03/21/2013 01:30 PM Senate LABOR & COMMERCE

          SB  65-RETIREMENT PLANS; ROTH IRAS; PROBATE                                                                       
                                                                                                                                
1:36:29 PM                                                                                                                    
CHAIR  DUNLEAVY announced  the consideration  of SB  65. "An  Act                                                               
relating to property exemptions  for retirement plans, individual                                                               
retirement  accounts, and  Roth  IRAs; relating  to transfers  of                                                               
individual retirement  plans; relating to the  rights of judgment                                                               
creditors of members of limited  liability companies and partners                                                               
of  limited  liability  partnerships;  relating  to  the  Uniform                                                               
Probate  Code,   including  pleadings,  orders,   liability,  and                                                               
notices under the  Uniform Probate Code and  the Alaska Principal                                                               
and Income  Act, the  appointment of  trust property,  the Alaska                                                               
Uniform Prudent Investor Act,  co-trustees, trust protectors, and                                                               
trust advisors; relating to the  Alaska Principal and Income Act;                                                               
relating to the Alaska Uniform  Transfers to Minors Act; relating                                                               
to  the  disposition  of human  remains;  relating  to  insurable                                                               
interests   for   certain   insurance   policies;   relating   to                                                               
restrictions  on  transfers  of   trust  interests;  relating  to                                                               
discretionary interests  in irrevocable  trusts; relating  to the                                                               
community  property of  married  persons; and  amending Rule  64,                                                               
Alaska Rules  of Civil Procedure,  and Rule 301(a),  Alaska Rules                                                               
of Evidence." This was the [first] hearing.                                                                                     
                                                                                                                                
1:37:35 PM                                                                                                                    
CHAD HUTCHISON,  Staff, Senator Coghill,  sponsor of SB  65, said                                                               
he would present  the bill with assistance from  Beth Chapman and                                                               
David Shaftel.  He described these  attorneys as  the predominant                                                               
engines behind the  drafting of the bill. He  noted that previous                                                               
legislatures considered substantially similar  versions of SB 65,                                                               
but failed  due to time  constraints. He reviewed the  bills from                                                               
previous sessions.                                                                                                              
                                                                                                                                
MR.  HUTCHINSON  explained  that  SB 65  focuses  on  trusts  and                                                               
updates trust law in Alaska. He  reminded members that a trust is                                                               
a legal relationship  created at the direction  of an individual,                                                               
in  which one  or  more people  hold  the individual's  property,                                                               
subject to certain duties, to use  and protect it for the benefit                                                               
of others. Trusts are useful  planning tools that are created for                                                               
the benefit  of a  child, for  somebody who  is unable  to manage                                                               
assets  him or  herself,  to avoid  probate  proceedings, and  to                                                               
reduce estate taxes.                                                                                                            
                                                                                                                                
He relayed  that Alaska  first modernized  its trust  statutes in                                                               
1997, which put Alaska at  the forefront and resulted in commerce                                                               
and jobs  for Alaskans. People  in the state and  nationwide were                                                               
able  to plan  their  financial future  and  security in  Alaska.                                                               
Since 1997, some states have kept  pace with Alaska trust law and                                                               
some  states  have  surpassed  it.  SB 65  seeks  to  update  the                                                               
statutes and again put Alaska at the cutting edge of trust law.                                                                 
                                                                                                                                
SB  65 will  encourage  job growth,  trust investments,  banking,                                                               
legal industries,  and will diversify  the economic  portfolio of                                                               
the state.  It will show  that Alaska  can compete in  the highly                                                               
competitive  financial planning  sector. It  will encourage  both                                                               
residents  and nonresidents  to plan  their financial  futures in                                                               
this state. He deferred questions  about specific sections of the                                                               
bill to Ms. Chapman and Mr. Shaftel.                                                                                            
                                                                                                                                
1:42:55 PM                                                                                                                    
BETH CHAPMAN,  Attorney, Juneau,  AK, said  she has  practiced in                                                               
the area  of trusts and estates  for 25 years, and  has worked on                                                               
this legislation  for several years. It  will provide flexibility                                                               
in trust and estate laws  to respond to changing circumstances so                                                               
that  families  can  protect  their  assets  from  generation  to                                                               
generation.  She  pointed  out  that the  bill  also  adopts  the                                                               
Uniform Disposition  of Remains  Act. This law,  which is  new to                                                               
Alaska, allows an  individual to designate his or  her own burial                                                               
or  cremation  wishes  and makes  them  legally  binding.  Alaska                                                               
currently  has no  guidelines in  this  area and  there has  been                                                               
litigation among family  members about who had  authority to make                                                               
a burial  decision. She noted  that in  many of these  cases, the                                                               
decedent's wishes were not followed.                                                                                            
                                                                                                                                
