Legislature(1997 - 1998)
05/07/1997 08:37 AM House JUD
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* first hearing in first committee of referral
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HB 199 - COMMUNITY PROPERTY Number 0036 CHAIRMAN GREEN announced the first order of business would be House Bill No. 199, "An Act relating to the property, transactions, and obligations of spouses; relating to the augmented estate; amending Rule 301, Alaska Rules of Evidence; and providing for an effective date." He noted that testimony had been taken previously. Number 0054 REPRESENTATIVE JOE RYAN, sponsor, stated, "I think we have tried to address the majority of the concerns the committee had about the bill." He referred to the Oklahoma Session Laws of 1939 and a court case from the U.S. District Court, Northern District of Oklahoma, which is a decision for a taxpayer; he said Oklahoma had an elective law similar to this, passed in 1939. Some people named McCollum had nominated some of their property as community property. The law was subsequently repealed. The husband died. And the Internal Revenue Service (IRS) would not allow the step-up in basis. "So, it was taken to court, and the court affirmed that the property was community property, that the step-up in basis was appropriate, and it made a decision for the taxpayer," Representative Ryan explained. He said he'd brought this up to show that there is case law and that it has worked in other jurisdictions; he believes it will work just as well here. REPRESENTATIVE RYAN indicated the bill offers the opportunity to the citizens of Alaska and others who would benefit from it. He fully supports the amendments to be offered by Representative Croft, which he hopes will allay the concerns expressed by the "family law folks," to make sure that no one is hoodwinked or misinformed and that there is no problem. Representative Ryan concluded, "We think this is a marvelous opportunity for people to take advantage of the federal law and to bring money into the country and for Alaskans." Number 0262 CHAIRMAN GREEN asked whether Representative Ryan had a response to oral and written testimony from family law attorneys and divorce attorneys that having such a trust could create a problem if a marriage dissolved. Number 0298 REPRESENTATIVE RYAN replied that the original legislation was based on the Wisconsin model, which calls for a 50/50 split. One of Representative Croft's amendments has language in "upper case bold" that will tell people before signing one of these voluntary agreements that they should make sure that they get counseling and are fully knowledgeable about what is going on. They'd swapped the Wisconsin model for the state of Washington model, which says the court has the discretion to make a distribution as it sees fit if it finds that one partner was misinformed or hoodwinked. He suggested that should address anybody's problem. He noted that "any property not nominated as community property stays individual property, and that's the discretion of the court." Number 0434 REPRESENTATIVE ETHAN BERKOWITZ asked whether there was anyone from the family law section listening. CHAIRMAN GREEN replied that he didn't know; they'd closed testimony. REPRESENTATIVE RYAN stated, "I have no problem with that. ... I don't want to see anyone taken advantage of. I've talked to a number of women and asked them what their concerns were. Most of them like the idea of being able to take advantage of the step-up in basis, but some have said, `Well, you know, the husband tells you to sign something, you go ahead and do it.' And I said, `With ... these amendments, would you think that would address things fairly?' And they seemed to feel that that's an appropriate thing. And I support those amendments." Number 0487 CHAIRMAN GREEN said he believed one concern offered was the question of what would happen if somebody encumbered the trust, unbeknownst to the other. He noted that the judge would still have discretion. REPRESENTATIVE RYAN explained, "Well, if you have a 50/50 ownership, which is under community property law, someone can only encumber what they have, their half. I can't go and encumber your property. Or I could try; I could sign a quitclaim deed and everything, but I don't think anybody's going to stand for it. ... But I can encumber my property. I have every legal right to do that. What I own, I own. ... This law here talks about what you nominate as community property. Everything else stays individual. ... Gifts, bequests, inheritances and so forth stay with the individual to whom they come, and ... in the case of a divorce, that would be adjudicated by the court as to what a reasonable disposition of the property is in the case of the divorce." REPRESENTATIVE RYAN said, "... we feel there's not going to be a lot of this