Legislature(2015 - 2016)BARNES 124
01/27/2016 03:15 PM House LABOR & COMMERCE
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| Audio | Topic |
|---|---|
| Start | |
| SB47 | |
| Overview: Division of Workers' Compensation, Department of Labor & Workforce Development | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 47 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
SB 47-LIFE INSURANCE/ANNUITY EXEMPTIONS
3:20:05 PM
CHAIR OLSON announced that the first order of business would be
SENATE BILL NO. 47, "An Act relating to exemptions for cash
surrender values, accrued dividends, and loan values of life
insurance and annuity contracts."
3:20:51 PM
SENATOR JOHN COGHILL, Alaska State Legislature, sponsor of SB
47, informed the committee the bill would remove an exemption in
[AS 09.38.025(a)] of the Alaska Exemptions Act. Currently,
there is a $500,000 "cap" on liability for annuities and
contracts for trust doctrine issues. He opined the exemption
should be lifted for public employees, and lifting the exemption
would be a way to protect money for people who create a business
in Alaska, and who could have all of their assets attached,
after the $500,000 limit. Senator Coghill related that the
banking industry questioned whether the bill would allow money
to be moved fraudulently, and he advised the answer to this
lingering question was forthcoming. He stressed that the
purpose of the proposed legislation is to protect those who have
savings that are unprotected beyond $500,000. As "trust people"
have cautioned, he acknowledged that money may be brought into
the state and protected, but that is not the primary purpose of
the bill. Senator Coghill told of his family's experience with
a small business that grew and then was lost in one year due to
market dynamics; SB 47 may have given his father the opportunity
to save enough from his business losses for retirement. This
experience showed Senator Coghill what can be worked for and
lost. He said he does not support fraud in any way, and there
are other protections in the law which address fraud. The
proposed legislation creates an important civil liability
protection for those who have earned it. Senator Coghill stated
his understanding of trust law is that if a liability is created
from an operation, the operation still has to pay its liability,
but personal assets are protected up to $500,000. He advised
that questions from the banking industry have arisen recently,
however, he remains satisfied with the trust bill as written two
years ago.
CHAIR OLSON stated that the bill would not move today, so
questions can be answered, and suggested that the bill should
move to the House Judiciary Standing Committee.
SENATOR COGHILL asked that the House Labor and Commerce Standing
Committee address any questions concerning the bill.
3:26:53 PM
RYNNIEVA MOSS, Staff, Senator John Coghill, Alaska State
Legislature, speaking on behalf of Senator Coghill, sponsor of
SB 47, said that last year the committee requested a summary of
the state's income from premium taxes. Provided in the
committee packet was a memo dated 1/25/16, which included a
[partial] history of premium tax revenues from 1997 - when the
first trust bill was passed - through 2015. In fiscal year 1997
[FY 97], premium tax revenues were $28.4 million, and the
anticipated income from said revenues in FY 15 is $62.7 million.
Ms. Moss recalled last year's committee packet included copies
of [AS 21.36.360 Fraudulent or Criminal Insurance Acts]
[document not provided], and advised that the Department of Law
verified that the bill covers not only insurance agents, but
also people who purchase life insurance policies. She
summarized as follows: several years ago Senator Coghill
sponsored a bill that put a $500,000 exemption on un-matured
life insurance policies and annuities; SB 47 would lift the
$500,000 exemption, so that life insurance policies and
annuities are treated in the same manner as Employee Retirement
Income Security Act (ERISA) retirements. Ms. Moss further
explained that small businesses do not have opportunities to
invest in retirement systems, so they invest in life insurance
and annuities as retirement plans, and thus the proposed
legislation intends to treat un-matured life insurance and
annuities as retirement plans for small businesses and others.
3:29:20 PM
REPRESENTATIVE COLVER surmised the bill only protects life
insurance and annuities contracts from bankruptcy and other
creditor actions. He asked whether there are federal or state
protections for individual retirement accounts (IRAs), and other
retirement accounts, against claims by creditors or bankruptcy.
3:30:22 PM
MS. MOSS said she has read that IRAs are very similar to ERISA
plans.
REPRESENTATIVE HUGHES expressed her understanding that public
employees do not have an exemption on a retirement account. She
asked whether there are retirement accounts, such as a 40l(k),
that a private individual can get and thus have the same
protection. In fact, a 401(k) could be equal to what public
employees have. Further, she questioned whether 401(k) is only
available in an employer/employee situation, or if they are
available to someone who is self-employed, and if so, other
investors already have an option without a limit. She said,
"... a public employee, they can't put all, all of their assets
in, into their employee retirement plans, so it's not, I don't
know that we're creating a level playing field."
