Legislature(1999 - 2000)
02/21/2000 01:19 PM House JUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 275 - UNIFORM PROBATE CODE/TRANSFERS CHAIRMAN KOTT announced that the first item of business would be SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 275, "An Act relating to the Uniform Probate Code, including trusts and governing instruments; relating to trustees; relating to underproductive trust property; and relating to conveyances of real property and interests in real property by or to trusts." Number 0071 REPRESENTATIVE GENE THERRIAULT, Alaska State Legislature, sponsor, came forward to present the bill. He explained that SSHB 275 proposes a number of changes to the Uniform Probate Code sections that were adopted nearly unanimously by the legislature a couple of years before. For the last couple of years, a loose "federation" of attorneys who deal with estate planning and probate issues in Alaska have been working on proposed changes to the state statutes, so Alaska can keep abreast of changes in federal laws and ideas put forward in other states' statutes. REPRESENTATIVE THERRIAULT referred members to the sectional analysis in the written sponsor statement, noting that it includes examples and cross-references to other states' statutes mirrored in SSHB 275. He pointed out that a couple of individuals who have been very involved in SSHB 275 were on teleconference to discuss technical aspects and provide real-life examples and explanations. He added that one driving concern for himself is that Alaska residents be able to avail themselves of all sections of the Internal Revenue Service (IRS) that would allow them to avoid having to pay federal income taxes. A number of sections, therefore, deal with how persons may plan their estates in order to pass on assets to loved ones without having to pay federal taxes. Number 0285 REPRESENTATIVE THERRIAULT informed members that along with SSHB 275 were a couple of suggested amendments. The one with his name on it [1-LS1188\I.1, Bannister, 2/18/00, which later became Amendment 1], requested by the Department of Law, read: Page 9, line 15, following "(a)", through line 17: Delete all material. Insert "A person, including a trustee, may convey real property to a trust whether or not a trustee of the trust is named as a grantee in the instrument of conveyance. A trustee of a trust may convey real property from a trust whether or not a trustee of the trust is named as a grantor in the instrument of conveyance." Page 9, line 18: Delete "or devise" REPRESENTATIVE THERRIAULT said the second amendment [copy not provided in packet] just corrects a typographical error. Number 0345 REPRESENTATIVE GREEN inquired about planned testimony. REPRESENTATIVE THERRIAULT specified that Steve Greer would walk the committee through the majority of bill sections but would defer to another individual with more expertise for two sections. In addition, Dave Shaftel was online to answer questions. Number 0388 REPRESENTATIVE MURKOWSKI asked if the Uniform Probate Code is like the Uniform Commercial Code in that uniformity is sought throughout the states and individual changes in states are discouraged. She further asked how it fits as a national uniform code. REPRESENTATIVE THERRIAULT deferred to testifiers but pointed out that federal tax codes change all the time. Until there is a new suggested uniform code to bring all states up to the same level, states are somewhat free, to his understanding, to deal with federal changes as they see fit. He noted that testifiers have participated in national bar association conferences where this has been discussed. Number 0502 REPRESENTATIVE ROKEBERG encouraged fellow members to complete their estate planning, as he himself had recently done. He referred to the phrase "stated rate" on page 3, line 28, in Section 3. He asked why that isn't defined in the bill unless it is defined elsewhere in statute. He voiced his understanding that it is a change from "legal rate." REPRESENTATIVE THERRIAULT answered that if he understands the question correctly, that refers to AS 45.45.010(b), commonly referred to as the "discount borrowing rate," so that it would be a floating rate instead of a rate set in statute. REPRESENTATIVE ROKEBERG pointed out that there isn't a reference to the other statute there. Recalling that this had been done before, on trust bills, he asked whether perhaps it is a conforming amendment. REPRESENTATIVE THERRIAULT suggested that would be a good question for the testifiers. He informed the committee that his assistant, Wilda Rodman, had been working with the gentlemen who were online, and that he himself had to leave the meeting to attend to other matters. Number 0714 STEPHEN GREER, Attorney at Law, testified via teleconference from Anchorage, first asking whether Bryan Merrell was online. CHAIRMAN KOTT answered that Mr. Merrell was not online yet. On teleconference were Dave Shaftel, mentioned previously, and Mary Ellen Beardsley of the Department of Law. MR. GREER told members that although dry and complicated, this bill is important because each provision can produce tax savings for Alaskans. He believes this legislation is very good and should be noncontroversial. It is essentially an estate planning bill. Many provisions originally contemplated for it were dropped after further study, he noted. All the provisions have been closely scrutinized and revised over the last year and a half by the informal committee of estate planning attorneys. In response to