Legislature(2021 - 2022)BUTROVICH 205
05/05/2021 01:30 PM Senate JUDICIARY
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| Audio | Topic |
|---|---|
| Start | |
| SB129 | |
| HB109 | |
| SB11 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 129 | TELECONFERENCED | |
| + | HB 109 | TELECONFERENCED | |
| + | SB 11 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SB 11-COMMUNITY PROPERTY TRUSTS
2:37:02 PM
CHAIR HOLLAND announced the consideration of SENATE BILL NO. 11,
"An Act relating to community property and to community property
trusts; and providing for an effective date."
2:37:27 PM
SENATOR TOM BEGICH, Alaska State Legislature, Juneau, Alaska,
sponsor of SB 11, stated that the bill reintroduces a bill from
a prior legislature. SB 11 would clarify the meaning of what
income and appreciation was intended by a bill introduced in
1997 by then-Representative Joe Ryan. He advised members that he
had reviewed the transcripts from the legislature's
deliberations on Mr. Ryan's bill. When one partner in a
relationship died, the basis for the value of the asset was the
purchase price and any appreciation of the estate to ensure it
had no tax liability. He briefly reviewed what then-
Representative Ryan wanted to address, which was to carry
forward the value of the trust and any appreciation when a
couple voluntarily forms a community property trust. Because it
was not specifically clear in the language, a recent court
hearing raised ambiguity related to estates. Some of today's
invited testifiers brought this matter to his attention.
2:39:26 PM
BRIX HAHN, Staff, Senator Tom Begich, Alaska State Legislature,
Juneau, Alaska, presented a sponsor statement and sectional
analysis on behalf of the sponsor. She read:
[Original punctuation provided.]
Alaska is a state with favorable trust laws and
favorable laws for property ownership between spouses.
Alaska allows for "opt in" community property
ownership between married spouses. Community property
ownership can provide tremendous tax advantages to
spouses. In Alaska, residents can enter into community
property agreements, and residents and nonresidents
can enter into Alaska community property trusts. This
benefits the individuals entering these agreements,
the trust industry of Alaska, increases deposits in
Alaska banks and through the revenue generated by the
formation of a new trust, the state.
Community property is simply a way to own joint
property. A common way to enter a community property
agreement is in conjunction with one's spouse. Each
party must elect into this agreement and the agreement
provides, most commonly, equal ownership and
management of specific property.
Currently, community property has a significant tax
advantage. When a spouse dies, community property is
placed into a category that allows tax advantages when
that property is sold. To realize these advantages,
appreciation and income must be characterized as
community property.
2:40:42 PM
The default rule has generally been that appreciation
and income on community property will be characterized
as community property, unless otherwise declared in
the community property trust. Trust attorneys have
attested to this interpretation, however recent court
rulings have created an ambiguous understanding of
this general criterion. This legislation, consistent
with industry understandings of trusts, seeks to
clearly define community property as including
appreciation and income on community property.
SB 11 establishes a clear definition of appreciation
and income as community property, as intended by The
Community Property Trust Act. This bill also has a
retroactive effective date of May 23, 1998.
2:41:31 PM
MS. HAHN provided the sectional analysis for SB 11. She read
[Original punctuation provided]:
Section 1. Clarifies AS 34.77.030(h), by affirming
legal intent to ensure appreciation and income in
community property trusts are in fact community
property unless expressly otherwise stated in legal
trust documents.
Section 2. Provides that AS 34.77.030(h) is
retroactive to community property trust agreements
entered into after May 23, 1998 and defines "community
property trust" consistent with statute.
Section 3. Adds as a new uncodified law of the State
of Alaska, a savings clause and asserts that Sec. 2 of
this act does not impact court actions or proceedings
that began before the effective date, or a community
property rights accrued before the effective date.
Section 4. Adds as a new uncodified law of the State
of Alaska retroactivity to AS 34.77.030(h).
Section 5. Establishes retroactivity through May 23,
1998.
2:42:46 PM
SENATOR HUGHES asked why the bill had a specific
retroactive date of May 23, 1998.
SENATOR BEGICH answered that this is the effective date of the
Community Trust Act. It will establish continuity but the
savings clause ensures that it does not affect any legal action
before the state today. Essentially, it will establish that the
understanding and intent extended by then-Representative Ryan's
comments during committee hearings was the bill's intent and of
the Community Trust Act established at the time.
SENATOR HUGHES asked whether any appreciation and income would
be considered community property prior to that date.
SENATOR BEGICH deferred to Mr. Blattmachr. He stated that the
Community Trust Act passed the legislature and prospectively
created that relationship. Before 1998, the law did not provide
for it.
2:44:12 PM
CHAIR HOLLAND asked if any dispute had occurred since 1998, such
that the bill would overturn the decision.
