Legislature(1999 - 2000)
01/19/2000 01:16 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 220 - COMMUNITY PROPERTY AGREEMENT/TRUSTS TAPE 00-2, SIDE A Number 0001 CHAIRMAN KOTT called the meeting back to order at 1:46 p.m., announcing that the next item of business would be HOUSE BILL NO. 220, "An Act relating to the amendment and revocation of spouses' community property agreements and community property trusts; and providing for an effective date." He noted that Representative Croft had joined the meeting some time ago. He then called upon Lesil McGuire to explain the bill. Number 0078 LESIL McGUIRE, Legislative Assistant to Representative Pete Kott, Alaska State Legislature, serving as Committee Aide to the House Judiciary Standing Committee, elaborated on the written sponsor statement for HB 220. She explained that the Alaska Community Property Act (ACPA) is based on the Uniform Marital Property Act (UMPA). Among many features shared by the two is a provision enabling a married couple to make a non-testamentary disposition under the community property agreement or trust. In addition, the ACPA provides that such instruments may not be amended or revoked unless the agreement or trust itself provides for revocation on a particular date or upon the occurrence of a particular event, or unless the agreement is amended or revoked by a later community property agreement or trust. That is the language now. MS. McGUIRE explained the problem: the provision may lead to an argument that the spouses made a completed taxable gift to the residual beneficiaries of the trust or agreement. This exact scenario occurred in Pyle v. United States, a 7th Circuit case; although Pyle isn't binding on Alaska, the concern is that it may lead to a similar result in the 9th Circuit because Alaska's language is based upon the UMPA as well. In Pyle, the court ruled that because the surviving spouse could not change the will after the death of her husband, she in effect made a taxable gift to the residuary beneficiaries who would inherit after the surviving spouse's death. As a result, federal [gift] tax was payable at the death of the first spouse, which otherwise would have been deferred to the time of the second spouse's death. MS. McGUIRE advised members that because Pyle - an Illinois case - was controlling in Wisconsin's 7th Circuit, the Wisconsin legislature became concerned and amended its own community property statute, which was almost identical to Alaska's. The amended language created a default rule that enables a spouse to unilaterally amend a community property agreement with respect to property to be disposed of at the death of the surviving spouse. MS. McGUIRE noted that the language in HB [220] is similar to that enacted by Wisconsin. Together, the amendments ensure that if a community property agreement or trust provides for the non- testamentary disposition of property, without probate, at the death of the second spouse, the surviving spouse may amend the community property agreement or trust with respect to the property to be disposed of at his or her death, unless the agreement or trust specifically provides otherwise. Rather than being a bill of policy, HB 220 is a bill of technicality, addressing possible problems. Some legislatures are responding to cases that tend to have a result in opposition to the policy of the UMPA. This language just clarifies the intent that the property should not be a taxable gift. Number 0430 REPRESENTATIVE MURKOWSKI asked whether this has been brought before the Alaska courts for interpretation. MS. McGUIRE said no. Number 0451 REPRESENTATIVE CROFT expressed his understanding that the ACPA was a tax-avoidance or tax-planning scheme whereby one could designate a piece of property as community property; therefore, when one spouse died, there was a step up in basis without its being a taxable event. He suggested its main advantage is there. He asked what the catch of Pyle is. MS. McGUIRE agreed with Representative Croft, saying that is the goal. There wasn't meant to be any taxable consequence to this language. In fact, it doesn't appear Pyle has been a major controversy out there. The language in the UMPA remains the same, identical to Alaska's language and to the language that was in Wisconsin's statute. The question is: Does it leave the door open? MS. McGUIRE explained that as Pyle is interpreted, when one spouse dies and there is an automatic transfer to the surviving spouse, if the language is not open to his or her amending it in any way, it is making a concrete gift to those residual beneficiaries; that is because there is nothing meaningful the spouse can do within his or her lifetime to alter that. In effect, it vests, and there is a gift taxation associated with that. Really all this does is add language saying the surviving spouse can amend that community trust or agreement if he or she so chooses. Consequently, a court doesn't have room to say the gift has vested, because there is always the chance that the surviving spouse might change that language. Number 0607 REPRESENTATIVE CROFT asked whether the surviving spouse could amend it in any way - including beneficiaries, for example - if that isn't prohibited in the trust agreement, and if it fits this category. MS. McGUIRE affirmed that as the language reads, there is room for that; it doesn't put any categorical restrictions on it. However, it does say "unless the community property agreement expressly provides otherwise," a limiting device. REPRESENTATIVE CROFT suggested that is within Pyle. [Comment indiscernible because of overlapping speech.] MS. McGUIRE replied, "To a degree." She noted that in Pyle, the will itself was narrow, providing only for her [Pyle's] comfort, enjoyment and health, a kind of provision where she really had no room to invest or dispose of the property unless she went to the