1(3)(F) of Version A], which
referenced two statutory and regulatory standards was
eliminated. He explained that the two concepts are being
combined into one simple subsection that says the distributions,
that are made under the exercise of discretion by a trustee who
is not the settlor, can be governed by a standard but don't have
to be governed by a standard - either way, [distributions] are
acceptable. This type of trust allows the assets in the trust to
be protected from the creditors of the settlor. SB 63 has been
simplified and the two concepts have been incorporated into
[Section 1(3)(E) of Version E].
10:00:59 AM
MR. SHAFTEL reiterated that the meaning has not been changed.
The original bill [Version A] said the trust still protects
assets from the creditor even though the trustee is not governed
by a standard. It then says that assets are still protected from
the creditors of the settler even though the trustee is subject
to a standard. [Section 1(3) (E) and (3)(F)] were combined to
say this trust is protected from the creditors of the settler
"whether or not" the trustee is governed by a standard. It is a
simplification of language.
10:02:09 AM
SENATOR PASKVAN asked if it was correct he was establishing a
method by which a creditor can't have access to monies of a
settlor in a trust that has a trustee who is another person.
MR. SHAFTEL replied that was correct and explained that this
type of trust was initially approved by the Legislature in 1997.
He said the Legislature has enacted various additional
provisions to strengthen and increase the workability of this
type of trust about six different times. With SB 63, the
Legislature is considering another slight improvement. This kind
of trust was always set up to have an independent trustee who
had absolute discretion as to whether or not to make
distributions. Several states have enacted laws that allow the
trustee of this type of trust to be subject to a standard,
meaning directions or guidelines. These other states have said
this trust will work even though the trustee is subject to a
standard. SB63 would make Alaska's trusts subject to a standard
as well and still protect the assets from the settlor's
creditors.
10:06:06 AM
MR. SHAFTEL said the language being discussed is a couple of
different ways of stating the concept that the trustee can be
subject to a standard.
10:07:54 AM
CHAIR MENARD said the committee can continue to become better
informed but she felt it would be better if Senator McGuire
could help clean up SB 63 for better understanding.
SENATOR PASKVAN agreed and asked Mr. Shaftel what [Section 1
(3)(E)] does beyond [Section 1 (b)(1)] which addresses the clear
and convincing standard with the settlor regarding an intent to
defraud.
MR. SHAFTEL replied that whenever one is required to prove
fraud, the standard burden of proof is by clear and convincing
evidence. Alaska's statute failed to address that subject; other
states' statutes point it out expressly in their statutes.
[Section 1 (b)(1)] is making it clear in the statue.
10:10:23 AM
SENATOR PASKVAN referred again to [Section 1(3)(E) and (F),
Version E] and asked what is being advanced, who is being
protected and who is at risk.
MR. SHAFTEL replied that this type of trust is designed to
provide two benefits to Alaska residents and non-residents that
want to use it. One, it allows a person who is solvent and has
adequate assets to put assets into irrevocable trust for the
benefit of that person and his or her family, assuming there is
no intent to defraud creditors. He noted that a person could
always do this for family, however, as of 1997, the creator of
the trust could also be a beneficiary of the trust. He explained
that the trustee, who is not the creator of the trust, can have
discretion to make distributions to the creator as well as the
creator's family.
MR. SHAFTEL said the second benefit is that the creator of the
trust can use the trust to minimize the amount of federal estate
taxes that will have to be paid upon his or her death. If a
person creates the same type of trust, but is not a beneficiary
of the trust, and makes gifts to that trust, then those assets,
plus the growth of those assets, are not taxed upon the
creator's death. Because this type of trust is subject to the
discretion of a trustee, who is not the person who created the
trust, experts said it should not be included in the creator's
gross estate tax, under the federal estate tax, when he or she
dies. Mr. Shaftel said the IRS just issued a private letter
ruling approving that.
10:14:43 AM
MR. SHAFTEL summarized the second benefit of this kind of trust:
it allows people to make gifts for their family into an
irrevocable trust, which will not be taxed when they die.
However, if they need the funds themselves, the trustee can
distribute the funds back to them. He said it is a very helpful
estate planning approach for Alaska families and is very
popular.
SENATOR PASKVAN thanked Mr. Shaftel and said he understands more
clearly now. He said some clean up between the original bill and
the committee substitute is needed.
CHAIR MENARD said she will hear SB 63 again after flushing it
out with Senator McGuire and the involved attorneys.
10:16:26 AM
SENATOR MEYER asked if a person's estate has to be a certain
value before a trust makes sense.
MR. SHAFTEL said not necessarily; it depends upon the purpose of
the trust and the needs of the person creating it. He said
trusts are often created with $25,000 or $50,000 to help
children or grandchildren go through college. He mentioned that
a temporary repeal of the federal estate tax is in place but if
Congress does not act, any person who dies who has more than 1
million assets will be subject to federal estate tax in 2011.
[SB 63 was held in committee.]
10:19:13 AM
There being no further business to come before the committee,
Chair Menard adjourned the meeting at 10:19 a.m.
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