Representative Murkowski's earlier questions, he said very few provisions of the Uniform Probate Code are being changed in this bill. Rather, this supplements those to take into account tax defects of legislation. "We have to put ... these sections in a certain place, and it just seemed most appropriate that it be put into the same chapter that the Uniform Probate Code provision is found," he added. Number 0860 MR. GREER discussed reasons that these tax-savings provisions are needed. First, estate planning is highly complicated and takes years to master because of the complexity of estate and gift tax, as well as the ever-changing nature. For example, Congress enacted a so-called generation-skipping tax in 1976; in 1986, after eight years of confusion, Congress repealed it retroactive to 1976 and enacted a new generation-skipping regime. At best, enactment of a tax section can only superficially cover a subject. Practitioners generally await the promulgation of [U.S. Department of the] Treasury regulations for guidance. In the generation-skipping tax area, however, it took that department from 1986 until December of 1995 to issue final regulations. Complicating this, the IRS issues thousands of rulings each year and there are countless court decisions, all instrumental to estate tax planning goals. Mr. Greer stated: Woe to the person who created a trust five years ago without having it updated to take into account today's tax law. Woe to the person who creates their own trust. ... You can go to any bookstore and you'll see countless do-it-yourself estate planning books. How could a lay person possibly recognize the dire tax consequence which the IRS attaches to the use of a word like "comfort," when the settlor of a trust is trying to state the manner in which trust assets should be made available to the beneficiary? Woe to the lawyer who doesn't specialized in this area, who creates a simple will for a client, not realizing the tax consequences which the simple will produces. And woe to the lawyer who practices in this area, who drafts a trust after a statute has been enacted, only to find regulations which are produced eight years later [put] a different cloth on prior planning. The taxpaying provisions in this bill are simply state law provisions that supplement the interpretation and administration of a trust so the correct tax result will be produced. No bill could ever completely ensure the tax viability of every trust instrument. This bill is only meant to deal with some of the commonly occurring problems. And with this bill, fewer Alaskans will be hurt by a bad tax consequence. Now, I should say at the outset that most, if not all, the provisions of this bill are found in other states. These provisions have been recommended for passage by a national expert in the estate planning area as models of good statutes for a state to follow. Reading these publications, ... our committee of estate planning attorneys have felt that these statutes would be good additions to our present statutes, so that bad tax results won't be produced and, instead, good tax results will be produced. And by that, I mean less estate taxes will have to be paid. And so that's the general underlying philosophy of this bill. Number 1103 MR. GREER addressed sections of the bill dealing with tax-savings provisions. He referred to page 3, beginning at line 6, Section 2, "family-owned business deduction," found under new section AS 13.12.720. In 1997, he explained, Congress passed a law allowing the owner of a family-owned business to deduct an additional $625,000 in estate tax; that was to prevent a business having to be sold to pay the estate tax. The government allows the additional deduction only if the trust instrument is properly drafted. The bill, therefore, says the family-owned business deduction will be allocated to the credit trust in order to take advantage of the deduction; if allocated to the marital trust, in contrast, the deduction couldn't be utilized. In itself, this provision allows almost $300,000 in estate tax savings to a family with a family- owned business. MR. GREER turned attention to Section 3, beginning on page 3, line 22, which deals with interest on general pecuniary devises. He said the first of two aspects to this provision is the tax-savings aspect. When one distributes assets to a grandchild, the government imposes a severe 55 percent generation-skipping tax on top of the estate tax. The government gives each person $1 million in generation-skipping tax exemptions, but in order to properly allocate this exemption to a trust, each trust has some highly technical requirements found in the regulations. One regulation says interest has to be paid on a pecuniary bequest in accordance with state law. If it isn't paid, the generation-skipping tax exemption is negated and the grandchildren are subjected to this severe tax. Therefore, [Section 3] delays the payment of interest to two years following the date of a decedent's death; presently, it is one year from the day that the personal representative is appointed. This allows more time to settle the estate so that the generation-skipping exemption can be properly allocated to these trusts to avoid this adverse tax result. Number 1312 MR. GREER alluded to Representative Rokeberg's earlier questions and said the second thing is a change in the interest rate. He drew attention to AS 45.45.010, subsections (a) and (b), which read: (a) The rate of interest in the state is 10.5 percent a year and no more on money