HB 208-TRUSTS; COMM PROP TRUSTS; POWERS OF APPT  2:17:22 PM CHAIR CLAMAN announced that the first order of business would be HOUSE BILL NO. 208, "An Act relating to trusts and powers of appointment; and providing for an effective date." 2:18:32 PM REPRESENTATIVE DELENA GOODWIN JOHNSON, Alaska State Legislature, paraphrased her sponsor statement, as follows [original punctuation provided]: Alaska has set a precedence as being a leader in the Nation's estate and tax planning Industry. Banks, trust companies, Alaskans, and Americans from all over seek out Alaska to be the home of their financial assets due to our environment which promotes economic security, strength, and growth. House Bill 208, seeks to continue the prosperity of this environment through further fostering a conducive place where people can invest their assets and know that our statutes will insure their integrity, and ability to benefit their intended audience. We can look at House Bill 208 as a "flexibility" bill which provides for those looking to perform the best estate planning, whether they are residents or non- residents, assurance that their irrevocable document won't hinder its beneficiaries through unintended results including; providing financial resource to a dangerous habit, not providing ability to pay for treatment of an unforeseeable disability, or by providing financial resource to someone who would rather put it towards a suitable charity. Decanting may also provide the ability to keep documents viable in response to changes in State or Federal tax laws. Since 1997, Alaska has been a leader in adopting laws to improve estate and tax planning options for both Alaskans and non-Alaskans. House Bill 208 is a continuation of this leadership as it provides expansion and clarification to our existing statutes. House Bill 208 focusses on expanding and clarifying four key areas of our State Statutes surrounding irrevocable trusts. The four areas are Decanting of Trusts, Powers of Appointment, traceability of Trust Assets for Tax Efficiency, and Clarification of Trustees' Specific Powers. These four areas have since, and in some cases prior to, 1997 been forced to be decided by a Judge. Providing the ability for these four areas to be clearly outlined by the original settlor, and by providing beneficiaries the ability to adapt to unforeseen events, we continue to provide an environment where irrevocable trusts, like our State and National Constitution, may be amended to provide, or not provide, in clearly outlined, yet commonly unforeseen, circumstances. Keeping all of these things in mind, I humbly ask for your support in keeping Alaska a leader in innovation in the trust industry as the financial industry continues it's perpetually changing mentality by passing House Bill 208. 2:21:23 PM SHAE SEGART, Staff, Representative DeLena Goodwin Johnson, Alaska State Legislature, paraphrased the PowerPoint presentation, titled "House Bill 208," as follows [original punctuation provided]: Why is House Bill 208 being introduced? What problem is being solved? House bill 208 seeks to expand, and clarify current State Statutes surrounding one of our most successful industries. The piece of legislation in front of you is seeking to continue the process started in 1997 by giving the State of Alaska a competitive advantage to once again be the best jurisdiction for Alaskans, and non-alaskans, to keep their trusts and estates in. Trust and Estate planning is one of these things that commonly gets overlooked in the search for industries that really strengthen our economy. We saw a value to this industry in 1997 when the Alaska State Legislature passed the Alaska Trust Act which quickly propelled our State to the top of the nation's ranking in Estate and Tax Planning Industry. It holds vast benefits to Alaskans as well as financial institutions in Alaska. I would like to point you all to a few documents in your bill packet, the first one, as we go forward to the four main areas of this bill is a matrix what you decant, what happens when you decant, and some kind of hypotheticals in moving forward. The other one is a trust and estate glossary, it has some helpful terms. As we move through this law that has a vernacular all to itself, and it is a very nuanced part of our state statute books. The next one would be our ranking comparatively to other states in the trust and estate planning industry. We are currently number 7, we used to be farther up on this list when we passed the Alaska Trust Act in 1997, and have since sunk in the rankings. 2:23:30 PM Online I have Matthew Blattmachr of Peak Trust Company, who will be able to answer any really professional questions that get really technical into the trust profession and industry. Going forth, there are four areas where this bill really seeks to add expansion, as well as clarify in our existing statutes. Since 1997, Alaska has been a leader in adopting laws to improve estate and tax planning options for both Alaskan and non-Alaskans. House Bill 208 is a continuation of this leadership as it adds expansion and clarification to our existing statutes. Decanting. Decanting, of course, is the act of pouring liquid from one container to another as often occurs with wine. When one trust pays (or pours) its assets to another trust, this too is referred to as decanting. Decanting is used to correct drafting errors, reduce costs of trust administration, enhance tax effects and many other reasons. While Alaska has had decanting statutes for nearly 20 years, House Bill 208 would provide additional flexibility and clarification to this great statutory provision. Decanting is commonly used by Alaskans who are looking to update their trust documents. Additionally, non- residents bring their business to Alaska because of this progressive statute. 