MS. MOSS responded that anyone can contribute to a 401(k);
however, 401(k) accounts are affected by stock market values.
3:33:01 PM
REPRESENTATIVE LEDOUX asked whether there is a limit to the
amount of money one can save in a 401(k).
MS. MOSS said she was unsure. She agreed to provide additional
information regarding 401(k) accounts.
3:33:46 PM
REPRESENTATIVE JOSEPHSON directed attention to a document found
in the committee packet entitled, "SB 47 Life Insurance &
Annuity Exemptions FACT SHEET." The seventh paragraph read as
follows:
Banks have a right to a collateral agreement for a
loan using a life insurance policy as collateral.
REPRESENTATIVE JOSEPHSON said if the above paragraph is correct,
the exemption in the bill can be waived.
MS. MOSS confirmed that the exemption can be waived. Also, the
bank can ask a person, who has a life insurance policy, to sign
off that policy as collateral when applying for a loan.
REPRESENTATIVE JOSEPHSON questioned whether that would be the
protection that the bank would need; the exemption would exist
until the holder of the insurance policy waived it in order to
obtain a loan.
MS. MOSS agreed.
3:34:57 PM
CHAIR OLSON added that the attachment would be limited to the
amount of the loan.
MS. MOSS said correct, the collateral would be for the amount of
the loan.
REPRESENTATIVE JOSEPHSON said he assumed the bank would
recognize the cash value at the time of the transaction, and if
so, the expected annuity of $500,000, or death benefit, would
not be an issue.
MS. MOSS said correct.
REPRESENTATIVE JOSEPHSON directed attention to a letter [letter
not provided] found in the committee packet from Lori Wing-
Heier, dated 3/17/15, which clarifies what is also found in AS
09.38.065: a criminal act would cause the exemption to be lost.
However, the letter said the bill would not provide an exemption
for civil acts. He posed an example of a criminal act that
garnered a civil judgement for a large amount resulting from a
jury verdict that held the driver's insurance policy holder
liable. He asked, "There's no way to pierce that veil is there,
under this bill?"
MS. MOSS said no, there "... might be a fix that needs to be
made."
3:37:17 PM
REPRESENTATIVE KITO expressed his concern about activities
and/or judgements that take place outside of the state, and
whether the state can legally respond thereto. For example, if
a person who has a policy from another state, and who has a
judgement - criminal or civil - placed against them in another
state, has the ability to access the funds that were placed in
trust in Alaska.
MS. MOSS advised that the State of Alaska can enforce [a
judgement] in Alaska, but does not have jurisdiction outside of
the state.
REPRESENTATIVE KITO concluded that if a judgement takes place in
another state, "there's not the ability to get the whole life
insurance policy from Alaska."
MS. MOSS said she assumed that the party has the ability to file
a claim in Alaska.
REPRESENTATIVE JOSEPHSON inquired as to other pending
legislation that would reduce tax rates on insurance and annuity
instruments.
MS. MOSS answered that SB 15 reduced tax rates from 1.0 percent
to 0.8 percent, passed the legislature and was signed into law.
3:39:31 PM
CHAIR OLSON opened public testimony on SB 47.
3:39:42 PM
LUKE FANNING, Vice President, First National Bank Alaska,
informed the committee he was speaking on behalf of the Alaska
Bankers Association (ABA), which represents all seven of the
national, state, and federal savings banks in Alaska. Member
banks are responsible for 85 percent of the non-public
commercial lending in Alaska, as well as 2,500 employees across
130 bank branches statewide. In the past, ABA has been in
support of trust legislation including SB 15. As background, he
pointed out that in the context of SB 47, the cash value of life
insurance and annuities is a form of investment, and not a
discussion of death benefits: an annuity is a series of
payments made while the purchaser is alive, and the cash value
of life insurance is the cash given to a policy owner for
canceling their contract, prior to maturity. Alaska law
provides exemptions intended to save debtors and their families
from hardship; the fundamental policy behind these exemptions is
to ensure that the debtor is not left destitute after the
distribution of his/her assets. After the discharge of debts,
exemptions are the principal means by which a bankruptcy
proceeding allows a debtor to rehabilitate himself/herself and
this/her family financially. For example, there are exemptions
for retirement plans and interest; in fact, exemptions extend
not only to public employees and members of unions, but to all
individuals. Senate Bill 47 is really about the ability to
exempt sums placed into life insurance and annuity accounts in
excess of a cash value of $500,000, in addition to existing
exemptions provided by pensions, a 401(k), profit-sharing IRAs,
and other accounts. Mr. Fanning said there are many forms of
creditors including: vendors; suppliers; contractors; civil
judgements; banks; state, municipal, and federal governments;
and child support. The existing $500,000 exemption that SB 47
removes makes Alaska a safe harbor for those who wish to invest
and shield their assets from creditors in the event of default
or bankruptcy. He said ABA opposes SB 47 because it seeks to
generate insurance and investment business by weakening creditor
protections. In fact, each dollar shielded from creditors is
one dollar denied to legitimate claims by those harmed. Also,
ABA does not regard the comparison to public pensions valid
because of the availability of 401(k), IRAs, and pension plans.