after it is due except as provided in (b) of this section. (b) Interest may not be charged by express agreement of the parties in a contract or loan commitment that is more than five percentage points above the annual rate charged member banks for advances by the 12th Federal Reserve District on the day on which the contract or loan commitment is made. A contract or loan commitment in which the principal amount exceeds $25,000 is exempt from the limitation of this subsection. MR. GREER pointed out that the 10.5 percent in subsection (a), above, doesn't take into account the changing economic times, whereas subsection (b) uses a rate not more than five percentage points above the rate used here, the discount borrowing rate. The idea is that one will pay interest on a pecuniary bequest. Noting that many states, including Washington, don't have this provision, he emphasized that if one is going to pay interest on a pecuniary bequest, it should be in accordance with the applicable rate at the time. MR. GREER further pointed out that where any kind of estate tax return has to be prepared, it is almost impossible to close out an estate until about three years after the decedent's death. The reason is that a personal representative cannot safely distribute assets until having received a closing letter from the IRS. In the meantime, the estate stays open. To have interest paid prior to the estate's closure punishes the residuary devisees, the people who, by and large, receive the largest part of the estate. "All of us felt that this was a good provision and would help facilitate the administration of estates," Mr. Greer added. Number 1456 MR. GREER reported that Section 4 [page 4] says although interest doesn't have to be paid until two years following the death of the decedent, nonetheless income allocated to a marital bequest has to be paid to the marital share from the date of death to the date of distribution. This mirrors, almost verbatim, a Virginia statute. The desire is to save the marital deduction for any property going to a surviving spouse. This provision ensures that delaying the payment of interest to other people won't jeopardize the marital deduction with respect to assets being allocated to the spouse. MR. GREER explained that Section 5 [beginning on page 4] adds another provision to AS 13.16.560(a)(4). This is meant to simplify the administration of a trust so that tax savings can be effected by its beneficiaries. If, for example, a decedent left two assets and had two beneficiaries, the two assets don't have to be split in half, with half of each going to each beneficiary. Instead, if the assets are of equal value, one asset can go to each beneficiary. This important tax provision puts into law that a personal representative has the authority to make these "non-pro rata" allocations of assets. Number 1587 MR. GREER told members Section 6 [beginning on page 5] is an important provision that will prevent many dire consequences. This provision is found in numerous states, and the heart of it came from Colorado. Mr. Greer explained that unfortunately many individuals create their own trusts or hire attorneys who aren't sophisticated estate planners. Much of what estate planning attorneys do is mandated by highly technical regulations promulgated by the Department of the Treasury. If he created a trust and named his spouse as trustee, for example, he could give his spouse certain rights to use the trust assets; if those were only certain limited rights, the assets wouldn't be included in her estate, to be taxed at her death. However, if he gave her an unlimited right to use the property of the trust, then this property would be included in her estate, producing a bad tax consequence. MR. GREER highlighted the importance of Section 6 to people doing their own trusts or hiring attorneys who don't know about the IRS distinction between "comfort" and "maintenance and support." If he named his spouse as trustee of the trust discussed previously, for example, he could give her the right to use the income and principal to the extent of her "maintenance and support"; those rights won't rise to the level of ownership. However, as trustee she couldn't distribute this principal and income to herself for her own comfort; that word "comfort" would result in all the trust assets being put into her estate and taxed at her death. Therefore, this provision is meant for situations where one has named the beneficiary of a trust as the trustee of the trust. If one mistakenly uses the word "comfort" in there, this statute will save the day. Number 1794 MR. GREER told members Section 7 [beginning on page 7] is another provision found in numerous states that is meant to save the day. He noted that the Q-TIP [qualified terminable interest property] provisions and the generation-skipping tax were enacted in 1982 and 1986, respectively. He pointed out the importance of every trust having a provision that allows its division, so that one can make elections to allow allocation of a proper amount for a marital deduction or for generation-skipping tax exemptions. Mr. Greer voiced his opinion that with such a provision, the interests of the beneficiaries aren't being changed at all. He recounted a case in which he went to court and asked the judge to reform the trust instrument so his client could make this division authorized by Department of the Treasury regulations; this cost his client money. The proposed provision would prevent that, because it says the trustee can