divorce, because, first place, a married couple have assets with unrealized gain would -- to take advantage of the federal provision, these people, who have lived together for a long time and intend on staying married until such time as they die -- if there were younger folks who had something nominated in community property, there probably wouldn't be much of a gain, because you have to hold that asset for a period of time to get that unrealized gain. So, ... it's aimed primarily at people that perhaps years ago bought a house for $10,000 and now it's worth a couple hundred. And so, they can take advantage of ... getting capital gains." CHAIRMAN GREEN noted that many people divorce after 20 or 25 years. REPRESENTATIVE RYAN again suggested the amendments adequately address the concerns. Number 0657 REPRESENTATIVE BRIAN PORTER apologized for missing the portion of the testimony that dealt with family law practice concerns. He stated, "But in reading some of it, one of the issues was that the court could find now that a prenuptial was unconscionable at the time of the divorce. But with this, they would have to find that it was unconscionable at the time it was consummated, I mean the trust or the community property establishment. Was there some testimony about the significant difference of those two, what could make it not unconscionable in the beginning but unconscionable at the time of a divorce?" REPRESENTATIVE RYAN replied that "in the statute, it says that this is a good-faith agreement entered into by both parties." He noted that the parties can also opt out; it is purely elective. Basic property in Alaska will remain individual property. REPRESENTATIVE PORTER clarified that he was asking the committee. Number 0731 REPRESENTATIVE ERIC CROFT stated, "The way that can work is you have two pieces of property, both worth $200,000, stock and a house. And you say, `If we get divorced, you keep the stock and I'll keep the house.' And in the meantime, either the market crashes and the stock or the -- so, the thing says, `Well, it's fair enough when you did it, but now it's zero to one party and the other has gone up to $300,000, and we're just not going to do that. ... It was an agreement, but we're not going to leave one party destitute.'" REPRESENTATIVE PORTER said if both of those assets were in a community property trust, they couldn't do that; it would be 50/50 each. CHAIRMAN GREEN said that was the kind of thing to which he was alluding. They hadn't really discussed it. Number 0787 REPRESENTATIVE PORTER said obviously, where there is a way to manipulate, somebody will to try. However, he couldn't see the big bugaboo that everybody was trying to allude to. He stated, "There's got to be some recognition of equal rights and equal responsibilities, while still trying to protect (indisc.)." Number 0793 REPRESENTATIVE BERKOWITZ explained that this bill targets estate planning, not family law per se. The problem is that they are finding unintended consequences to some of the language as far as family law is concerned. He stated, "And to the extent ... we can back out of that quandary by saying this is solely an estate planning device -- I don't ... have any proposed language to do so, other than just standing here and saying so and having everyone nod, which indicates that that's the committee's understanding and intent, and if ever comes a time where a court needs to interpret ... the application of this legislation, they would know full-well that we intend it solely for estate planning." Number 0867 REPRESENTATIVE JEANNETTE JAMES indicated she doesn't understand the fears and that this goes towards more fairness than less. She briefly discussed her own marriage and both partners' commitment to it, with everything jointly owned. She indicated she believes marriage partners who decide to go separate ways should share assets equally; anything else is for the lawyers to argue about, although she has little confidence in either lawyers or the courts. "I support this bill as it's written; I think it's a good piece of legislation," she concluded. Number 0941 CHAIRMAN GREEN asked whether she had read the "WMPA" article from Wisconsin. REPRESENTATIVE JAMES said no. Number 0948 REPRESENTATIVE CON BUNDE suggested, "Just to Representative Berkowitz's point, perhaps we ought to say, `For the record, we feel that this concerns estate planning and not family law.' And if, then, there are further court discussions as they examine our transcript, `For the record' should be a flag ... that stands out." Number 0980 REPRESENTATIVE NORMAN ROKEBERG suggested that saying what they intend is all well and good, but he isn't sure that is what the statute does. He said, "It gives the right of a married couple to elect to enter into a community property regime and leaves it there in event of a divorce, unless there's