Furthermore, the benefits of a public employee may be accrued
over a long career. An important reason for ABA's concern is
that the bill provides a weakening of creditor protections which
may restrict the ability to lend money, and would harm trade
creditors as it "calls into question the dependability of a
personal guarantee." Since banks are successful at protecting
their risks in the case of default, unsecured and trade
creditors are in the weakest positions. At this time, Alaska
businesses and individuals are going to need access to credit,
and he cautioned against raising barriers to credit. He
informed the committee there have been instances of fraud, and
legal counsel has advised the banking industry that existing
exemptions in statute are insufficient to protect creditors in
the case of fraud due, in part, to time limits.
3:46:42 PM
MR. FANNING noted that banks have been asked to create a
document designed to pierce the exemptions established in SB 47.
He pointed out that said "creditor's document" would not
supersede SB 47. In closing, Mr. Fanning restated that ABA is
generally very supportive of bills that would bring business
into Alaska; however, ABA is concerned that SB 47 provides
protections of wealth by denying the legitimate claims of
creditors.
REPRESENTATIVE LEDOUX questioned why banks cannot create a
document that would waive any defense to execution of a life
insurance policy, or annuity contract, shielded previously by AS
09.38.025(a).
MR. FANNING restated that legal counsel advised that a bank is
unable to create a document that would supersede terms provided
in statute, and he gave an example. This is the basis of ABA's
belief that the proposed legislation does not provide adequate
protection to creditors.
REPRESENTATIVE TILTON referred to previous testimony that loans
are also based on personal assets, and asked whether a loan
decision can also be based on "cross-collateralization" of
assets.
3:49:36 PM
TOM SULLIVAN, Vice President, Northrim Bank, explained that when
a bank underwrites a loan, a variety of factors work in concert:
the primary source of repayment is cash flow from the operation;
the secondary factor is the financial strength of the
guarantors; the tertiary factor is collateral as a source of
repayment. He agreed that the bank looks at the entirety of a
loan package, which can be affected by weakening in one area.
REPRESENTATIVE TILTON observed that litigation of a suspected
fraudulent bankruptcy allows for a reversal within a time period
of 24 months. She suggested that this is a protection for
creditors.
MR. FANNING said a bank may be able to pursue its options within
the time period; however, the bank still must prove fraudulent
intent, which is a difficult hurdle.
REPRESENTATIVE LEDOUX asked whether a person can put an
unlimited amount of money in a 401(k).
MR. FANNING advised that there are federal limitations as to the
amount that can be contributed - as well as to the amount of
favorable tax treatment - associated with retirement accounts
including 401(k) or IRAs. In a similar manner, a public
employee has limitations on how much can be earned from a
pension in a single year; on the other hand, the proposed
exemption can be for a one-time purchase of an annuity or an
investment asset, which is fundamentally different than the
accumulation of pension benefits over multiple years.
3:52:46 PM
REPRESENTATIVE HUGHES asked:
If the fraud protections were strengthened, would you
be able to support this, or is it just the idea of the
exemption itself problematic, in other regards, for
someone who wouldn't be doing it fraudulently?
MR. FANNING said the bank would still have to prove fraud and
intent.
REPRESENTATIVE HUGHES then asked, "Have you examined that, is
there a way to strengthen those statutes in a way that, that
this general concept might be acceptable to you?"
MR. FANNING said he was unable to answer her question.
MR. SULLIVAN added that Mr. Fanning and he are representing
bankers; however, there are other creditors - such as small
businesses - that would not have the means to prove intent and
would simply write-off the debt.