2:25:02 PM Powers of Appointment. One of the most powerful estate planning tools is to grant someone, such as a beneficiary, a "power of appointment," which allows that person the right to specify where property will pass at certain times, such as when the beneficiary dies. The proposal would clarify certain aspects of Alaska law relating to these powers so they can be used more efficiently for tax and other reasons. Tracing of Trust's Assets for Tax Efficiency. Trusts are often created by more than one settlor. Under Internal Revenue Code Section 671, a settlor is treated as the owner of the portion of the trust to which the settlor contributed, if the settlor reserves certain powers over the trust property. Under AS 13.36.169, a trustee may divide a trust into one or more separate trusts if certain tax elections are made. However, the statute does not contemplate dividing a trust into separate portions when there are multiple settlors and treating each separate portion as being contributed to solely by one settlor. Although a trust instrument might grant this power, Alaska law does not. The proposal would allow a trustee who has traced contributions to a trust, as well as earnings and reinvestments on such contributions, to divide the trust into one more separate trusts of which each settlor would be treated as the sole settlor of the trust as to the portion to which he or she contributed. This power would provide more clarity as to the tax treatment of trusts with more than one settlor. No other state appears to have a similar law in effect at this time. This bill would help Alaska remain at the forefront of trust legislation. 2:27:04 PM Clarification of Certain Trustee Powers. Alaska law grants trustees certain powers. Among these are the right to acquire insurance to protect the trust from claims from third parties; however, certain aspects of the powers are not clear. The proposal would clarify Alaska law to say that a trustee can acquire insurance to protect the trust assets from claims of third parties and the trustee from third party and beneficiary claims and to charge the premiums to the trust. These and many other Alaska laws the Legislature has enacted have benefitted Alaskans, has resulted in millions of dollars being deposited in financial institutions in the state which, in turn, have provided funding for Alaska businesses, and provided significant work for many Alaskans. We hope to see this success continue for years to come. 2:28:58 PM MATHEW BLATTMACHR, Peak Trust Company, offered that in 1997, the legislature passed the Alaska Trust Act, which put Alaska not only as the first state, but made Alaska the premier jurisdiction for trust and estate planning. These laws were powerful and created a desire from other states to copy Alaska's laws in that this would be a good industry to have in their state, it's a clean industry, it doesn't require any outlay from the state in order to bring it to a state, or requires maintain the industry. Therefore, he said, it created a competitive environment with options for clients and their advisors, and in the event Alaska wants to maintain its standing, it must frequently consider additional bills that not only clarify but add to existing statutes. [MR. SIEGERT read each slide on the PowerPoint word for word, please review each slide for his testimony.] 2:30:41 PM MR. SIEGERT turned to slide 2, "4 Areas of Concern" and paraphrased as follows: 4 Areas of Concern, Decanting of Trusts, Powers of Appointment, Traceability of Trust Assets for Tax Efficiency, and Clarification of Trustees' Specific Powers MR. SIEGERT turned to slide 3, "Helpful Definitions" and advised these definitions are not located in the glossary. MR. SIEGERT turned to slide 4, "Decanting a Trust," questions posed to Mr. Blattmachr, and paraphrased as follows [original punctuation provided]: Decanting a Trust. Why would someone want to decant a trust? We already have decanting statute, isn't that enough?! What instances are most common that call for a trust to be decanted? 2:32:04 PM MR. BLATTMACHR answered there are a variety of reasons someone would want to decant, and advised that the matrix provided within the materials assists in setting up some examples as to how decanting can help. Decanting, he explained, may include a potential scrivener's error in the original document, and because the issue was dealing with irrevocable trusts and there was no way to revoke them, the technical way would be to decant. An additional reason for decanting may be changes in tax law, and pointed to the shift in the national presidential regime which may bring about tax law changes, thereby, rendering some planning documents as inefficient or ineffective. The current decanting statute is almost 20 years old, he described, and due to advancements in decanting and estate planning law, this bill would add some flexibility for Alaskan practitioners to match what other states currently allow. He explained that most of these instances are brought up due to a certain need to amend the document in some manner, and is done so for the best interests of the beneficiaries, whether it was updating provisions in the document or changing dispositive provisions, he explained. 