a mutuality of agreement to elect out. So, the fact that the -- by the construction of the bill, as I take it, is that it does place this body of type of domestic relations arrangement on our statute book and would allow anybody who chose to do it, for whatever reason, to do it. And I understand that that's the purpose of the sponsor, to do that for estate planning purposes. ... Please tell me if I'm wrong here, ... for the record." Number 1027 CHAIRMAN GREEN replied, "I think that probably is exactly what would happen. If one party opted out, the other one didn't, it stays in the trust, unless, I would presume, ... there's some sort of ... economic burden; they've got this trust, they've lost everything else. ... I mean, we're looking at things because we want to make sure we're covered or that we elect knowingly not to cover. But if you have an estate and you're crazy in love, and so, you put, say, half of that in a trust and the other half you've kept out, but 25 years hence, the rest of this is fine sand that's lost and this is the only thing you have left, and comes a divorce, is there a `contentious' there? Now, that's obviously a specific, small piece of the action. But do you feel that there is adequate protection for both spouses in that situation?" Number 1080 REPRESENTATIVE RYAN responded, "If it's 50/50, Mr. Chairman ..." CHAIRMAN GREEN said, "If it went in 50/50, and it has to do that." REPRESENTATIVE RYAN continued, "... and it says ... under community property there is a 50/50 division, I can't see how either spouse can be ... left short, because the man's going to get 50 percent, the woman's going to get 50 percent, the property was earned during the time of the marriage, they both by law have a right, the same right to it, and then if the judge ...." CHAIRMAN GREEN said, "If it's a community property state, which we're not, it would have to be through the trust." REPRESENTATIVE RYAN said, "Under this bill, you don't have to go into a trust to do it." CHAIRMAN GREEN said, "Well, or contract out, but it's not a ...." REPRESENTATIVE RYAN stated, "Your agreement is a basic, binding thing. Now, if the contention is raised in court that somehow, `We're broke on everything else, and this is the only asset we have, and somehow I was hoodwinked when we put this in, and I deserve more than 50 percent,' I would think that's up to the attorneys and the court to litigate. And under the amendment that Representative Croft has, it gives the court that discretion. So, ... it would seem to allay any concern that anyone could have as far as family law is concerned. You can't ask for anything better than that." Number 1146 CHAIRMAN GREEN called an at-ease at 8:53 a.m. He called the meeting back to order at 8:58 a.m. and noted that all members were present. Number 1198 REPRESENTATIVE CROFT offered Amendment 1, which read: Page 2, line 19, following (d): Delete all material. Insert "When distributing property identified as community property under a community property agreement or trust under 34.75, unless the parties have provided in the agreement or trust for another disposition of the community property, the court shall make such disposition of the community property as shall appear just and equitable after considering all relevant factors including, but not limited to (1) the nature and extent of the community property; (2) the nature and extent of the separate property; (3) the duration of the marriage; and (4) the economic circumstances of each spouse at the time the division of property is to become effective, including the desirability of awarding the family home or right to live therein for reasonable periods to a spouse with whom the children reside the majority of the time." Number 1208 REPRESENTATIVE PORTER objected for the purpose of discussion. REPRESENTATIVE CROFT explained, "This addresses the concern about it having to be a 50/50 split. Right now in family law, we have an equitable distribution of property, that you consider a number of factors. And there was some concern that one of the things people would not understand is that they're giving up a complete right to an equitable distribution at that time. This says unless the agreement provides otherwise, you divide the property on a fair basis that the court determines. The factors listed are very similar to, though not quite identical to, ... the factors that we equitably divide in the other areas. That's a little bit of a discrepancy that worried me, but it's, `but not limited to'. I think the court would do both." REPRESENTATIVE CROFT continued, "The reason we liked this language is it came straight from a community property state, and therefore in any discussion with the IRS, we want to be sure we're firmly in community property. So, by the fact that both of the lists of factors, under Alaska's current marital