Legislature(1999 - 2000)
05/10/1999 01:38 PM House JUD
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 219 - RULE AGAINST PERPETUITIES
CHAIRMAN KOTT announced the next order of business is HOUSE BILL
NO. 219, "An Act relating to the rule against perpetuities,
nonvested property interests, and powers of appointment; and
providing for an effective date."
Number 0079
CORY WINCHELL, Administrative Assistant to Representative Pete
Kott, Alaska State Legislature, came before the committee and
presented the following sponsor statement:
This legislation corrects a technical problem created by
the Alaska Trust Act. The Alaska Trust Act effectively
repealed the rule against perpetuities. As a practical
matter, this old common rule prevented the continuation
of trusts for longer than 90 to 110 years. The Alaska
Trust Act changed the common law rule to allow a trust to
continue in perpetuity if the income of principle of the
trust could be distributed in the discretion of the
trustee to a person who was living when the trust was
created.
The problem with the Alaska Trust Act is that it does not
allow a person to create a perpetual charitable lead
trust. A typical perpetual charitable lead would pay all
income to a charity for a term of 20 years (not to a
person who was living when the trust was created) and
then would continue in perpetuity for the benefit of the
descendants of the person creating the trust. Since the
passage of the Alaska Trust Act, many persons have
contacted trust companies and attorneys in Alaska and
have expressed a desire to create perpetual charitable
lead trusts. This new legislation would completely
repeal the rule against perpetuities and would permit the
creating of perpetual charitable lead trusts.
Number 0241
REPRESENTATIVE CROFT referred to Section 2 of the bill and noted
that it doesn't eliminate perpetuities, but that it gives a 90-year
optional savings clause.
MR. WINCHELL stated under the language in the bill a person would
not be able to create a trust so that a person's descendants would
receive money from it. However, a trust could be created as a
charitable lead so that a person's descendants could take advantage
of it.
Number 0360
REPRESENTATIVE MURKOWSKI asked Mr. Winchell what the reason is for
the April 2, 1997 date in the bill [Section 7].
REPRESENTATIVE JAMES noted that is the date of the Alaska Trust
Act.
Number 0400
ERIC KNEFFNER, Attorney, Faulkner Banfield P C, testified in
Juneau. The real reason for the bill is to allow charitable lead
trusts for a state to take a charitable deduction thereby "getting
money to charities that might not otherwise get there." In
contrast, a charitable remainder trust is one in which the benefits
go to human beings first and the remainder goes to charities.
Number 0483
REPRESENTATIVE CROFT said in either case a trust has to satisfy the
old rule against perpetuities, or vest or terminate within 90
years.
MR. KNEFFNER said that's right. That's his understanding. The
existing rule required "life" for the first period rather than a
charity or institution.
Number 0580
REPRESENTATIVE MURKOWSKI asked Mr. Kneffner whether there was a
point - prior to enacting the Alaska Trust Act - when the state did
not have a rule against perpetuities.
MR. KNEFFNER replied a modification was made at the same time of
the Alaska Trust Act.
REPRESENTATIVE MURKOWSKI said then, prior to April 2, 1997 the
state has always had a rule against perpetuities.
MR. KNEFFNER replied that's his recollection.
Number 0623
REPRESENTATIVE KERTTULA referred to the language - "A nonvested
property interest is invalid unless the interest is created on or
after January 1, 1996, and before the effective date of this Act
and" [Section 2] - and asked Mr. Kneffner why there is a window.
MR. KNEFFNER replied that's when the rule against perpetuities was
modified. The period between January 1, 1996 and April [2], 1997
is the section that needs to be applied.
REPRESENTATIVE KERTTULA said: "Don't you want to change it so that
they can always be done? Why would you want it only for that
window of time?"
MR. KNEFFNER replied prior to that time the rule against
perpetuities was in effect...
REPRESENTATIVE KERTTULA interjected and said: "Right. During this
time only the other Act is in effect and then there's some interim
Act in effect and then the final Act comes into effect."
MR. KNEFFNER said what is being done with the bill would be in
effect since April [2], 1997. It can't go back beyond January [1],
1996 because that's when the rule was modified the first time
around.
Number 0718
REPRESENTATIVE MURKOWSKI asked Mr. Kneffner what the modification
was in 1996.
MR. KNEFFNER replied, according to his recollection, it was
modified to vest or terminate in 90 years.