go ahead and divide the trust if that provision is lacking in the trust instrument. MR. GREER turned attention to Section 8 [page 8]. He noted that years ago wills were the going instrument for testamentary dispositions. Now, perhaps in the vast majority of cases, revocable trusts are used because they can avoid the cost of a probate proceeding. Most Uniform Probate Code provisions pertain to the administration of an estate that follows a will which goes through probate court; very little is said about how to administer a trust after a person dies. Many, if not most, of the same considerations pertain to administration of a trust, however. Therefore, this provision makes certain distribution provisions that are applicable to an estate also applicable to the administration of a revocable trust following the death of a settlor. Number 1978 MR. GREER pointed out that Section 9 [beginning on page 8] would rarely, if ever, be used. It simply defines those individuals in a trust who, for some reason, may want to elect out of the tax- savings provisions. He said he can't imagine that circumstance. MR. GREER informed members that Section 10 [page 9] is another tax- savings provision. If he creates a trust for his spouse, for example, and gives his spouse all the income which that trust produces on an annual basis, that trust will qualify for the marital deduction, and no estate tax will be imposed with respect to assets going to that trust. However, that right to receive income has to be a genuine right. This provision says that a spouse can require the trustee to make those trust assets productive of income. Normally, one finds that in a trust instrument produced by someone technically competent in that area. However, in those trusts where that provision is not found, the IRS could challenge the trust, saying that because the spouse doesn't have the right to require the trustee to produce income, they aren't receiving all the income that this trust could earn. This tax-savings provision supplements an otherwise sufficient trust instrument. Number 2053 MR. GREER turned attention to the two nontax-savings provisions. He asked whether Bryan Merrell was online yet; he was not. He noted that the most significant of these two provisions deals with the ability of the trust to own real estate. He had wanted that to be addressed by Mr. Merrell, an Anchorage attorney who serves as legal counsel to First American Title Company of Alaska, and who had gone over this provision in depth. Mr. Greer confirmed that Mary Ellen Beardsley of the Department of Law was online. He told members that he, Ms. Beardsley and Mr. Merrell had discussed this provision the previous week. MR. GREER explained that this provision is simply meant to end confusion as to whether a trust can own real estate. It has been the position of some title companies that whenever property is transferred to a trust, it must state that the property goes to "John Doe, trustee of the John Doe trust"; if it said the property goes to "the John Doe trust," there might be an ineffective transfer of the real estate to the trust. Therefore, this provision is to clarify that property can be conveyed to the trust directly, without having to say "John Doe, trustee of the John Doe trust." Mr. Greer stated his understanding that Mr. Merrell saw this as a benefit to the title company industry in general and had shared this proposed statute with his colleagues, who were all in support of the provision. Number 2071 MR. GREER reported that the final provision deals with a very limited circumstance, and is the only provision that changes a provision of the Uniform Probate Code. When the state originally enacted the (indisc.) section of the Uniform Probate Code, they threw out two provisions that were believed not to arrive at the intent of the average testator; this throws out one additional provision for the same reason. Mr. Greer posed a situation where his will leaves a cabin to one child who has a special attachment and investment in it, with the rest of the property to be distributed equitably to his remaining children. If Mr. Greer sold that cabin prior to his own death, that money would fall into the residuary estate, to be divided equally among all the residuary devisees, of whom that child probably be one. That is the law now, as it always has been. MR. GREER continued. If he had sold his cabin to a third party who was unable to get a bank loan and cash him out, however, then Mr. Greer would probably have to take back the promissory note. Under current law, that note would go to the child mentioned, even though the intention was to have the child receive the cabin, not the money. That result seems unfair; in that instance, the note should be shared by all of the residuary devisees. Mr. Greer concluded by indicating this bill is just meant to assist Alaska residents by producing good tax results in trust instruments where they otherwise might not be found. Number 2334 REPRESENTATIVE GREEN referred to page 3, Section 3. He asked whether going from one year to two years may create a longer time than even a probate in some cases. MR. GREER said no. It just says that if an estate is unduly delayed, one doesn't have to start paying interest on the pecuniary bequests until two years after the decedent's death. He illustrated the unfairness of having the interest payments be due earlier, posing an example where he had an estate of $100,000, leaving $10,000 to one child and the remaining amount to be divided equally among