property and under this one, say, `not limited to,' here -- consider these type of things but consider whatever else is fair. I think they both can mesh." REPRESENTATIVE CROFT continued, "I guess there's still the concern that people can opt out with this, opt to a 50/50. ... That concern is not a big one ... because it says, `unless the ... parties have provided in the agreement or trust for another disposition.' So, they can say, `We don't want equitable at the time; we want 50/50.' But now, that would have to be in there explicitly, rather than a product of community property that people may not understand. So, the agreement they're signing would then have to say, `And you understand: This is half and half.' I think if parties do that, absent some sort of fraud or misrepresentation, then they can take the consequences." REPRESENTATIVE CROFT continued, "And I think they could now. ... That's been a point that hadn't come out. We could now make an agreement, my wife and I, that certain classes of property would be marital, certain would not, that at break-up, ... if we had a divorce, that that would be divided in a certain way. And I think the rules in this bill ... would generally apply, absent some sort of fraud or misrepresentation. That's a contractual matter. We've agreed to that, and the court will do that. The rest it will divide equitably. ... If this so throws things out of whack that it's just unconscionable ..., even at the time, then maybe a court can step in. But barring those sorts of things, they would say, `Well, you agreed to it; you knew what you were doing (indisc.).' ... This solves, I think, Maryann Foley's concern, on her memorandum, page 1, and there was a letter from Jill Dean, also expressing it, a couple of other people that I haven't tagged yet, spotlighted this provision, that they were worried it wouldn't allow an equitable distribution. And so, this amendment would put it back." Number 1372 REPRESENTATIVE PORTER removed his objection. REPRESENTATIVE ROKEBERG asked whether Representative Ryan had run this by the estate planning people to see whether adoption of this amendment would jeopardize the community property presumption in the bill. REPRESENTATIVE RYAN said he'd run it by them and, in fact, "most of these people supplied the language." He referred to page 2, line 24, which says, "unless the parties have provided in the agreement or trust for another disposition of the community property." He said there is flexibility already in there, and this should give about the ultimate amount of flexibility, so that nobody is going to have a problem. And if it is unconscionable, the courts won't allow it anyway, just as they don't allow fraudulent transfers. Number 1457 REPRESENTATIVE BERKOWITZ asked whether anything in the bill prevents parties from including a provision along the lines of, "This agreement is null and void in the contingency of divorce or separation." REPRESENTATIVE RYAN said no. REPRESENTATIVE BERKOWITZ asked, "In which case, division of marital assets is to be calculated according to existing family law provisions?" REPRESENTATIVE RYAN replied, "If the agreement were null and void, yes, you'd be back to -- the basis of property in Alaska is individual property. We're not changing that at all. ... This is strictly an elective procedure." Number 1500 REPRESENTATIVE JAMES asked Representative Croft whether all community property states do this. REPRESENTATIVE CROFT replied, "From what we can find, no. Some say 50/50 is 50/50 .... I went to law school in California, which ... is a community property state. My recollection is that they had an `out' somewhere, but I didn't go back and research it, that it was `presumption of 50/50 but' kind of thing: You can divide it if certain things are met, if it looks really bad, you can change 50/50. But I didn't go back to California statutes." REPRESENTATIVE CROFT continued, "This was the clearest equitable distribution that could be found in a community property state. We have a similar set-up. ... We divide equitably, but we presume 50/50 is equitable unless you show otherwise. So, we're sort of almost there anyway on our ...." Number 1545 REPRESENTATIVE RYAN noted that this language came from the state of Washington. Number 1549 REPRESENTATIVE ROKEBERG said, "The indication of 50/50 is in the deleted language under this amendment. So, is that still satisfactory?" [There was no discernible response.] Representative Rokeberg then said, "Okay." CHAIRMAN GREEN asked whether there was an objection. Hearing none, he announced that Amendment 1 was adopted. Number 1573 REPRESENTATIVE CROFT offered Amendment 2, which read: Page 4, line 22: Delete "34.75.090(b)" Insert "34.75.090(c)" Page 9, following line 31: Insert a new subsection to read: "(b) A community property agreement must contain the following