court. REPRESENTATIVE ROKEBERG suggested it was like a life estate. MS. McGUIRE agreed, adding that even though it didn't start out that way, the court said it was, in effect, a life estate. This language just adds protection so a person won't be in a judicial trap of having it interpreted as a life estate. REPRESENTATIVE CROFT suggested the goal is to provide authority for not just any amendments, but rather those that could fix the problem. Here, however, the spouse could make any type of amendment at all. MS. McGUIRE pointed out that there are some qualifiers: it is a community property agreement, it is a non-testamentary disposition of property, probate is not provided, and it is at the death of the first spouse. It is up to the committee if they want to narrow that language further. Number 0838 ERIC KUEFFNER, Attorney at Law, Faulkner Banfield, PC, came forward on his own behalf. He agreed with Representative Croft that the purpose of the ACPA was to give people certain options. This amendment maintains those options against the possibility that they might be foreclosed in a way that wasn't anticipated when the statute was first passed. Number 0866 REPRESENTATIVE ROKEBERG asked whether one of the concepts of community property isn't to pass on property, with an accelerated basis, to the spouse without restriction. He asked how it can be community property if there are restrictions. He further asked whether it is correct that people wanting restrictions would use another type of trust agreement. MR. KUEFFNER replied, "Yes and no." Although he hadn't actually done one of these agreements yet, he added, he would advise a client that if the client wants the advantages that other states have of community property here, the client could declare certain property as community property to get those advantages. Yes, there are other methods to achieve some of these same ends, but it the basis change that is really the best thing about the ACPA. REPRESENTATIVE ROKEBERG suggested that notwithstanding the federal spousal exemption, there would be a basis adjustment upon the death of one's spouse but for a community property scenario. MR. KUEFFNER concurred. REPRESENTATIVE ROKEBERG referred to Ms. McGuire's testimony. He asked whether, with a spousal exemption, there is a gift tax. MR. KUEFFNER responded that at the risk of misinterpreting what Ms. McGuire was suggesting, the gift tax in Pyle was imposed because the gift was deemed to be made to the residual beneficiaries, not to the spouse. The "middle man" - a woman in the case of Pyle - has no say over that. Mr. Kueffner agreed there is a marital exemption. He said he believed he had looked at Pyle, but not recently. Number 1052 REPRESENTATIVE CROFT suggested in Pyle it was so restricted to the wife that it was, in effect, nothing but place holding - a life estate. It was a completed gift to the ultimate beneficiaries. MR. KUEFFNER specified that that is what the court said. To his knowledge, no court in Alaska has interpreted it that way. However, there is the risk that some might. REPRESENTATIVE CROFT suggested it is created by people who try to tie the hands of the spouse. If the agreement is a simple community property designation, then the surviving spouse has what was community property, a stepped-up basis, now as his or her sole property. He said it is only this "string-tying thing" that causes a problem. MR. KUEFFNER agreed that is what got them in trouble in Pyle. REPRESENTATIVE CROFT suggested what is needed, then, as far as the ability to go back and amend, is to fix that. He proposed that Mr. Kueffner could suggest language there that talked about what could be amended. MR. KUEFFNER said he isn't a bill drafter, then agreed this could be made much more narrow, restricted to precisely what they are talking about here. However, he would recommend against that, because who knows what a court might think later on about something done in the effort to avoid a completed tax upon creating this? REPRESENTATIVE CROFT said that is a good point. He clarified that he wasn't implying that Ms. McGuire or the drafter had done anything wrong, but rather that there are other options to explore. He asked why this includes the language "unless the community property agreement expressly provides otherwise." He also asked whether they shouldn't say instead, in essence, "notwithstanding the community property agreement, you can." MR. KUEFFNER returned to his basic point: The idea of the uniform community property Act is to give people options, including the opportunity to do an agreement that isn't going to be altered by the surviving spouse. Number 1196 REPRESENTATIVE CROFT asked whether the agreement in Pyle, in addition to listing restrictions, said it couldn't be amended. He further asked, "If it did, we wouldn't be solving the Pyle problem, right?" MR. KUEFFNER replied that he doesn't know whether Pyle had a restrictive clause. It could well be that this wouldn't fix that problem, he added. REPRESENTATIVE CROFT suggested in that case it would seem better to have it broader in the first part and more narrow in the second. In other words, they would allow somebody the ability only in this specific situation, regardless of what it said. He mentioned removing the language "unless the community property agreement expressly provides," but having the only cure be in this one narrow area. Number 1322 REPRESENTATIVE MURKOWSKI pointed out that Pyle was a 1985 case, and that the Wisconsin legislature has subsequently enacted legislation to deal with it. She asked if there have been further challenges or tests to this, so Alaska's legislators can know whether the proposed language is sufficient or needs to be narrowed further, as Representative Croft is suggesting. MR. KUEFFNER indicated he doesn't know but surmises there haven't been, because otherwise he would have