all the children; he acknowledged that these amounts are too low. If there is a tax consequence, he explained, that estate couldn't be safely distributed to anyone until the IRS had issued its closing letter with respect to the estate. Unless the final estate tax bill is known, the IRS will look to the personal representative if he or she makes any distribution; therefore, no personal representative will ever make a distribution such as the $10,000 until receiving the closing letter. MR. GREER continued. He emphasized that how long the estate remains open depends, essentially, upon the IRS. However, a year after the personal representative's appointment, that $10,000 devise would start receiving interest at 10.5 percent per year, and the people who are supposed to receive the remaining $90,000 - who aren't at fault - would receive far less because the interest charge would come from that portion. Therefore, this provision cuts everyone a break by saying interest begins two years after the date of death. It just extends the time. If the estate is closed within that time period, everyone is happy and no interest must be paid at all. It certainly doesn't delay administration of the estate. It just means this exorbitant interest rate doesn't have to be paid to this specific devisee. Mr. Greer pointed out that the federal government had issued regulations in December 1999 in which they say pecuniary bequests have to share in the income earned by the estate until the estate is closed [ends mid-speech because of tape change]. TAPE 00-16, SIDE B Number 0001 REPRESENTATIVE GREEN asked whether, if it takes two years and there is a large amount of cash, for example, then no interest will be returned to any of the recipients. MR. GREER replied, "No, we're only talking about specific devisees. After two years, interest starts accruing on that specific bequest. But it's going to accrue at the interest rate that's there at the time, not the 10.5 percent - whatever the discount borrowing rate is at the time." Number 0035 REPRESENTATIVE ROKEBERG asked whether Mr. Greer had said that "stated rate" means the discount borrowing rate. He also asked whether "stated rate" is defined in trust law now, pointing out that it isn't in a definitions section. MR. GREER drew attention to AS 45.45.010(b) and to the web page of the 12th Federal Reserve District, the latter which lists all of these rates. He affirmed the first question. In response to the second, he said, "No. In fact, that's why we're defining it here." He agreed that there isn't a separate definitions section. He read from Section 3 of the bill, page 3, lines 27 through 31, agreeing that the whole description is the discount borrowing rate; that language read: In this subsection, "stated rate" means the annual rate charged member banks for advances by the 12th Federal Reserve District in effect on the first day of the month that is the 23rd month following the decedent's death, not counting the month of the decedent's death. REPRESENTATIVE ROKEBERG asked whether there is any way to modify that to make it clearer to the public, because it is usually called the "discount rate," not the "stated rate." He asked whether that is a term that the Federal Reserve District uses. MR. GREER said he shares Representative Rokeberg's concern. He explained that in an effort to eliminate controversy, they had decided to use the same language presently found under AS 45.45.[010](b). As to why the phrase "discount borrowing rate" wasn't used back when that was enacted, he couldn't answer. REPRESENTATIVE ROKEBERG asked whether Mr. Greer would object if the committee added the word "discount" and retained the word "stated." He pointed out that "stated rate" is in quotation marks on line 28 because it refers back to line 24. MR. GREER proposed perhaps saying that the "stated rate" means the discount borrowing rate. REPRESENTATIVE ROKEBERG replied, "'Stated rate' or 'discount rate' means." He asked whether that would be all right with Mr. Greer. MR. GREER affirmed that. Number 0167 REPRESENTATIVE ROKEBERG said his second question is one that Representative Green was pursuing. He expressed some concern that if there were a general pecuniary devise such as a cash grant in a person's will, that disposition couldn't be made without the closing letter from the IRS. He asked whether one could make dispositions to one's spouse for maintenance and support, however. MR. GREER said one could always make interim distributions, but one would never make the final distribution or want to make a distribution in which the personal representative became subjected to liability should that representative distribute too much, leaving too little for the federal government. He pointed out that this primarily deals with estates of some substantial size, then said, "You're going to find that the surviving spouse, if they did any kind of estate planning, is probably going to have half the assets owned by them in any event, so they can continue on." REPRESENTATIVE ROKEBERG asked whether typically there aren't trusts where the devisees are the children or other selected parties, but that Mr. Greer is saying that any cash grants aren't made until there is a closing letter. MR. GREER answered that it could be done if it were a small cash distribution, because obviously there would be enough money left to pay the estate tax, even if there were to be some discussion over exactly what that tax would be. REPRESENTATIVE ROKEBERG surmised that it would be the trustee's