Number 0771
REPRESENTATIVE KERTTULA asked Mr. Kneffner why the bill is being
limited to before the effective date of the Act in Sections 2, 4
and 5; they create a window. She is concerned about creating a
window upon which it drops out again.
MR. KNEFFNER replied that's not the intention. The sections talk
about three different kinds of powers or trusts, which is why the
language has to be repeated for each section. He further noted
that after the date of the Act the common law is superseded.
Therefore, in going forward it is not needed anymore.
Number 0914
REPRESENTATIVE CROFT stated that he thinks there was a pure rule
against perpetuities until January 1, 1996 and then there were
modifications made to the Alaska Trust Act - the 90 years. The
statute refers to SLA 1994, which went into effect on January 1,
1996.
Number 0990
REPRESENTATIVE KERTTULA said, given this particular topic, she is
concerned about inadvertently dropping the whole thing, especially
since Section 6 talks about the extent provided under AS 34.27.050
- 34.27.090.
MR. KNEFFNER noted that Section 6 is key because it supersedes the
rule of the common law. The other four sections deal with the
interim period. After that interim period, it is completely
repealed, which is why there are Sections 3, 4 and 5 - to deal with
the period from January 1, 1996 to April 2, 1997.
REPRESENTATIVE KERTTULA noted the language appears to be circular.
Number 1067
DICK THWAITES testified via teleconference from Anchorage. He
explained that the pure version of the Act was amended in 1994 to
provide clarification in limiting the rule against perpetuities to
90 years. When the Alaska Trust Act was adopted in 1997, the
concept of charitable lead trusts were overwhelming; therefore,
they were left out. The bill attempts to bring forward that period
because there are charitable lead trusts that have been created in
other jurisdictions that have mobility language: language that
allows them to be transferred to one of the Alaska trust
institutions, if they can get around the rule of a 1996 effective
date of the state's 90-year rule against perpetuities.
Number 1213
REPRESENTATIVE MURKOWSKI asked Mr. Thwaites to explain - in real
terms - what the adoption of HB 219 would mean for the state. In
other words, would it increase business for the state?
MR. THWAITES replied he believes that it would bring increased
business to the state. A charitable lead trust is a device used in
the estate planning world that allows for someone with a fair
amount of wealth to give money to a charity, to receive an income
tax deduction (the difference in value between what goes to charity
and what goes to the rest of the family), and to set up a perpetual
benefit to the family and successive generations - the intent of
the Alaska Trust Act. He further noted that many of the
practitioners around the country have indicated that the Alaska
Trust Act is flawed in that regard. He reiterated the intent of
the bill is to bring charitable lead trusts into Alaska in order to
be administered by one of the Alaska trust institutions.
Number 1310
REPRESENTATIVE CROFT asked Mr. Thwaites what the flaw was. The
biggest change in the bill is to AS 34.27.050, which is only the
deletion of an "or" provision.
MR. THWAITES deferred the question to the bill drafter [Terry
Bannister, Legislative Affairs Agency].
REPRESENTATIVE CROFT asked Ms. Bannister to explain the effective
dates - January 1, 1996 and April 2, 1997.
Number 1354
TERRY BANNISTER, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency, replied
January 1, 1996 is the date that the current modification of the
rule against perpetuities went into effect - the 90 years.
REPRESENTATIVE CROFT asked Ms. Bannister why there needs to be a
window for that modification.
MS. BANNISTER replied the abolition in the bill starts
prospectively, except for a few things in AS 34.27.042. The other
property interests that have been created before the effective date
are to be covered as they are currently being covered.
REPRESENTATIVE CROFT asked Ms. Bannister what happens after the
effective date of the Act.
MS. BANNISTER replied the bill creates a window for both interests.
She doesn't know the reason for it, however.
REPRESENTATIVE CROFT said that Section 2 would invalidate the
interest created by the window. He asked Ms. Bannister what would
be the state of the law after the effective date of the Act in
regards to Section 2.
MS. BANNISTER replied the property interests created and subjected
to the current statute would still be covered under AS 34.27 -
Sections 2-6 in the bill. The property interests created
afterwards in AS 34.27.042 would be handled by the new prospective
law.
REPRESENTATIVE CROFT asked Ms. Bannister where the new prospective
law is referred to in the bill.