1:44:09 PM                                                                                                                    
SENATOR  ELLIS asked  if Alaska  is  updating its  trust laws  to                                                               
address  changing  legal circumstances  or  to  make Alaska  more                                                               
attractive than  other jurisdictions for parking  money and doing                                                               
this kind  of business. If Alaska  is only competing to  have the                                                               
most attractive laws, he wondered at  what point it would be good                                                               
for  just professionals,  not consumers,  and  when common  sense                                                               
would dictate that it's enough.                                                                                                 
                                                                                                                                
MS.  CHAPMAN confirmed  that the  bill  does have  an element  of                                                               
trying to ensure  that other states are not  taking business from                                                               
the  state  of Alaska.  However,  the  provisions  in SB  65  are                                                               
dictated  by common  sense and,  based on  her practice,  are not                                                               
designed  to compete  with other  states; they  generally address                                                               
problems  that  have  arisen during  litigation.  More  and  more                                                               
individuals  and   families  are  relying  on   trusts  and  it's                                                               
important to continue to develop the law, she said.                                                                             
                                                                                                                                
1:46:50 PM                                                                                                                    
SENATOR OLSON  asked what the  IRS consequences would be  if this                                                               
legislation were to become law.                                                                                                 
                                                                                                                                
MS.  CHAPMAN  explained  that  the bill  is  written  to  provide                                                               
safeguards  against  tax  consequences. Many  of  the  provisions                                                               
update  current  statutes to  ensure  that  an individual  cannot                                                               
inadvertently create a tax problem.                                                                                             
                                                                                                                                
SENATOR OLSON asked if she was  saying that if he received assets                                                               
from  his  parents' trust,  that  would  not create  adverse  IRS                                                               
consequences if  he kept  the assets or  transferred them  to his                                                               
children.                                                                                                                       
                                                                                                                                
MS. CHAPMAN  said it would depend  on how the trust  was written,                                                               
but the  proposed laws would  allow parents  to draft a  trust to                                                               
pass assets from generation to  generation without any additional                                                               
estate or gift tax.                                                                                                             
                                                                                                                                
SENATOR OLSON asked how that is different from current law.                                                                     
                                                                                                                                
MS.  CHAPMAN  said  Sections  9-11  provide  an  example  of  the                                                               
safeguards   the  bill   provides.  These   sections  relate   to                                                               
modifications  of trusts,  referred to  as decanting.  This is  a                                                               
provision that  allows a trustee  to extend  the term of  a trust                                                               
when  it  is   deemed  necessary.  For  example,   a  parent  has                                                               
established a  trust for a child  that terminates at age  25, but                                                               
the child has developed significant  substance abuse problems and                                                               
the  parent does  not  want  to give  the  child  the money.  The                                                               
decanting  provision allows  the trust  to continue.  The concern                                                               
with the current statute is  that the IRS potentially could argue                                                               
that  it gives  the trustee  too much  power. The  bill addresses                                                               
this by  focusing on  how much  power a trustee  can be  given to                                                               
ensure  that  it  does  not   conflict  with  the  IRS  code  and                                                               
accidentally invoke an estate or gift tax.                                                                                      
                                                                                                                                
1:49:10 PM                                                                                                                    
SENATOR OLSON  asked if a  beneficiary could use trust  assets as                                                               
collateral for a loan.                                                                                                          
                                                                                                                                
MS. CHAPMAN said it would depend  on how the trust is written. If                                                               
it  is a  spendthrift trust,  which  is designed  to protect  the                                                               
assets  from the  beneficiary's creditors,  the individual  would                                                               
not be  able to  pledge the  assets of the  trust for  a personal                                                               
loan.  However,  the   trust  could  borrow  the   money  from  a                                                               
commercial institution  in which case  the trust assets  would be                                                               
pledged as collateral.                                                                                                          
                                                                                                                                
SENATOR  OLSON   asked  what  the   bill  does  to   protect  the                                                               
beneficiary when  the writer of  the trust dies and  has creditor                                                               
claims.                                                                                                                         
                                                                                                                                
MS.  CHAPMAN  explained that  if  the  trust was  established  as                                                               
irrevocable (meaning  that the  writer could  not take  the money                                                               
back) the creditors  of the decedent would not be  able to attach                                                               
the  funds  in  the  trust.  The  funds  would  pass  on  to  the                                                               
beneficiary  free of  those claims,  because it  is considered  a                                                               
completed gift at the time the trust is established.                                                                            
                                                                                                                                
SENATOR  OLSON  asked what  protection  a  creditor has  in  that                                                               
circumstance.                                                                                                                   
                                                                                                                                