decision. MR. GREER affirmed that. If, however, there were a large pecuniary bequest, and if the trustee felt he or she couldn't safely make a distribution of that pecuniary bequest until receipt of the IRS closing letter, then interest isn't going to accrue on it until two years after the date of the decedent's death. Certainly, nothing prevents one from making a prior distribution if it is small and doesn't put the personal representative in a bad position. Number 0267 REPRESENTATIVE ROKEBERG asked why they couldn't use the date of the IRS closing letter, rather than the two years [following the death of the decedent]. MR. GREER said that is very astute, noting that in these discussions over the last year and half among estate planning attorneys, that was his own original position. However, because this is a bill that was reached through consensus, the two-year provision is what the group all agreed upon. REPRESENTATIVE ROKEBERG commented that if there were some controversy or lawsuits attacking the will, he could envision a much longer period of time before there would be any disposition. MR. GREER said he wouldn't disagree with any of Representative Rokeberg's assumptions here. He restated that this is the consensus arrived at by the group. REPRESENTATIVE ROKEBERG asked whether the IRS usually is able to issue a closing letter even if there is litigation underway. MR. GREER answered that two things can delay the administration of the estate. One is the IRS, when parties don't agree on the value of a piece of real estate or a business, for example. Or there might be the circumstances Representative Rokeberg just alluded to, where heirs fight over a will's validity or whether it was written under duress; in that case - even if there is no estate tax controversy because the estate comes under the threshold for taxation - the estate could not be closed until the judge said so. In each instance, the bill says that if there is a pecuniary bequest, interest doesn't accrue until two years following the date of the decedent's death; Mr. Greer said that is certainly better than what is in the law now. REPRESENTATIVE ROKEBERG responded, "We'll go with the 'discount' but I'll leave your two years alone." Number 0413 REPRESENTATIVE GREEN referred to Section 6 and Mr. Greer's testimony that the word "comfort" causes a problem that "maintenance and support" alleviates. He said he was told recently that if by chance the surviving spouse expressed the need for a Chevrolet, for example, that might be fine, whereas a request for a Rolls Royce might not be authorized despite the fact that the term "maintenance and support" had been used. MR. GREER said that is an interesting question. He pointed out that these are all found in the [federal] regulations under Section 2041, which defines a general power of appointment. Regulations say maintenance and support will be determined in the customary manner of living of that person. He cited examples, saying it really depends on the situation. Number 0499 REPRESENTATIVE MURKOWSKI mentioned Sections 6 and 7 of the bill and the avoidance of unintended consequences, whether or not those are related to taxes. She asked whether people who really know what they are doing could use this as a "hammer" in trying to gain some advantage if there were a dispute over the will. MR. GREER said that is a good question. He pointed out how well thought-out this is, and how many revisions this particular statute has gone through, more than all the rest. He answered that he can't think of the circumstance where that would be the case. However, there is a provision in this section that says the beneficiaries of a trust can elect out of this provision is they so desire. So they are protected. REPRESENTATIVE MURKOWSKI questioned the need for Section 9, then, if they cannot think of anybody who might want to opt out. MR. GREER responded that it is for that one situation they might not have envisioned. Noting that this provision has a counterpart in the Colorado statute from which this came, he added, "For the most part, you're seeing it here just because it was also there." Number 0617 REPRESENTATIVE GREEN asked about modifying the trust without actually dropping it and starting over again. MR. GREER said that question isn't answered by any of the sections in this bill. There is another bill, however, where arguably that problem will be approached. He noted that one may want to create a trust that gives the spouse as many rights to these as possible without giving so many rights that it would result in the inclusion of those assets in the spouse's estate. Someone technically competent in this area would also give that spouse what is called a limited power of appointment, which would allow the spouse to direct where those assets are going to go at his or her own death, so that person can alter the testamentary disposition and direct the assets away from a child who happens to be a drug addict, for example, and towards the other children. Mr. Greer restated that nothing in this current bill really touches on that problem, one way or the other. Number 0752 REPRESENTATIVE ROKEBERG referred to Section 6 on page 5; he expressed some discomfort with it. He questioned the meaning of "independent trustee" on line 16, then referred to lines 23 and 24. He said it seems that the beneficiary of the trust would have that power to remove the trustee. He asked, "How could you prohibit the discretionary distribution to pay a legal obligation of the beneficiary