03/12/2021 01:30 PM Senate LABOR & COMMERCE

                SB 11-COMMUNITY PROPERTY TRUSTS                                                                             
                                                                                                                                
2:10:31 PM                                                                                                                    
CHAIR  COSTELLO   reconvened  the   meeting  and   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."                                                                                               
                                                                                                                                
2:11:01 PM                                                                                                                    
SENATOR  TOM BEGICH,  Alaska State  Legislature, Juneau,  Alaska,                                                               
Sponsor of  SB 11, (via Teams),  stated that SB 11  is similar to                                                               
Senate Bill  91 that  former Senator  John Coghill  introduced in                                                               
the last  legislature. He agreed  to reintroduce  the legislation                                                               
when  he realized  that it  clarifies the  meaning of  "increment                                                               
appreciation"  as intended  by legislation  passed in  1997. That                                                               
was House Bill  199 and the sponsor was  Representative Joe Ryan.                                                               
He quoted  testimony from  1997 that described  the basis  of the                                                               
value of an asset when a partner dies.                                                                                          
                                                                                                                                
      Any appreciation of that on behalf of the estate of                                                                       
     the person who died has no tax liability.                                                                                  
                                                                                                                                
He   emphasized   that   the  original   legislation   recognized                                                               
appreciation in  the valuation of assets  in an estate and  SB 11                                                               
clarifies that  and corrects the ambiguous  interpretation of the                                                               
original law.                                                                                                                   
                                                                                                                                
2:14:38 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
2:15:16 PM                                                                                                                    
CHAIR COSTELLO reconvened the meeting and asked Ms. Hahn to                                                                     
continue her testimony.                                                                                                         
                                                                                                                                
2:15:22 PM                                                                                                                    
BRIX HAHN,  Staff, Senator Tom  Begich, sponsor of SB  11, Alaska                                                               
State  Legislature, Juneau,  Alaska, read  the following  sponsor                                                               
statement  for  SB  11 into  the  record:  [Original  punctuation                                                               
provided.]                                                                                                                      
                                                                                                                                
     Alaska  is  a  state  with favorable  trust  laws,  and                                                                    
     beneficial  laws   for  community   property  ownership                                                                    
     between  spouses.   The  state   allows  for  "opt  in"                                                                    
     community    property    ownership   between    married                                                                    
     couples.     Community property  ownership can  provide                                                                    
     tremendous  tax  advantages   to  these  couples.    In                                                                    
     Alaska,  residents  and  nonresidents alike  can  enter                                                                    
     into Alaska community  property trust agreements. These                                                                    
     agreements benefit  the individuals entering  them, the                                                                    
     trust industry  of Alaska,  banks that  hold associated                                                                    
     deposits,  and   through  revenues  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  into  a  community                                                                    
     property  agreement is  with  your  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  your spouse dies,  community property                                                                    
     is  placed into  a  tax category  that  allows for  tax                                                                    
     advantages when  the property in question  is sold.  To                                                                    
     realize these advantages, appreciation  and income in a                                                                    
     trust must be characterized as community property.                                                                         
                                                                                                                                
     The default rule has been  that appreciation and income                                                                    
     on   community  property   will  be   characterized  as                                                                    
     community property,  unless specifically declared  in a                                                                    
     community   property  trust.    Trust  attorneys   have                                                                    
     attested  to  this  interpretation,  but  recent  court                                                                    
     rulings  have  created  an ambiguous  understanding  of                                                                    
     this general norm. This  legislation is consistent with                                                                    
     industry understandings of trusts  and seeks to clearly                                                                    
     define community  property to include  appreciation and                                                                    
     income on community property.                                                                                              
                                                                                                                                
     Senate  Bill  11  establishes  a  clear  definition  of                                                                    
     appreciation  and  income  on  community  property,  as                                                                    
     intended  by   original  drafters  and   The  Community                                                                    
     Property Trust  Act. This bill  also has  a retroactive                                                                    
     effective date of May 23, 1998.                                                                                            
                                                                                                                                
                                                                                                                                
2:17:45 PM                                                                                                                    
MS. HAHN presented the sectional analysis for SB 11.                                                                            
                                                                                                                                
     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.                                                                            
                                                                                                                                
2:18:43 PM                                                                                                                    
At ease                                                                                                                         
                                                                                                                                
2:19:15 PM                                                                                                                    
CHAIR COSTELLO reconvened the meeting and moved to invited                                                                      
testimony                                                                                                                       
                                                                                                                                
2:19:33 PM                                                                                                                    
DAVE SHAFTEL,  representing self, Anchorage, Alaska,  stated that                                                               
SB 11 corrects  a long-standing problem in the  statutes that has                                                               
become a  trap for  the unwary  when drafting  community property                                                               
trusts.  He reminded  the members  that the  tax purpose  is that                                                               
when  one spouse  dies,  both halves  of  the community  property                                                               
basis step  up to  the fair  market value.  He said  this unusual                                                               
rule applies  only to  community property states  and it  keys on                                                               
appreciation of the property being the default rule.                                                                            
                                                                                                                                
2:23:17 PM                                                                                                                    
MR.  SHAFTEL  said unfortunately  the  1998  act was  drafted  to                                                               
create  the  opposite  default   rule  and  appreciation  is  not                                                               
included  as part  of the  community property.  Over the  last 20                                                               
years,  many  attorneys have  said  in  the trust  document  that                                                               
appreciation is  part of  the community  property, but  some have                                                               
been  unaware and  appreciation is  not included  as part  of the                                                               
community property. He  characterized SB 11 as a  correction of a                                                               
drafting error  to make appreciation  part of  Alaska's Community                                                               
Property Act.                                                                                                                   
                                                                                                                                
2:25:40 PM                                                                                                                    
SENATOR  STEVENS  asked  if this  includes  investments  held  as                                                               
community property.                                                                                                             
                                                                                                                                
MR. SHAFTEL answered  yes; it includes any type  of property held                                                               
as community property.                                                                                                          
                                                                                                                                
SENATOR STEVENS commented that it  appears that the bill would be                                                               
advantageous to all people, not just the wealthy.                                                                               
                                                                                                                                
MR. SHAFTEL  replied it is important  to anyone who wants  to own                                                               
property jointly  and take advantage  of reducing income  tax for                                                               
the surviving spouse.                                                                                                           
                                                                                                                                
CHAIR COSTELLO  asked if the  bill would increase the  estate tax                                                               
liability.                                                                                                                      
                                                                                                                                
MR. SHAFTEL answered no.                                                                                                        
                                                                                                                                
2:28:08 PM                                                                                                                    
MATHEW BLATTMACHR, Peak Trust  Company, Anchorage, Alaska, stated                                                               
agreement with the  previous testimony. He said this  is a widely                                                               
used  financial planning  technique  for  Alaskans. The  original                                                               
intent of the Community Property  Act was to include appreciation                                                               
and  income  and  SB  11   clarifies  that  original  intent.  He                                                               
encouraged the committee to support the bill.                                                                                   
                                                                                                                                
CHAIR COSTELLO noted who was available to answer questions.                                                                     
Finding no questions, she thanked the sponsor.                                                                                  
                                                                                                                                
2:29:39 PM                                                                                                                    
CHAIR COSTELLO held SB 11 for future consideration.