MS.  CHAPMAN explained  that if  it  is a  spendthrift trust  and                                                               
there  are   outstanding  creditors,   there  is  a   statute  of                                                               
limitations for  when claims  can be  presented. However,  if the                                                               
assets in  the trust were  pledged as security, the  trust cannot                                                               
defeat a perfected security interest.                                                                                           
                                                                                                                                
DAVID SHAFTEL, Attorney, Anchorage, AK,  said he practices in the                                                               
area of estate  planning and trust and  estate administration. He                                                               
related that  he is a  member of a  group of attorneys  and trust                                                               
officers  that,  since  1997,   have  suggested  improvements  to                                                               
Alaska's trust and  estate laws. Responding to  Senator Ellis, he                                                               
said  there are  17 subjects  in this  bill that  this group  has                                                               
worked on  for about  three years.  As Mr.  Hutchinson indicated,                                                               
most  of the  provisions were  reviewed  by both  the Senate  and                                                               
House last  year, but didn't make  it through the process  due to                                                               
time considerations.  He offered  his belief  that 80  percent of                                                               
the  provisions are  designed to  assist  Alaskan residents  with                                                               
Alaska trust and  estate law, not to attract  business from other                                                               
jurisdictions.  The  provisions  are   intended  to  upgrade  and                                                               
improve Alaska statutes for administration  of trusts and estates                                                               
and  for estate  planning  purposes. For  example,  in 2003,  the                                                               
legislature adopted  the Alaska Uniform Principal  and Income Act                                                               
and the  IRS has since  issued final regulations.  Sections 16-32                                                               
of  the   original  bill  propose   amendments  based   on  those                                                               
regulations  that will  allow  Alaska to  take  advantage of  the                                                               
flexibility that Congress has approved for trusts.                                                                              
                                                                                                                                
MR. SHAFTEL  explained that  Sections 1-3  conform Alaska  law to                                                               
the majority  rule among the  states to exempt  the beneficiary's                                                               
interest in a retirement plan or  IRA under state law. In Section                                                               
43, there is  a new provision that allows for  the transfer of an                                                               
IRA interest. This  will give Alaska residents  (and residents of                                                               
other states  who want to  take advantage  of it) the  ability to                                                               
transfer an IRA interest to a trust.                                                                                            
                                                                                                                                
Section 37  contains provisions to update  the insurable interest                                                               
provision in  Alaska law. He  explained that  it is common  for a                                                               
person to  buy an  insurance policy  and place it  in a  trust so                                                               
that the proceeds won't be taxable  under the estate tax when the                                                               
insured  dies.  This clarifies  that  it  is still  an  insurable                                                               
interest and  valid under  state law. He  noted that  the current                                                               
law does not address that.                                                                                                      
                                                                                                                                
MR. SHAFTEL said his practice is  similar to Ms. Chapman's in the                                                               
respect  that  about  95  percent   of  his  clients  are  Alaska                                                               
residents. The  legislature's continuing efforts to  update these                                                               
laws is for the benefit of all Alaskans, he said.                                                                               
                                                                                                                                
1:58:19 PM                                                                                                                    
DOUGLAS  BLATTMACHR,  President  and CEO,  Alaska  Trust  Company                                                               
(ATC), Anchorage,  AK, said  ATC strongly  supports SB  65, which                                                               
updates Alaska  trust laws.  In the past  these laws  have helped                                                               
create jobs  and commerce  and have helped  bring revenue  to the                                                               
state.                                                                                                                          
                                                                                                                                
SENATOR  OLSON  asked  if  the  bill would  affect  the  cost  of                                                               
establishing a trust.                                                                                                           
                                                                                                                                
MR.  BLATTMACHR  said  ATC  bases  its  fees  on  the  facts  and                                                               
circumstances  of a  particular individual  or family  situation.                                                               
The bill  does not address  those fees; it simply  modernizes the                                                               
law.                                                                                                                            
                                                                                                                                
2:00:02 PM                                                                                                                    
BRET  S. KOLB,  Director,  Division of  Insurance, Department  of                                                               
Commerce, Community and  Economic Development (DCCED), Anchorage,                                                               
AK, offered to answer questions on SB 65.                                                                                       
                                                                                                                                
SENATOR OLSON asked  why this legislation hasn't  made it through                                                               
the process in previous years if it's such a good law.                                                                          
                                                                                                                                
MR.  KOLB offered  his  understanding  that it  was  a matter  of                                                               
timing, not the merits of the bill.                                                                                             
                                                                                                                                
2:01:08 PM                                                                                                                    
CHAIR DUNLEAVY  found no further  questions or  public testimony.                                                               
He announced  he would hold  SB 65  in committee and  continue to                                                               
take public testimony at a subsequent meeting.