language in capital letters at the beginning of the agreement: THE CONSEQUENCES OF THIS AGREEMENT MAY BE VERY EXTENSIVE, INCLUDING, BUT NOT LIMITED TO, YOUR RIGHTS WITH RESPECT TO CREDITORS AND OTHER THIRD PARTIES, AND YOUR RIGHTS WITH YOUR SPOUSE BOTH DURING THE COURSE OF YOUR MARRIAGE AND AT THE TIME OF A DIVORCE. ACCORDINGLY, THIS AGREEMENT SHOULD ONLY BE SIGNED AFTER CAREFUL CONSIDERATION. IF YOU HAVE ANY QUESTIONS ABOUT THIS AGREEMENT, YOU SHOULD SEEK COMPETENT ADVICE." Reletter the following subsections accordingly. Page 10, lines 3 - 4: Delete "(b) of this section" Insert "(c) of this section" Page 12, following line 19: Insert a new subsection to read: "(b) A community property trust must contain the following language in capital letters at the beginning of the trust: THE CONSEQUENCES OF THIS TRUST MAY BE VERY EXTENSIVE, INCLUDING, BUT NOT LIMITED TO, YOUR RIGHTS WITH RESPECT TO CREDITORS AND OTHER THIRD PARTIES, AND YOUR RIGHTS WITH YOUR SPOUSE BOTH DURING THE COURSE OF YOUR MARRIAGE AND AT THE TIME OF A DIVORCE. ACCORDINGLY, THIS AGREEMENT SHOULD ONLY BE SIGNED AFTER CAREFUL CONSIDERATION. IF YOU HAVE ANY QUESTIONS ABOUT THIS AGREEMENT, YOU SHOULD SEEK COMPETENT ADVICE." Reletter the following subsections accordingly. Page 12, lines 22 - 23: Delete "(b) of this section" Insert "(c) of this section" CHAIRMAN GREEN objected for the purpose of discussion. Number 1607 REPRESENTATIVE CROFT explained that he believes this meets the concerns of Joan Clover of the Law Offices of Gruenberg and Clover. On page 2 of her memorandum dated April 30, 1997, it said, "I believe that the `warning' proposed by Representative Croft's amendment should be even more strongly worded." Representative Croft indicated there had been some discussion in committee, and for the amendment, they'd taken Ms. Clover's proposed wording, with very few changes. The proposed warning in Ms. Clover's memorandum had read: "THE CONSEQUENCES OF THIS AGREEMENT MAY BE VERY EXTENSIVE, AFFECTING, FOR EXAMPLE, YOUR RIGHTS WITH RESPECT TO CREDITORS AND OTHER THIRD PARTIES, AND YOUR RIGHTS WITH YOUR SPOUSE BOTH AT THE TIME OF A DIVORCE AND DURING THE COURSE OF YOUR INTERACT MARRIAGE. ACCORDINGLY, THIS AGREEMENT SHOULD ONLY ...." Number 1629 CHAIRMAN GREEN suggested there is another place of warning. REPRESENTATIVE CROFT explained, "They provide for two different types: a community property agreement and a community property trust. So, both would have to have that." Number 1649 REPRESENTATIVE ROKEBERG referred to the last sentence of the warning language. Noting that it had been a couple of weeks since he read the bill, he asked whether there isn't a requirement in the bill that before entering into the community property agreement, both parties must have separate counsel or are advised to do so. CHAIRMAN GREEN said as he recalled it, the testimony from Mr. Blattmachr, and others who'd called in, had suggested that. REPRESENTATIVE ROKEBERG said it was his understanding that for a prenuptial agreement, for example, to have any force of law, "under the state view here in Alaska now, that the presumption is that you would have separate counsel advising both parties to that, to make sure it would have enforceability in the courts." He expressed concern about whether this language is strong enough. He suggested they should presume that the parties should have questions about the agreement. Number 1721 REPRESENTATIVE BERKOWITZ stated, "It seems to me that you can't even get to one of these agreements unless you have a lawyer ...." REPRESENTATIVE ROKEBERG asked: How many lawyers? He said that is the issue. Presumably, there should be counsel for both parties on something as complex as this. REPRESENTATIVE BERKOWITZ said his guess is that there might be some ethical prohibitions about a lawyer representing both parties to this agreement. For example, one lawyer wouldn't represent both parties to a contract. Number 1767 REPRESENTATIVE CROFT commented that he wasn't going to be the one to propose that everyone must see a lawyer. He indicated it is probably a good idea in these cases, and he would think that a lawyer couldn't ethically advise both parties. However, he didn't know that they needed to require it. REPRESENTATIVE PORTER said there are all sorts of things that a couple can do that don't require independent counsel or independent stock brokers, such as obtaining loans or buying cars, a house, stock and so forth. REPRESENTATIVE ROKEBERG said in his experience with the legal profession, he had been strongly advised that while entering into a prenuptial agreement, this would be the case. It was the advice he'd received, and he thinks it is most appropriate here. Number 1845 CHAIRMAN GREEN replied that he understood what Representative Rokeberg was saying. However, testimony indicated this is primarily for "large-buck-type