03/05/1998 01:52 PM Senate L&C

                   HB 199 - COMMUNITY PROPERTY                                 
                                                                               
CHAIRMAN LEMAN announced HB 199 to be up for consideration.                    
                                                                               
REPRESENTATIVE JOE RYAN, sponsor, said HB 199 allows Alaskans to               
take advantage of a loophole in the federal tax law that says if               
you have property that is designated community property when one of            
two married people dies, the property gets adjusted up from its                
original value to its present value and there is a capital gains               
liability of 20 percent.  This bill exempts the property from tax              
liability, because it is community property.  This bill allows                 
people by election to take some or all of their assets and name                
them community property.  Both people have to sign an agreement and            
can have the advantages.  Family law people felt that somehow a                
woman would be taken advantage of and wanted more than a 50/50                 
split, and so cautionary language was put in to consult an attorney            
before signing an agreement.                                                   
                                                                               
The other aspect of this is that it ties in with a series of                   
investment bills he is introducing, with the Alaska Trust Act being            
one.  He is trying to make Alaska a favorable place to bring  money            
to invest.                                                                     
                                                                               
SENATOR KELLY asked if enactment of this legislation makes Alaska              
a community property state.                                                    
                                                                               
MR. RICHARD THWAITES, Alaska Trust Co., answered no.  He explained             
in 1981 a change was made with regard to estate taxes and community            
property states had an advantage we didn't have as a separate                  
property state.  In community property states, if one person died,             
the surviving spouse got a stepped up income tax basis in both                 
halves of the property.  He has proposed here an optional community            
property provision which is much like the one passed in Oklahoma in            
1938 (which was approved by the federal statutes),  with an opt out            
clause which has passed IRS muster.  Alaska can have the best of               
both worlds by staying a separate property state and by offering an            
optional community property designation for spouses to elect asset             
by asset.  There would be three classifications of states:                     
community property, separate property, and Alaska which would be a             
separate property state with a community property option available             
on a designated basis and you could go into it or out of it as long            
as both people consented.                                                      
                                                                               
SENATOR MACKIE asked why other states hadn't come up with this                 
option.                                                                        
                                                                               
MR. THWAITES answered that they hadn't thought about it, yet.                  
                                                                               
Number 364                                                                     
                                                                               
He said after Alaska adopted its Trust Act a couple of years ago,              
Delaware tried to copy it, but it  changed three things in its                 
statute which rendered it unworkable.  The banks, family lawyers,              
and personal injury lawyers wanted and were granted special                    
exceptions.  Now Delaware is trying to fix it.                                 
                                                                               
SENATOR KELLY asked if another state besides Delaware did a trust              
statute after us.                                                              
                                                                               
MR. THWAITES answered that South Dakota introduced a bill and the              
legislature tabled it.                                                         
                                                                               
SENATOR KELLY asked where is the advantage to the State?                       
                                                                               
MR. THWAITES answered that over the last two years we have gotten              
a lot of publicity around the country.                                         
                                                                               
SENATOR KELLY asked if our law is known as the Alaska Trust.                   
                                                                               
MR. THWAITES answered yes, but the trusts are being called Tundra              
Trusts.                                                                        
                                                                               
SENATOR KELLY asked how many trusts had been established in Alaska             
as a result of the Trust Law.                                                  
                                                                               
MR. THWAITES answered they have over 50 in the Alaska Trust                    
Company, some as high as $26 million from Florida.  Key Bank is                
doing a major marketing campaign across the country as a result of             
it.                                                                            
                                                                               
SENATOR KELLY asked if he knew how much total money had come to                
Alaska as a result of that legislation.                                        
                                                                               
MR. THWAITES answered he just knew of the 50 with his company, but             
meetings he has been to have had the largest attendance in the                 
Alaska section.  He said that the Delaware law works from a                    
creditor's standpoint, but it wouldn't work with the IRS.  If you              
want the estate planning rationale, you need to go with the IRS.               
                                                                               
Number 448                                                                     
                                                                               
There has been an attack on the Alaska Trust as being a sham by the            
off-shore trust people.  But most of the people he talked to at an             
institute said it's obvious if Alaska does work, all the people                
with legal purposes are going to go to Alaska and all the drug                 
people and O.J. Simpson are going to be the only ones left off-                
shore - and there's $1 trillion off-shore right now.  He has seen              
three trusts come to Alaska from California that were off-shore                
before by people who didn't like the off-shore stuff.  He thought              
HB 199 would further enhance that trend and get it down to where               
more practitioners would want to do it.  From the tax standpoint,              
this is a pretty straightforward option.                                       
                                                                               
SENATOR KELLY asked how the State of Alaska benefits from passage              
of this bill.                                                                  
                                                                               
MR. THWAITES answered that the citizens of Alaska are going to                 
benefit in that they will not pay as much (federal) income tax as              
they would have paid before.  This is somewhat decreased by the                
after 55 one-time $125,000 exemption which has been changed by                 
Congress to the $250,000 exemption for as many times as you want to            
with no age limit.  Very often at a liquidation stage, most of the             
cash that comes in on a sale like that goes to commissions and                 
taxes.  This will take the tax part of that away to the extent the             
assets were elected.                                                           
                                                                               
SENATOR KELLY asked if there were any fees the State of Alaska                 
receives from any of these trusts that are being established up                
here.                                                                          
                                                                               
MR. THWAITES answered yes, that they are $25 for the registration              
and whatever fees or taxes other trusts pay.                                   
                                                                               
SENATOR MACKIE asked if there was any correlation between estate               
taxes and assets received by heirs.                                            
                                                                               
MR. THWAITES said there was in the Trust Act, but this is purely an            
income tax bill.                                                               
                                                                               
MR. RICHARD HOMPESCH, Fairbanks Trust Attorney, supported HB 199.              
                                                                               
CHAIRMAN LEMAN asked if there were any downside to this at all.                
                                                                               
MR. THWAITES answered that the only loser is the IRS.                          
                                                                               
MR. HOMPESCH agreed, he added that it this is purely optional.                 
                                                                               
SENATOR KELLY asked what the administration thought of it.                     
                                                                               
REPRESENTATIVE RYAN said he had discussed this with Willis                     
Kirkpatrick, Director, Division of Banking, who endorsed the bill.             
He noted the $0 fiscal note.                                                   
                                                                               
(Mr. Kirkpatrick had to leave the hearing for another appointment.)            
                                                                               
Number 482                                                                     
MS. ANNETTE KREITZER, Staff to Senate Labor and Commerce, said she             
also had talked to Mr. Kirkpatrick who had no problems with the                
bill.                                                                          
                                                                               
SENATOR MACKIE moved to pass HB 199 with individual                            
recommendations.   There were no objections and it was so ordered.