heard of them. To his way of thinking, Pyle is somewhat of an aberration against which this legislation is guarding. In response to Representative Murkowski's suggestion that this is precautionary or prophylactic legislation, then, Mr. Kueffner agreed it is prophylactic. Number 1336 REPRESENTATIVE ROKEBERG suggested possibly nobody has died under a community property device in Alaska because of the newness of these agreements to the state. He expressed curiosity about the effect elsewhere. He then asked whether it is possible, under a normal community property situation, to will part of a title in a property or estate to a party other than the surviving spouse. MR. KUEFFNER said the simple answer is no. Community property is for spouses. A person wanting to do an arrangement with someone other than a spouse must use something else. However, there can be a residual beneficiary of the community property; for example, in Pyle, the wife was the primary beneficiary and the children were the residual beneficiaries. Number 1449 REPRESENTATIVE ROKEBERG posed a scenario in which someone comes to Mr. Kueffner's office requesting that he do this type of estate planning. He asked if the community property arrangement and agreement would be part of that person's will, or if the wills would be separate. MR. KUEFFNER said it could be done in a variety of ways. However, he himself would normally do the agreement and the will separately. He would specify the property to be designated as community property, then do an agreement regarding that, and so forth. Although it could be part of the will, he wouldn't recommend it because it could be confusing. REPRESENTATIVE ROKEBERG asked if most trust-type estate plans aren't within the will itself. MR. KUEFFNER said no, then explained: If I do a living trust, then the whole ball of wax is in the trust. And then we do what's called a pour-over will that says anything that I forgot goes into the trust. So, you're right that most of the details and the nuts and bolts will be in the trust, but it will not actually be the will itself. MR. KUEFFNER added that it is possible to put it all in one place. Restating that he hasn't done one yet, although he has talked to people about doing them, he said it is specialized, for someone with a certain kind of property for which there is a desire to get this basis straightened out. It is specific, not over-arching like a trust, which would apply to everything a person owns. Number 1607 STEPHEN GREER, Attorney at Law, testified via teleconference from Anchorage, noting that Dave Shaftel was responsible for drafting this. Approximately a year ago, he and Mr. Shaftel had spent months writing a definitive article on the Alaska Community Property Act, which was published in the most prominent estate planning journal nationwide; Mr. Greer suggested they could therefore answer members' questions and resolve some of the confusion. He emphasized that HB 220 is really just a technical amendment. The problem in Pyle won't occur in 99.9 percent of trusts drawn. However, Mr. Shaftel had anticipated a problem if, for some reason, a practitioner were to draft some strange sort of trust. Mr. Greer deferred to Mr. Shaftel for further discussion. Number 1691 DAVID SHAFTEL, Attorney at Law, testified via teleconference from Anchorage, noting that he practices estate planning in Anchorage, where a group of attorneys have been working on proposed legislation that they believe would help both Alaska residents and nonresidents who desire to use various types of Alaska trusts. He explained that the ACPA is implemented by either a community property agreement - which only can be entered into by Alaska residents - or by a community property trust, which can be entered into by Alaska residents or nonresidents. MR. SHAFTEL noted that community property is owned half-and-half, under a sharing system where each spouse has equal ownership and often equal rights. While both spouses live, if a community property trust is used, they can amend that trust at any time. "That's what you want to allow," he told members. Mr. Shaftel explained that the other nine states with community property systems use community property trusts, called joint revocable trusts. The two spouses, together, can amend those trusts anytime they want. If they are using wills, after one dies, the property of the first spouse to die is controlled by that spouse's will. If they are using a community property trust that is a joint revocable trust, there will be a dispositive plan for the one-half of the community property that belonged to the first spouse to die; often that goes into a bypass trust and a so-called Q-TIP trust [a trust to which qualified terminable interest property is transferred for purposes of taking a marital deduction]. MR. SHAFTEL explained that the surviving spouse's one-half of the property continues to be that spouse's property. That is where attorneys want the surviving spouse to have the ability to amend that trust, anytime he or she wants. That is allowed in every other community property state. The UMPA has only been enacted in one other state, he noted, which is Wisconsin. Unfortunately, it has a glitch, this language that says the agreement can only be amended on a particular date, or upon the occurrence of a particular event. MR. SHAFTEL reported that typically agreements drafted by most practitioners would include the following: "When both spouses are alive, they both can amend the agreement. When one spouse has died, ... the surviving spouse can amend it as to his or her one- half of the community property." That wouldn't apply to the decedent's one-half of the property, Mr. Shaftel pointed out. Unfortunately, with this awkward language about a particular date or on the occurrence of a particular event, an argument can be made that the surviving spouse could not amend