investors," not those with limited monetary worth. He suggested with large dollar volumes, the people involved would have adequate counsel. Number 1871 REPRESENTATIVE BUNDE indicated he believes these concerns are addressed by putting in that warning. He commented that to him, "counsel" is not singular. REPRESENTATIVE BERKOWITZ said it seems that under the ethical requirements for being a lawyer, the lawyer would advise a couple that he or she shouldn't represent both parties because they may wind up on opposite sides of an agreement, and the lawyer would advise the parties that each should have advice. However, if they made a knowing and intelligent waiver of the right to alternative counsel, the lawyer should say, "here's how an agreement would pan out." If both parties agreed to have one lawyer, that would happen. "But the lawyer would also have a requirement to be fair in what he was saying," Representative Berkowitz stated. "He couldn't skew it one way or the other. Or she." Number 1939 REPRESENTATIVE ROKEBERG stated that he strongly endorses this amendment and its intention. He'd just wanted to make that point. Number 1948 REPRESENTATIVE RYAN referred to page 9, line 28, "Community property agreement", which continues to page 11. He stated, "The majority of things that the people have talked about, the `what ifs,' are addressed in here. On line 31, on page 10, it says ... a community property agreement executed during marriage is not enforceable if the spouse against whom enforcement is sought proves that the agreement was unconscionable when made. So, that language is already in the bill. The spouse against whom enforcement is sought did not execute the agreement voluntarily. Or before execution of the agreement, the spouse against whom enforcement is sought was not given a fair and reasonable disclosure of the property and financial obligations of the other spouse, did not voluntarily sign a written consent expressly waiving the right to disclosure of the property and financial obligations of the other spouse beyond the disclosure provided, and so on and so on." REPRESENTATIVE RYAN said they've covered this comprehensively. If one party hoodwinks the other, already in here is a basis to have those things set aside. However, he has no objection to "putting this extra stuff in there if people will feel comfortable." He said it adds extra protections, and everybody should be happy that they tried to address the issues. Number 2016 CHAIRMAN GREEN removed his objection. REPRESENTATIVE JAMES objected, indicating the desire to vote. CHAIRMAN GREEN requested a roll call vote. Voting for Amendment 2 were Representatives Bunde, Porter, Rokeberg, Croft, Berkowitz and Green. Voting against it was Representative James. Therefore, Amendment 2 was adopted, 6 to 1. CHAIRMAN GREEN asked whether there was further discussion of the bill. Number 2046 REPRESENTATIVE CROFT stated, "I don't know the unconscionability timing now, whether it's done ... at the time of the agreement or at the time of divorce. But I've been thinking about it since Representative Porter brought it up. It would seem to me that there's not a big problem with doing it when made. If they throw all of their property in to a community property agreement, they're all in the same boat. If they throw some of it and not the rest, the court retains the power to equitably divide the rest. ... I can't see - and I've thought about it some - where that distinction between `unconscionable when made' or `unconscionable at divorce' makes a tremendous amount of difference; it may." REPRESENTATIVE CROFT said the Oklahoma case mentioned by Representative Ryan had reassured him some. That state had enacted an "opt in" that was declared by the IRS to be appropriate for this double step-up in basis. Number 2092 CHAIRMAN GREEN indicated his only concern had been the age of that case. REPRESENTATIVE RYAN said it is a precedent. Number 2103 REPRESENTATIVE ROKEBERG said the first amendment they'd adopted provided for greater flexibility on the part of the courts. He expressed concern that it might lead to greater confusion. He said this bill, if adopted, is destined to create a real boom in the legal profession in Alaska. He believes the application will be limited, as he believes it is intended for estate planning purposes. However, it has the potential for going beyond that. He concluded that it has a lot of potential good. "But there's a lot of caveats here, and I've got some concerns about it," he added. Number 2145 REPRESENTATIVE CROFT made a motion to move HB 199, as amended, from committee with attached fiscal notes and individual recommendations. CHAIRMAN GREEN asked whether there was any objection. There being none, CSHB 199(JUD) moved from the House Judiciary Standing Committee.
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