there? ... Or am I reading too much into the language?" MR. GREER pointed out that there is a lot to this particular section. He offered to explain a couple of these provisions. Mr. Greer said he can create a trust, transfer property into the trust, and name a bank as trustee of the trust, for example, giving the bank the ability to distribute income and principal, as they see fit, for the benefit of his children. The bank is an independent trustee, neither related nor subordinate to Mr. Greer, and not a beneficiary of the trust. MR. GREER continued with hypothetical situations. He said if he creates a trust for the benefit of his [children] and appoints one of his children as trustee, that child, as trustee, has the ability to distribute income and principal, as he or she sees fit, for the benefit of the remaining children. If he gives the children the ability to remove and replace that child, then the IRS will step in and say, "Hey, it's just as if you named the children who are beneficiaries as trustees of this trust, because you can appoint someone in there, ... as a trustee, who is essentially just a nominee of yourself. Heck, this is you. And if you have the right to make unlimited distributions of principal and income to yourself, well, this property's going to be included in your estate." Mr. Greer continued: What we're saying here is this: ... if you have the ability to remove and replace the trustee, and that person is related or subordinate to yourself, well, that person can only make distributions of principal and income down to you, as a beneficiary, in a manner that's related to your maintenance and support. And it puts it on ... an estate tax footing. All this - I mean, this is just how crazy this area is - ... was changed dramatically by Revenue Ruling 95-58. Before, the IRS says that ... it doesn't matter who the trustee was. Now, they came out with this ruling and said, ... "As long as you're an independent trustee, we don't care. But if somebody (indisc.), we continue to care." Number 0984 REPRESENTATIVE ROKEBERG suggested typically it would be a child with siblings as the administrator, and in that case, the trust should not have one of the other children as the trustee. MR. GREER agreed that is certainly the safe ground. REPRESENTATIVE ROKEBERG surmised that many trusts appoint one of the children as the trustee, however. Number 1012 DAVID SHAFTEL, Attorney at Law, spoke up via teleconference from Anchorage. He pointed out that typically, if there is a spouse or child as a trustee, an experienced attorney would include in the trust an "ascertainable standard," which basically says the trustee may distribute to the beneficiary income or principal to satisfy support, maintenance, health or education needs, in order to maintain the beneficiary's accustomed manner of living. That is what is almost always done. Mr. Shaftel continued: In a number of trusts, no standard is put in. But here we have independent trustees, such as a bank or a family friend who is not related or subordinate - the way the IRS code defines that term - to the person involved. So, there will be trusts that say the trustee has the power to make distributions as the trustee deems advisable; in other words, there's no limitation on it at all. But in those situations, that's where we use independent trustees. Now, there are many, many trusts where the spouse will be the trustee of the trust created by his or her spouse when the first spouse dies. So if the husband dies and creates a bypass trust and a marital trust for his wife, the wife will be the trustee, but we always give her an ascertainable standard so that those assets won't be included in her estate and taxed when she dies. Similarly, there are trusts created for children where you may ... put the child in the role of being trustee of his or her own trust, but you limit the child by, again, an ascertainable standard. Now this "ascertainable standard" is ... a phrase of art; it's defined in the regulation. And really it's a very broad standard. ... It allows distributions for any kind of use or need that that person has experienced in the past. You're right in your examples that if you were to exaggerate it horribly, so that you got into a wasteful situation, then another beneficiary could come in and go to court and have the trustee prevented from making distributions in that fashion. But if distributions are made just according to ... the beneficiary's accustomed manner of living, there's no problem at all with that. What we're concerned about here, with this particular statute, is people who either drafted their own trust or went to attorneys or other professionals for assistance in having those trusts drafted, and ... those trusts were not drafted properly: they put in no standard, and then they put the family member in as the trustee. And this cures that problem. And, unfortunately, you see a number of these situations arise, where either ... general practitioners have drafted the documents and don't understand the tax law or people go and get stationery forms or books from Amazon.com, draft their own documents and do it inadequately. So this is a safety net, and that's all is intended, is a safety net for people who have fallen into ... these traps of these regulations, not knowing what they were doing. This safety net prevents all of the assets from that trust from being included in the spouse's estate and taxed, or being included in the child's estate and taxed - ... which is a consequence that