Legislature(2009 - 2010)BELTZ 105 (TSBldg)
02/04/2010 09:00 AM Senate STATE AFFAIRS
| Audio | Topic |
|---|---|
| Start | |
| SB216 | |
| SB217 | |
| SB63 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SB 217 | TELECONFERENCED | |
| *+ | SB 216 | TELECONFERENCED | |
| *+ | SB 63 | TELECONFERENCED | |
SB 63-TRANSFER RESTRICTIONS ON TRUSTS
9:45:46 AM
CHAIR MENARD announced the next matter to come before the
committee would be SB 63.
SENATOR MEYER moved to adopt the proposed committee substitute
CS for SB 63, labeled 26-LS0317\R, as the working document of
the committee. There being no objection, version R was before
the committee.
ESTHER CHA, staff to Senator McGuire, sponsor of SB 63, read the
following statement:
The climate for trust and estate planning is highly
competitive, and the trust business is a multi-billion
dollar sector that often crosses state lines in order
to take advantage of more attractive state trust laws.
In 1997, Alaska became the first state to establish a
law that allows a person to form an irrevocable trust,
be a discretionary beneficiary of the trust and, if
the trust has a spendthrift clause, protect the trust
assets from the settlor's creditors.
9:47:21 AM
To give a little background, I'll summarize the aspect
of trusts to which this bill refers. In trusts, there
are three parties: a settlor also known as a trust-
maker, grantor, or testator; the trustee, which can be
an individual or an institution; and beneficiaries.
The settlor designates whether or not a beneficiary is
discretionary, which means that payment of
distributions is determined based on the discretion of
the trustee instead of the settlor stating how much
and how often payments will be distributed. With
discretionary beneficiaries, trustees may be given
standards by which to exercise discretion e.g. the
HEMS or Health, Education, Management, and Support
standard. If the trust has a spendthrift provision, a
creditor cannot force the trustee to pay money
directly to the creditor. Instead, the creditor must
wait until the trustee pays out the distribution to a
beneficiary, at which time the creditor can seize the
assets.
Alaska established in 1997 that assets in a trust
would be protected from a settlor's creditors if he
designates himself as a discretionary beneficiary,
provided that he has no current claims pending. Since
Alaska enacted this statute, numerous other states
have enacted similar statutes. At present, twelve
states allow this type of trust. SB 63 upgrades
Alaska's trust statute by adopting provisions that
have been adopted by other states. Therefore, without
changes in legislation, Alaska would not be able to
maintain its position at the forefront.
This bill provides the following amendments:
· It clarifies the burden of proof which a creditor
must meet to establish that a transfer in trust
was done with the intent to defraud a creditor
· Clarifies that a spendthrift provision will apply
to a trust if distributions are made under the
exercise of discretion by a trustee who is not
the settler, whether or not the exercise of the
discretion is governed by the standard
· Provides that the spendthrift provision in a
trust will apply even though the trustee may
distribute income or principal to the settlor to
pay income taxes
· Clarifies that a beneficiary's interest in a
trust, whether or not vested, is not considered a
factor or economic circumstance in the division
of property subject to divorce
These changes in SB 63 were brought to our office's
attention by experts in the probate and trust field.
SB 63 is part of an ongoing effort to modernize our
trust laws and by doing so (1) to create jobs and
revenue, (2) to diversify our economy, and (3) to
continue making Alaska attractive to trust business
and investment.
9:50:35 AM
DOUGLAS BLATTMACHR, President, Alaska Trust Company, spoke in
support of SB 63. He said Alaska Trust Company is constantly
trying to update trust laws to keep them the best in the
country, bringing substantial assets and employment
opportunities to Alaskans.
9:52:04 AM
SENATOR PASKVAN said he wanted to make sure he understood the
difference between the original bill and committee substitute:
(3)(F) was removed from Section 1 of the original bill [Version
A] so that in the committee substitute [Version E] what was
section (3)(G) is now section (3)(F). He asked for the reason
for the removal of 3(F) from [Version A].
CHAIR MENARD pointed out that section (3) is on page 3.
MS. CHA pointed out that a house companion bill moved out of
judiciary yesterday. She explained that some of the committee
substitute is a reflection of changes made in the house.
DAVID SHAFTEL, Shaftel Law Offices, said he is a private
attorney and a member of an informal group of attorneys and
trust officers that has been working with the Legislature since
the late 1990's on state and trust legislation. He said the
Alaska Legislature has passed a number of bills that have
improved this area of law for Alaska residents and that the
statutes are often used by non-residents who want to take
advantage of Alaska's improved law in this area.
9:55:26 AM
MR. SHAFTEL said he does not have a copy of the committee
substitute [Version E].
SENATOR PASKVAN said the provision labeled as [Section (3)(F),
subparagraph (i) in Version A] addressed the "reasonable
definite standard as described in 26 CFR1.674(b)-1(b)(5)" and
[Section (3)(F), subparagraph (ii) in Version A] read "an
ascertainable standard relating to health, education, support,
or maintenance as described in 26 U.S.C. 2041(b)." He said he is
wondering why this section [Section 1(3)(F)(i)and (ii) in
Version A] is no longer in committee substitute [Version E].
MR. SHAFTEL said the house bill combines [Section 1(3)(E) and
(F) from Version A] into a simpler statement. He said people
who have worked on SB 63, including himself, must have decided
it would be simpler to use this language rather than the
references to the federal regulations and code.
9:57:45 AM
SENATOR PASKVAN said [Section 1(3)(E) of Version A] reads "the
exercise of discretion by a trustee who is not a settlor and
that are not governed by a standard". The committee substitute
removes the conjunctive term "and" and says, "whether or not the
exercise of discretion is governed by a standard". He asked why
"and" was changed to "whether or not it is governed by a
standard."