2:34:01 PM MR. SIEGERT turned to slide 5, "Sec. 29, 30" having to do with decanting, and paraphrased as follows [original punctuation provided]: Section 29 Adds a new section 13.36.380 (Distribution of principal) (a) Authorizes a court to authorize a trustee to invade the principal of a trust if the court makes certain findings (b) Limits the application of this section to an irrevocable trust for which the trust instrument provides for certain distributions Section 30 (a) indicates that a second power, as defined in the subsection, created by a first power may be validly exercised to postpone the vesting of property without regard to the creation of the first power (b) states that if a first power is exercised to create a second power as defined in the subsection, the second power is not valid unless all property interests vest not later than 1000 years after the creation of the first power. (c) defines "first power" for the section. MR. SIEGERT turned to slide 6, "Powers of Appointment," questions for Mr. Blattmachr, and paraphrased as follows [original punctuation provided]: Powers of Appointment. Do Powers of Appointment have to do with more than just the distribution of assets? Who holds the Power of Appointment in a trust? Does this bill change that to more people? Is the Power of Appointment a Fiduciary or Non-fiduciary power? Why do they matter? MR. BLATTMACHR responded that powers of appointment can do more than the distribution of assets because that provision broadly gives the beneficiary the ability to appoint assets for a variety of reasons, such as winning the lottery and appointing the assets to a charity, putting assets into a trust for a child with substance abuse problems. The powers of appointment can be used for tax planning reasons, for example, to pull the assets out of someone's estate and into their estate. Typically, he advised, the powers of appointment is given to the beneficiary of the document, although sometimes they can be further assigned, and the bill does not change who is appointed or the number of people. He offered that powers of appointment can be held in a fiduciary or non-fiduciary power depending upon the document and the power itself, and they matter as they increase flexibility within trust documents. 2:37:04 PM CHAIR CLAMAN referred to slide 5, Section 30, subsection (b), which read as follows: (b) states that if a first power is exercised to create a second power as defined in the subsection, the second power is not valid unless all property interests vest not later than 1000 years after the creation of the first power. CHAIR CLAMAN noted there is a rule of perpetuity making it 1,000 years after the creation of the first power, and asked the justification for 1,000 years. MR. SIEGERT answered that under current statute [AS 34.27.051] there is a statutorily protected section of 1,000 years of perpetuity, and this does not change the common 21 year rule of perpetuity. He advised there are many states with expanded rules against perpetuities and Alaska is one state that contains 1,000 years. CHAIR CLAMAN commented that that is existing statute and surmised that nothing was being changed today with respect to trusts. MR. SIEGERT agreed. 2:39:15 PM MR. SIEGERT turned to slides 7-12, "Sections 1, 5-7, 10-22 (Powers of Appointment), and read each slide word-for-word. [Please see PowerPoint "House Bill 208."] 2:45:15 PM MR. SIEGERT turned to slide 13, "Traceability of Assets," questions for Mr. Blattmachr to answer, and paraphrased as follows [original punctuation provided]: Traceability of Assets. Isn't this just a way of avoiding taxes? Why don't we already have a statute protecting this already; if it is such a big deal? MR. BLATTMACHR responded that traceability of assets has nothing to do with avoiding taxes, in that it provides practitioners a provision with which to rely when unwinding a trust and separating assets. For example, practitioners can rely upon this provision when "planning the event" and they have multiple grantors of a single trust, for whatever reason, and would like to separate the assets of the trust. This provision is not a big deal, but it adds clarity to Alaska law, he commented. 2:46:35 PM REPRESENTATIVE KOPP surmised that this is technical area of law and some of these terms should be discussed for clarity, such as the definitions of fiduciary versus non-fiduciary. MR. BLATTMACHR responded that fiduciary versus non-fiduciary comes down to who holds that power. In the event a person is already acting in a fiduciary capacity, such as a trustee, they typically hold a fiduciary power. In the event they hold that power as a beneficiary and are not in a fiduciary capacity to begin with, typically it is a non-fiduciary power. Generally, he explained, the entity or person that holds the power dictates whether it is fiduciary or non-fiduciary. 2:48:21 PM REPRESENTATIVE KOPP referred to non-fiduciary, and asked that when a person is the holder of a non-fiduciary power, that means the person is not a beneficiary, the person is holding it in trust for another person. MR. BLATTMACHR said, "No, not necessarily." For example, in the event Peak Trust Company held a fiduciary power of appointment over trust assets, it would hold that in a fiduciary capacity, most likely. Wherein, he said, the Peak Trust Company would be held to the same standard with that power as with any other action or inaction. He related that for a beneficiary holding that power, they typically do not have to hold it in a fiduciary capacity. There may be standards to who they can appoint it to, such as a defined class of beneficiaries, and there may not be, that goes into different types of powers. He advised that they do not have a fiduciary duty when exercising that power, but again, if they are a beneficiary, they would be appointing the assets for their benefit. 