MS. BANNISTER replied in Section 1. There are two sections within
Section 1 - AS 34.27.040 and 34.27.042. The limited coverage of
current interests are covered in 34.27.042.
REPRESENTATIVE CROFT said: "So, there's no 90-day [year] limit
either. I mean, we've gotten rid of the 90-day [year]. So,
getting through all that Mr. Chairman, why is it a good idea to get
through the 90-day [year] and just abolish ... We've in effect
created a complicated rule or 90-day [year] and then we're just
saying forget the whole thing and just do what you want. Why
wouldn't it be appropriate to keep some sort of outer clear limit
like the 90-day [year] we have?"
MR. KNEFFNER replied that's a policy question for the legislature
to decide. The reason for the bill is to create a fair amount of
flexibility for charitable lead trusts. The existence of the
Alaska Trust Act contemplates perpetual trusts; and, under that
scheme, it's already assumed that the legislature has decided - in
some circumstances - that perpetual trusts are a good idea.
Number 1585
MS. BANNISTER said that the application-back erases contract
impairment issues. However, it's not a great idea to change
contracts that have already been entered into before putting in a
new bill.
Number 1629
REPRESENTATIVE CROFT said, as he recalls, the rule against
perpetuities was put on because there were tax consequences to
vesting back in the time of Henry VIII. He asked Mr. Thwaites how
true is that now; have the tax consequences changed so that's not
as significant?
MR. THWAITES replied yes there is the generation skipping transfer
tax now. The purpose of the rule then was because of an
inexhaustible supply of land, and the idea of commerce was to keep
the land revolving in "the commerce." Now, with conservation
easements, for example, land is perpetually protected from
development. It's a change of policy from the 1600s to now. He
further noted that the actual provision, under the rule against
perpetuities, is found in AS 34.27.050 (3), which states that the
interest is in a trust and all or part of the income or principle
of the trust may be distributed, at the discretion of the trustee,
to a person who is living when the trust is created. He noted, of
course, a charity is not a person; therefore, repealing the Act in
this sense would allow Alaska to have perpetual trusts for
charitable lead trusts.
Number 1764
REPRESENTATIVE CROFT said: "Why would you want to get rid of
subsection (3) then? Do we get ourselves in any bind by--I mean
why wouldn't you want to just say what we say in Sections 1 and 2.
Create this window for the current law and then know that you could
write these--these ones that start with the designation of a
charity only after the effective date."
MR. THWAITES said the discussion following the passage of the
Alaska Trust Act was to create a more aggressive environment in the
estate planning area, which is what the bill does. He noted that
the state of Delaware, within 16 weeks after the Alaska Trust Act
was effectuated, included the language - "this is an act to keep
Delaware the preeminent trust jurisdiction like the Alaska
statute." The state of Delaware also repealed the rule against
perpetuities entirely because there doesn't seem to be a lot of
reason for continuing exceptions because of the way society has
developed.
Number 1853
RICH HOMPESCH testified via teleconference from Fairbanks. Section
1 - AS 34.27.040 - abolishes the rule as to nonvested property
interest, a general power of appointment not presently exercisable.
He noted, because the existing law took effect January 1, 1996,
Sections 2, 3 and 5 have to be carried in the bill. But from then
on, the rule against perpetuities would be abolished.
Number 1899
MR. KNEFFNER stated, at the time the rule against perpetuities was
created, there weren't things like charitable trusts or
foundations. Those kinds of charitable enterprises are already
allowed to be perpetual under Alaska law. He said, "If your
looking for a reason to evolve into allowing to have perpetual
trusts, that's perhaps one reason. I'm not saying that's the
defining one, but it's certainly something to consider."
Number 1941
SHARALYN SUE WRIGHT testified in Juneau as the beneficiary of a
trust. She is concerned that the bill would benefit a few
attorneys, when it isn't necessarily true that the money would stay
in the state. She mentioned that the committee hasn't heard from
any bankers yet that would benefit from this. Furthermore, if this
bill perpetuates trusts, it would also perpetuate trust violations
and the bad things that go on with trustees. However, she is
mostly concerned that the bill is being rushed, given its magnitude
and given that very educated and concerned people don't fully
understand it.
Number 2031
CHAIRMAN KOTT indicated that the bill would be held over for
further consideration; there wasn't a quorum to conduct business.
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