MR. SHAFTEL asked for clarification.
SENATOR PASKVAN said that on page 3, line 2 of the original bill
[Version A], it says, "and that are not governed by a standard."
He said he assumed the phrase is addressing the exercise of a
trustee who is not a settlor "and that are not governed by a
standard" as to the exercise of discretion.
MR. SHAFTEL replied, "Correct."
SENATOR PASKVAN said the committee substitute [Version E]
eliminates the conjunctive ["and"] and says "whether or not the
exercise of discretion is governed by a standard."
MR. SHAFTEL said [Section 1(3)(F) of Version A], which
referenced two statutory and regulatory standards was
eliminated. He explained that the two concepts are being
combined into one simple subsection that says the distributions,
that are made under the exercise of discretion by a trustee who
is not the settlor, can be governed by a standard but don't have
to be governed by a standard - either way, [distributions] are
acceptable. This type of trust allows the assets in the trust to
be protected from the creditors of the settlor. SB 63 has been
simplified and the two concepts have been incorporated into
[Section 1(3)(E) of Version E].
10:00:59 AM
MR. SHAFTEL reiterated that the meaning has not been changed.
The original bill [Version A] said the trust still protects
assets from the creditor even though the trustee is not governed
by a standard. It then says that assets are still protected from
the creditors of the settler even though the trustee is subject
to a standard. [Section 1(3) (E) and (3)(F)] were combined to
say this trust is protected from the creditors of the settler
"whether or not" the trustee is governed by a standard. It is a
simplification of language.
10:02:09 AM
SENATOR PASKVAN asked if it was correct he was establishing a
method by which a creditor can't have access to monies of a
settlor in a trust that has a trustee who is another person.
MR. SHAFTEL replied that was correct and explained that this
type of trust was initially approved by the Legislature in 1997.
He said the Legislature has enacted various additional
provisions to strengthen and increase the workability of this
type of trust about six different times. With SB 63, the
Legislature is considering another slight improvement. This kind
of trust was always set up to have an independent trustee who
had absolute discretion as to whether or not to make
distributions. Several states have enacted laws that allow the
trustee of this type of trust to be subject to a standard,
meaning directions or guidelines. These other states have said
this trust will work even though the trustee is subject to a
standard. SB63 would make Alaska's trusts subject to a standard
as well and still protect the assets from the settlor's
creditors.
10:06:06 AM
MR. SHAFTEL said the language being discussed is a couple of
different ways of stating the concept that the trustee can be
subject to a standard.
10:07:54 AM
CHAIR MENARD said the committee can continue to become better
informed but she felt it would be better if Senator McGuire
could help clean up SB 63 for better understanding.
SENATOR PASKVAN agreed and asked Mr. Shaftel what [Section 1
(3)(E)] does beyond [Section 1 (b)(1)] which addresses the clear
and convincing standard with the settlor regarding an intent to
defraud.
MR. SHAFTEL replied that whenever one is required to prove
fraud, the standard burden of proof is by clear and convincing
evidence. Alaska's statute failed to address that subject; other
states' statutes point it out expressly in their statutes.
[Section 1 (b)(1)] is making it clear in the statue.
10:10:23 AM
SENATOR PASKVAN referred again to [Section 1(3)(E) and (F),
Version E] and asked what is being advanced, who is being
protected and who is at risk.
MR. SHAFTEL replied that this type of trust is designed to
provide two benefits to Alaska residents and non-residents that
want to use it. One, it allows a person who is solvent and has
adequate assets to put assets into irrevocable trust for the
benefit of that person and his or her family, assuming there is
no intent to defraud creditors. He noted that a person could
always do this for family, however, as of 1997, the creator of
the trust could also be a beneficiary of the trust. He explained
that the trustee, who is not the creator of the trust, can have
discretion to make distributions to the creator as well as the
creator's family.
MR. SHAFTEL said the second benefit is that the creator of the
trust can use the trust to minimize the amount of federal estate
taxes that will have to be paid upon his or her death. If a
person creates the same type of trust, but is not a beneficiary
of the trust, and makes gifts to that trust, then those assets,
plus the growth of those assets, are not taxed upon the
creator's death. Because this type of trust is subject to the
discretion of a trustee, who is not the person who created the
trust, experts said it should not be included in the creator's
gross estate tax, under the federal estate tax, when he or she
dies. Mr. Shaftel said the IRS just issued a private letter
ruling approving that.
10:14:43 AM
MR. SHAFTEL summarized the second benefit of this kind of trust:
it allows people to make gifts for their family into an
irrevocable trust, which will not be taxed when they die.
However, if they need the funds themselves, the trustee can
distribute the funds back to them. He said it is a very helpful
estate planning approach for Alaska families and is very
popular.
SENATOR PASKVAN thanked Mr. Shaftel and said he understands more
clearly now. He said some clean up between the original bill and
the committee substitute is needed.
CHAIR MENARD said she will hear SB 63 again after flushing it
out with Senator McGuire and the involved attorneys.
10:16:26 AM
SENATOR MEYER asked if a person's estate has to be a certain
value before a trust makes sense.
MR. SHAFTEL said not necessarily; it depends upon the purpose of
the trust and the needs of the person creating it. He said
trusts are often created with $25,000 or $50,000 to help
children or grandchildren go through college. He mentioned that
a temporary repeal of the federal estate tax is in place but if
Congress does not act, any person who dies who has more than 1
million assets will be subject to federal estate tax in 2011.
[SB 63 was held in committee.]
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