2:49:46 PM REPRESENTATIVE KOPP noted that he would research the issue a bit on his own, and asked that "invasion of trust" be explained. MR. BLATTMACHR explained that invasion is typically a term that defines the appointment of assets from one trust to another trust as far as decanting. Typically, he said, it is not separated between whether that was income or principle, it is that the current trust was being invaded, pulling assets out and putting them into a new trust. 2:50:53 PM REPRESENTATIVE KOPP surmised that it has nothing to do with getting into earnings of a trust versus getting into an appropriation or a withdrawal of the principle of the trust, it doesn't break it down in that manner. He further surmised that an invasion means taking anything out of a trust. MR. BLATTMACHR responded in the sense of decanting, yes. Typically, the entirety of the original trust is put into a new trust. Although, he commented, that might change when decanting one trust and separating it out into three trusts, one trust for the benefit of three different beneficiaries and take a pro rata share. He agreed that it is typically, not necessarily the definition of principle versus income. 2:51:58 PM REPRESENTATIVE FANSLER asked that the tax structure, currently in place in Alaska, be explained, whether they are all taxed equally, and whether there are different structures. MR. SIEGERT deferred to attorney Richard Hompesch. 2:53:43 PM REPRESENTATIVE FANSLER noted that different types of trusts are available, and requested that tax liability structures be explained within the different trusts set up in the State of Alaska. 2:53:54 PM RICHARD HOMPESCH, Attorney, Hompesch Evans & Averett, advised that Alaska does not tax the income of trusts or estates under current law, trusts and estates are subject to federal income and transfer taxes. He advised that he was testifying today on his own behalf, and not on behalf of any party. 2:54:31 PM REPRESENTATIVE FANSLER specifically asked whether all trusts tax in the exact same manner, whether it be a federal or state tax structure. MR. HOMPESCH replied that the taxation of trust income varies from state-to-state, and the federal taxation income and transfer tax of trusts is generally the same. There are exceptions, some trusts are exempt from federal income taxation, known as Charitable Trusts, but most of the trusts being discussed today may be decanted into another trust and are subject to federal income taxes. REPRESENTATIVE FANSLER referred to allowing decanting due to innovations in trusts or changes in the tax code, for example, and asked whether it would be possible for a person to decant their current trust into a new trust that would suddenly occur into a tax liability. MR. HOMPESCH answered "Not to my knowledge, no." 2:56:23 PM MR. SIEGERT turned to slide 14, "23 - Dividing trust into separate portions for income tax purposes," and paraphrased as follows [original punctuation provided]: This section adds a new subsection to read: Unless a governing instrument specifically refers to this section and provides otherwise, if a trust is created by more than one settlor, and if a trustee keeps records tracing contributions, a trustee may divide the trust into one or more separate trusts for which a specific settlor shall be treated as the sole settlor of the separate portion of the trust to which the settlor contributed. A trustee may exercise this power at any time, whether before, or, or after a settlor's death. A trustee may exercise this power whether or not the trust was initially governed by the law of this state or the situs of a trust was moved to this state. 2:57:36 PM MR. SIEGART turned to slide 15, "Clarification of Specific Powers of a Trustee," having to do with clarification of specific powers of a trustee, and paraphrased as follows [original punctuation provided]: What are Specific Powers of a Trustee? Can't specific powers be given by the trust? MR. BLATTMACHR advised that under Alaska law, the specific powers of a trustee are quite broad and include anything that might be reasonably expected for a trustee to perform to administer a trust. He further advised there are some specific definitions under Alaska law that can be further clarified under the trust documents. In addition, he explained, Alaska law allows for different trustees to hold different powers, and for certain powers to be taken away from trustees. Specific powers can be given by the trust and give more flexibility to the trustee than what Alaska law allows, or it can also restrict abilities of trustees in the document, he explained. 2:58:57 PM MR. SIEGERT turned to slide 16, "Section 2," and paraphrased as follows [original punctuation provided]: Specific Powers of Trustees. Except as otherwise provided by this chapter, in addition to the powers conferred by the terms of the trust, a trustee may perform all actions necessary to accomplish the proper management, investment, and distribution of the trust property, including the power? This is followed by the 29 powers that are statutorily protected. (17) to insure the property of the trust against damage or loss and to insure the trustee against liability with respect to third persons or  beneficiaries of the trust; 2:59:29 PM MR. SIEGERT turned to slide 17, "Section 3," having to do with the clarification of specific powers of trustees, and paraphrased as follows [original punctuation provided]: (b) A trustee may pay as a charge against trust property the cost incurred to perform an action authorized under (a) of this section 2:59:50 PM MR. SIEGERT turned to slide 18, "Sections 25-28 (Definitions)," changes