REPRESENTATIVE LEDOUX inquired as to whether an addition to the
bill which specifically directed that a bank would be able to
require that an applicant - as a condition to getting a loan -
waive his/her defenses, would be acceptable to the banking
industry.
3:55:31 PM
MR. SULLIVAN said he was unsure, and added that the issue is:
Does that provide enough protection to not be superseded by SB
47?
REPRESENTATIVE LEDOUX clarified that the suggested change would
be in statute, and not just written in the loan agreement.
MR. SULLIVAN said he was unsure.
MR. FANNING pointed out that doing so may negate much of the
purpose of the bill.
REPRESENTATIVE JOSEPHSON redirected attention to a document
found in the committee packet entitled, "SB 47 Life Insurance &
Annuity Exemptions FACT SHEET," [text previously provided]. He
asked whether the banking industry agreed.
MR. FANNING responded:
Whether I agree with that sentence or not, we would -
as a practical matter - heavily discount any
protection afforded by that sentence because it
provides us no real means of adequately securing our
loans, especially in context of the exemption.
REPRESENTATIVE JOSEPHSON asked - from the sponsor's standpoint -
even though retirement pensions are earned over time, what the
difference is in terms of either the ability to capture one
asset and not the other, because a policy decision has been made
to protect one type of asset and not another.
MR. FANNING opined, as a matter of public policy, there are
protections for retirement accounts, and other exclusions, so
one is not left destitute; on the other hand, he cited an
example of one who was acquitted in a criminal trial, but who
was found responsible in a civil trial, and by moving to
Florida, was shielded from paying a legitimate claim. In
further response to Representative Josephson, he agreed that it
is plausible that financial advisors and attorneys may advise
their clients of protections afforded under SB 47, which is one
of ABA's concerns with the bill.
4:01:26 PM
REPRESENTATIVE JOSEPHSON suggested that the position of ABA
should be that the present exemption of $500,000 is "too much,
also ... if you're upset about unlimited, you should logically
be upset about half a million dollars."
MR. SULLIVAN pointed out that the limit in California is
approximately $20,000; however, the existing limit of $500,000
has not created any problems in Alaska, and he restated ABA's
and creditors' concerns about fraudulent transfers.
REPRESENTATIVE JOSEPHSON referred to an un-matured life
insurance policy, or an annuity, and said, "What is being
protected doesn't have any present value to the holder of the
instrument ... I have whole life insurance, but it doesn't, it's
not going to benefit me today, I don't think."
MR. FANNING responded that a life insurance policy has a cash
value that would be paid for canceling the policy prior to
maturity; in fact, many people pay into policies for years and
the cash value could be greater than $500,000.
REPRESENTATIVE LEDOUX pointed out that once cashed out,
creditors could execute on the proceeds.
4:05:44 PM
MR. FANNING opined that one who wished to shield assets from
his/her creditors would not cash out a policy.
REPRESENTATIVE LEDOUX asked, "... then how do you get any
benefit out of it?"
MR. SULLIVAN explained that the core of ABA's concern is: cash,
or an asset that was used to support a credit decision, is
changed into another instrument to which creditors do not have
access.
REPRESENTATIVE JOSEPHSON referred to [AS 09.38.065 Claims
enforceable against exempt property] which read in part:
(2) a creditor may make a levy against exempt property
to enforce a claim for
(A) the purchase price of the property or a loan
made for the express purpose of enabling an individual
to purchase the property ...
(B) labor or materials furnished to make, repair,
improve, preserve, store, ...
REPRESENTATIVE JOSEPHSON surmised that many loans relate to
property, buildings, and their related labor, and he asked
whether the above existing exemption would "cover you, in most
instances."
4:08:12 PM
MR. FANNING relayed that legal counsel for First National Bank
Alaska and Northrim Bank opined that the protections afforded in
[AS 09.38.065] are of minimal value to the banks because they
would be superseded by SB 47.
REPRESENTATIVE JOSEPHSON said:
But, if this statute's on the books, and theirs is
too, a court would have to make them meld, that I know
for sure ... so, I'd like that addressed. So, that
bill would not trump this, unless it has a repealer in
it that says it does. That's my understanding.
REPRESENTATIVE KITO described a recently purchased whole life
policy, with a cash value of $500,000, and asked how much
insurance it would buy the holder. He said he would hold his
question for a later witness.
REPRESENTATIVE LEDOUX questioned whether, without SB 47, if a
person bought a life insurance policy in a state with an
unlimited exemption, ABA could execute on that out-of-state
policy.
MR. SULLIVAN said he did not know the answer.