SENATOR BEGICH responded that the bill included the savings
clause to clarify that the intent is not to overturn any legal
decisions already made. Instead, the intent is to enforce the
will retroactively. He introduced the bill to correct the
interpretation but not change any specific court outcome.
2:45:16 PM
SENATOR HUGHES disclosed that she had community property with
her husband prior to 1998. She asked whether there was any legal
way to apply SB 11 to community property acquired before May
1998.
CHAIR HOLLAND turned to invited testifiers.
2:46:35 PM
MATTHEW BLATTMACHR, Attorney; President & Chief Executive
Officer, Peak Trust Company, Anchorage, Alaska, spoke in support
for SB 11. He stated that many Alaskan residents had taken
advantage of this law since it passed in 1998. He related a
scenario in which a couple bought an asset together to fund
their grandchildren's education through Alaska's community
property and options. The surviving spouse sold the asset and
funded their grandkids' college education. He characterized this
as a powerful law. In response to the question, if it would
overturn any disputes, he referred to a case in Alaska court. He
explained that the case in question used semantics but did not
consider the law's intent, which was to follow the rules of the
federal property law. The savings clause was specifically added
to protect those parties and ensure that this bill will not
overturn their case.
MR. BLATTMACHR, in response to Senator Hughes' earlier question,
clarified that prior to the passage of the 1998 law, Alaska did
not have the option of community property. It was solely
separate property, and it became optional with the passage of
the Community Property Act.
2:48:52 Pm
SENATOR KIEHL asked what right might have accrued before May 23,
1998, that the bill protects since it only affects community
property.
MR. BLATTMACHR answered that he was not sure any right could
have accrued prior to the passage of the Community Property Act
and any property being converted to community property. The only
protection would be any right that has accrued since 1998 that
was converted during that time.
2:49:56 PM
WILLIAM PEARSON, Attorney, Foley and Pearson, Anchorage, Alaska,
said he is a shareholder with Foley and Pearson. He stated that
the firm believes that SB 11 is a simple but effective statutory
fix. It would create the presumption that the income and
appreciation of an asset transferred to a community property
trust is community property. As Mr. Blattmachr testified, the
bill would clarify that the income and appreciation is community
property. It will provide the double benefit of the step-up in
basis under the federal tax regime, which is the purpose of this
legislation.
2:50:54 PM
ABIGAIL O'CONNOR, Attorney, O'Connor Law Office, LLC, Anchorage,
Alaska, stated that she is an estate planning attorney. She
stated her support for SB 11. She opined that multiple trusts
would be adversely affected without this bill because the income
and appreciation would not be treated as community property. She
said she was aware of at least one trust that would be affected
by this issue. This bill will provide an automatic fix.
2:52:05 PM
DAVE SHAFTEL, Attorney, Shaftel Delman & Associates, Anchorage,
Alaska, stated that he practices in the trust and estate area of
law. He said he is one of a group of attorneys that have worked
with the legislature since the enactment of the enabling
legislation to improve the trust and estate laws. This bill will
correct a trap for the unwary, he said. He stated a false rule
exists. The person drafting a trust must affirmatively state in
the trust that community property includes appreciation and
income to receive federal tax benefits. Absent that affirmative
statement in the trust, the default rule will apply, such that
the appreciation and income will not be considered community
property. Then the estate would lose the entire tax benefit of
community property. SB 11 would reverse the default rule. It
provides that the default rule will be that appreciation in
income will automatically become community property unless
otherwise stated. He acknowledged that a few people might wish
to state otherwise. However, almost all of his clients are
Alaskan residents or nonresidents who will want to opt-in and
use this tax advantage for community property. He explained that
if a married couple owns property in tenants in common or
tenants by the entirety, not by community property when the
first spouse dies, only that spouse's one-half of the community
property will receive an adjustment of basis up to a fair market
value. When that deceased spouse's half is sold, there would not
be any capital gains tax, but when the surviving spouse's half
is sold, there will be a capital gains tax equal to that
appreciation and income. Community property law takes advantage
of a tax rule that dates back to the 1940s. Alaska is one of 13
states with community property laws. Under those provisions,
when the first spouse dies both halves get an adjustment of
basis up to fair market value. The adjustment of basis is the
appreciation and income under discussion. In community property
states, if one spouse dies, both halves will receive an
adjustment of basis up to fair market value. The surviving
spouse can sell the property and not be subject to a capital
gains tax. Thus, community property has a significant advantage,
so Alaska adopted it in 1998. He stated support for the bill.
2:57:46 PM
CHAIR HOLLAND opened public testimony and, after first
determining no one wished to testify, closed public testimony on
SB 11.
[SB 11 was held in committee.]