in definition to accommodate new sections, and paraphrased as follows [original punctuation provided]: Sec. 25 - Changes definition to accommodate new subsections of Definition Sec. 26 - (b)(2) updates to include new legal term "power" instead of authority. Deletes clarification of "trustee" to agree with powers given in the proposal. Sec. 27 - includes a revocable trust in definition of "invaded trust" Sec. 28 - Adds definition of beneficiary 3:00:43 PM REPRESENTATIVE KOPP offered appreciation for the technical bill and acknowledged the capacity of Alaska to be a vanguard for setting up trusts in estates because it is a significant industry in and of itself. He offered his understanding that clean-up keeps the state in a leadership role, and asked when the committee would hear from the Department of Law. CHAIR CLAMAN advised the bill would not move today, and asked that the Department of Law be available during the next bill hearing. CHAIR CLAMAN opened public testimony on HB 208. 3:02:36 PM BETH CHAPMAN, Attorney, Faulkner Banfield, advised she has practiced in estate planning and the special needs planning area for the past 29 years, and supports HB 208. She pointed out that not only will the legislation continue to improve Alaska's laws in bringing trust business to the state, but it will also help Alaskans. The decanting provisions, in particular, are used quite frequently to help Alaskan families' correct trusts and protect beneficiaries. These amendments continue to provide flexibility and more opportunities to help their, mostly, Alaskan clients, and respond to changed circumstances in a cost efficient manner so that the court system was not involved, she said. Oftentimes, these trusts are written when children are young and may terminate at a certain age, and that child may later develop disabilities or sometimes substance abuse problems. These laws allow the correction of those trusts, to make sure the funds stay in trust for the individual, provide a safety net, and give their clients certainty that their families will be cared for in the future. 3:04:07 PM REPRESENTATIVE KREISS-TOMKINS asked Ms. Chapman to speak to the nature of the trust industry in Alaska, the industries attracted to the state with the most appealing statutory environment, the attractiveness of Alaska to the industry, and the scope of the industry relative to other states. MS. CHAPMAN responded that the industry has been comprised of various components since 1997, the financial industry, the trust companies, and the financial institutions that receive the trust funds required to be deposited in Alaska for non-residents to use the trust laws. Since 1997, Alaska had been the premiere jurisdiction and it was the first jurisdiction to start modernizing trust laws, other states started to compete and the states copied whatever was done in Alaska, in particular, Delaware, South Dakota, and Nevada. Over the years, she said, "we have tried to limit" how many times they go before the legislature to seek modernization of these laws, and [due to those efforts] other states leaped over [Alaska]. Several rankings are provided, one was included in the materials regarding decanting, and Alaska previously was at the top, but it is no longer at the top. She said, "We are trying to strike a balance" that will continue to attract those trusts to Alaska, and also continue to ensure that Alaskans want to keep their funds in Alaska because, she explained, similar to anyone, Alaskans will look for the best laws for their particular financial needs. 3:06:21 PM REPRESENTATIVE KREISS-TOMKINS described that the notion of modernizing laws was interesting and it suggested that the laws are neutral and merely reacting to the changing financial industry or evolving technologies. In the event his description was correct, he asked whether the trust industry had considered trying to get around the legislative process if the revisions were merely technical, and whether it considered regulations with a board. He then asked, if that was not the case, what the points of pushback were, and why had not all 50 states adopted laws appropriately modern. MS. CHAPMAN reminded Representative Kreiss-Tomkins that she is an attorney in private practice, and while she drafts trusts, she is not part of the trust industry and was appearing today as a private practitioner. The trust industry, whether it be the Peak Trust Company or other trust companies in Alaska, are regulated by regulation and one state department. She related that when she first started practicing, the state did not have a trust code and when she had a question she had to look to other states to find the answer. She said, "What we are trying to do" is create a statutory framework offering practitioners, clients, and anyone using those laws, some certainty as to what they are, with some standards. Other states are starting to also move forward with new changes, she opined, as 22 states adopted the decanting statutes, and Alaska was the second state in 1997. Also, more and more states are moving toward the repeal of the rule against perpetuity and states are looking to make it more assessable for people to use trusts as part of their estate plan, she explained. 3:09:44 PM JONATHAN BATTMACHR, Attorney, advised he is a member of the New York, California, and Alaska bar associations, and is currently retired. He described HB 208 as "excellent" in that it will help Alaska maintain its position as one of the premiere trust jurisdictions in the country. CHAIR CLAMAN, after ascertaining no one wished to testify, closed public testimony on HB 208. [HB 208 was held over.]