the agreement, if the agreement provided power to amend but didn't key it to a particular date or the occurrence of a particular event. Similarly, when both spouses are alive, that same awkward, overly restrictive language should not be in there because an argument could be made that the spouses couldn't amend the agreement. Number 1865 MR. SHAFTEL advised members that this has broader implications beyond just the Pyle case. It reflects on whether there is community property in Alaska, because typically either spouse - when both are alive - can withdraw any or all property from a community property trust. Although it remains community property in that spouse's hands, either spouse can do that. That is one requirement for a valid community property trust under the Internal Revenue Service (IRS) procedures. REPRESENTATIVE CROFT told Mr. Shaftel, "Okay, Dave, I give up." MR. SHAFTEL continued, however. Similarly, he said, this overly restrictive language could create the argument that when the first spouse died, that surviving spouse could not change the disposition of his or her property. He stated: And if they're locked in, then what that means is they've made a completed gift at that time, which really the surviving spouse doesn't want to do. The surviving spouse wants to have the ability to change that dispositive plan for his or her property until he or she dies, because her children, her grandchildren, the whole situation - she may remarry and may well want to change the disposition, or the dispositive plans, for her half of that property. We are following here, exactly, the amendment that Wisconsin came in, in 1985, and enacted in their statute, which is our model. ... When we enacted this in 1997 - and the practitioners like myself have to take the blame for this - we did not catch this glitch. And since then, when Steve [Greer] mentioned, when we were researching for the article that we wrote, I researched the treatise put out by the State of Wisconsin, their continuing legal education program. And they describe, very specifically, how they had come across this glitch, how they had corrected it. ... And that's what we're doing here. So, it really is a technical amendment, ... but it's more than that, in that it has some broad ramifications that if we don't do it, we really are leaving a flaw in our community property statute that the nine other states do not have. REPRESENTATIVE CROFT restated that he was giving up. Number 1991 REPRESENTATIVE ROKEBERG asked Mr. Shaftel and Mr. Greer whether they had had an opportunity to utilize the recently passed law to enter into these types of community property agreements. MR. SHAFTEL answered that a majority of his clients, who are either reviewing their existing estate plans or creating new ones, are adopting community property for part of their property. He said they see the benefits, from not only the standpoint of income tax but also the aspects of sharing and equality. MR. GREER concurred, calling it a very important vehicle. He said the fear here is that other states will become envious and try to do the same thing. He concluded by saying it is a wonderful thing for married couples to do. REPRESENTATIVE ROKEBERG requested that Mr. Greer or Mr. Shaftel provide the committee with copies of their law review article. Number 2061 DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska Trust Company, testified via teleconference from Anchorage in support of HB 220, calling it a technical amendment and indicating the desire to keep Alaska in the forefront for estate planning. He referred to the Phillip E. Heckerling Institute on Estate Planning, an annual conference held in Miami, Florida. Indicating that more than 2,700 participants had attended recently, and that a program there had drawn a lot of interest from nonresidents, he suggested it is important to clarify any possible ambiguities in order to receive substantial business. "We've received hundreds of Alaska trusts from outside of Alaska the last couple of years," Mr. Blattmachr stated, "and we think we'll receive as many community property trusts if the law is clarified and there isn't this concern." Number 2101 REPRESENTATIVE ROKEBERG asked Mr. Blattmachr how business activity in the legal community has been affected by the series of trust bills enacted by the legislature over the last few years. MR. BLATTMACHR indicated response has been positive from both the trust company community and the legal community. So far, about 300 trusts have been set up in the last two years, the bulk of which came from outside of Alaska. He told members: We've received substantial business, and a lot of attorneys have reviewed those trusts or had relationships with outside counsel. So, it's been very positive, and it just continues to build all the time. We were at that conference, had a booth, and more and more people are coming up and looking at Alaska as the premier jurisdiction. Just one of our problems is the fact that Delaware has adopted similar legislation. It's not quite as clean as Alaska's. But there's a tendency to want it to ... go to Delaware, but we've been able to convince most of them that Alaska is a better jurisdiction. And so, we think this is going to develop into ... good business opportunities for both lawyers, accountants, life insurance agents, and a lot of life insurance sold to be going to these Alaska trusts. It's been very positive. Number 2174 CHAIRMAN KOTT asked if there were further questions, then closed public testimony. He asked if there were comments from the committee; there were none. Number 2191 REPRESENTATIVE CROFT made a motion to move HB 220 from the committee with individual recommendations and the attached zero fiscal note. There being no objection, HB 220 was moved from the House Judiciary Standing Committee.
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