REPRESENTATIVE LEDOUX commented that if a policy can be
purchased now out-of-state, creditors are subject to the same
risks anyway, with respect to sophisticated borrowers, and she
did not see that SB 47 posed any additional problems for Alaska.
4:11:1 PM
CHARLES MCKEE provided comments that were not on topic with the
published agenda, and said he was unhappy with the bill.
4:14:48 PM
LINDA HULBERT informed the committee she has lived in the
Interior since 1968, working 20 years in the field of education,
and the last 27 years working as an insurance agent with offices
in Fairbanks and Anchorage. She said SB 47 raises significant
revenue for the state, provides incentives for individuals to
save for the future, and said savings are from after-tax income
in an annuity, as in life insurance. For most residents, an
annuity brings in 2.7 percent of funds deposited, and for life
insurance 2.7 percent is gained up to the first $100,000
deposited per year, and 0.8 percent is gained per year on
amounts over $100,000. Ms. Hulbert advised that this is a
significant source of revenue; in fact, since the enactment of
the trust act with the exemption of $500,000, state premium tax
revenue has increased from $28.4 million to $62.7 million.
Furthermore, 30 other states offer some form of asset protection
for life insurance, and several states offer unlimited
exemptions. Ms. Hulbert pointed out that the residency of the
owner of the policy determines whether a policy is exempt or
not, thus if an Alaska resident owns a policy and moves to
another state, the rules governing the policy are subject to the
rules of the new state of residence. She clarified that when a
bank or lender take access to a life insurance policy, the bank
or lender is listed with the insurance company as a collateral
assignee, and the individual is unable to acquire the cash value
of their policy without permission or notification to the
collateral assignee. In addition, most banks contact insurance
companies annually to verify that their position is still in
effect until the collateral assignment is removed and the bank
releases the collateral assignment. Ms. Hulbert continued to
explain that if a person dies and there is an assignment, the
assignee is paid first, and the balance is paid to the
beneficiary of the contract. She said her experience is that a
bank has the right to take first position on a whole life or
term life insurance policy, as well as on an annuity.
4:21:10 PM
REPRESENTATIVE LEDOUX asked whether SB 47 "would work" for the
insurance industry and the trust industry if a waiver is written
into the bill. The previous discussion related to policies that
have been written before loans were executed; however, she
surmised the banking industry is concerned about a loan
evaluation that is based upon personal credit, and then
subsequently, the debtor places his/her funds in a life
insurance policy. She restated her question.
MS. HULBERT was unsure as she is not an attorney. Currently, if
someone wants to hide an asset, he/she would choose to do that
in another jurisdiction because Alaska has very strong
fraudulent transfer rules. She opined that most of those using
life insurance and annuity products are using them for
legitimate planning purposes.
REPRESENTATIVE JOSEPHSON observed that creditors are right to be
insecure because even though there may not be an ill motive to
defraud, a debtor may fail to make payments and his/her assets
are insulated from creditors.
MS. HULBERT restated that Representative Josephson's example is
not part of her experience; in fact, fraudulent transfer for
large sums of money "is something that can be done in other
ways." If the cash value is pulled out of a life insurance
policy, the life insurance policy ceases to exist, which is not
its intent. She added that in Alaska, people put their time and
money into their businesses because they cannot afford to invest
in a 401(k), which requires an employer-sponsored plan. A
business person is limited to how much they can save for
retirement, which is the reason to create a mechanism whereby
people can put money aside for retirement.
4:27:00 PM
CHAIR OLSON announced SB 47 was held over with public testimony
open.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SB47 Fiscal Note DCCED-DOI-01-22-16.pdf |
HL&C 1/27/2016 3:15:00 PM |
SB 47 |
| SB47 Opposing Documents-Letter AK Bankers Assoc 1-22-16.pdf |
HL&C 1/27/2016 3:15:00 PM |
SB 47 |
| SB47 Supporting Documents-History of Premium Tax Revenues 1-25-16.PDF |
HL&C 1/27/2016 3:15:00 PM |
SB 47 |
| SB47 Supporting Documents-Fact Sheet.pdf |
HL&C 1/27/2016 3:15:00 PM |
SB 47 |
| SB47 Supporting Documents-Recap of Other States 1-26-16.pdf |
HL&C 1/27/2016 3:15:00 PM |
SB 47 |
| DOLWD-Div of Workers Comp Overview 1-27-16.pdf |
HL&C 1/27/2016 3:15:00 PM |
DOLWD Presentation on Workers' Compensation 1-27-16 |