nobody wanted - without really limiting their power. The ascertainable standard is so broad that ... it allows distributions for anything that they've really needed in the past. Number 1252 REPRESENTATIVE ROKEBERG said he thinks he understands this now. He noted that subsection (b) under Section 6 of the bill prohibits a grant of total discretion, for example. He mentioned an example where a trust created 15 years before had granted total discretion here; he suggested this new provision would override the provisions of that 15-year-old trust and prevent its being taxed at a higher rate. He asked whether that is the logic here. MR. SHAFTEL replied, "Absolutely." He pointed out that a $700,000 trust may not be taxed at all if properly drafted. Without an ascertainable standard in there, however, the whole trust gets pulled into the wife's estate when she dies, and about $275,000 of estate tax will have to be paid, unnecessarily, just because of that. REPRESENTATIVE ROKEBERG asked whether Mr. Shaftel would suggest that there is significant consumer protection in this statute. MR. SHAFTEL said all of these provisions are designed to provide Alaskans with these safety nets that other states are providing. These provisions have come from national conferences and journals, where they are discussed as necessary provisions to add to state law to protect residents. Mr. Shaftel urged support for the bill, which he believes is practical and valuable. Number 1440 REPRESENTATIVE GREEN asked whether, when this hybrid was put together, there was review to ensure that wording taken from another state's statutes didn't conflict with something that Alaska already has. MR. GREER answered that this has gone through an amazing amount of review, not only by the attorneys who drafted it but also by Legislative [Legal and Research] Services personnel, who were invaluable in pointing out any possible conflicts. He particularly extended credit to legislative drafting attorney Teresa Bannister, as well as Mary Ellen Beardsley of the Department of Law for her improvements to the section dealing with real estate. Number 1513 REPRESENTATIVE JAMES remarked that she is impressed with the changes made but wonders whether the Internet encourages people to draft their own documents. MR. SHAFTEL said he couldn't answer that directly regarding the Internet. However, he can comment that nonprofessionals - who are neither lawyers nor accountants - do try to market estate planning tools and "trusts" in Alaska. During the 1970s pipeline-building era, for example, many of those were seen in the area of so-called tax shelters. Alaska doesn't have a strong statute dealing with the unauthorized practice of law but only prevents people from appearing in court. Nor does Mr. Shaftel believe that the bar association has authority regarding people who peddle these types of documents. He agreed the Internet would make it even more complicated. MR. GREER spoke up, adding that not so many years ago, a group up here was marketing trusts; the person promoting these trusts certainly never went to law school and had no clue about them. Mr. Greer reported that he himself had filed a complaint with the bar association; much to his surprise, however, the bar association's response was that they couldn't do anything unless the person was actually going to court. He pointed out that many times these people go to senior centers and dupe senior citizens. REPRESENTATIVE JAMES recalled her own experience as a tax preparer, saying she wishes she had a nickel for every hour she spent trying to help folks with their problems with the IRS. She is very concerned about this issue because these are vulnerable people. With the Internet, she believes it will be more prolific. REPRESENTATIVE ROKEBERG expressed his understanding that the Division of Banking, Securities and Corporations is drafting regulations regarding trusts in general right now, focusing mainly on trust companies. He asked Mr. Shaftel and Mr. Greer whether their organization has been contacted by that division or whether they are aware of the regulations. Number 1812 MR. SHAFTEL answered that they are aware of trust legislation. To his recollection, several members of his own group, including Bob Manley (ph) and Doug Blattmachr, are involved, although he cannot report on their conclusions. As for regulations, he hasn't seen those and can't say whether those two individuals are involved. He offered to call Representative Rokeberg's office with that information. REPRESENTATIVE ROKEBERG said it is troubling that Mr. Shaftel isn't aware of what is going on. MR. SHAFTEL restated that he would check on it and make sure that they are involved in it. MR. GREER pointed out that his own focus is mostly as an estate planning lawyer to his clients, rather in relationship to a trust company. Number 1997 CHAIRMAN KOTT asked whether anyone else wished to testify, then closed public comment in order to take up the proposed amendment. He asked Mr. Greer and Mr. Shaftel whether they had seen Amendment 1, amending page 9 of SSHB 275. MR. GREER said it certainly had been discussed with him, although he hadn't seen it in written form. He surmised that it has to do with the discussion that occurred between Mary Ellen Beardsley, Bryan Merrell and himself on Friday, cleaning up the section that pertains to the ability of a trust to own real estate. He requested confirmation and suggested perhaps Wilda Rodman [staff to Representative Therriault] could comment. CHAIRMAN KOTT confirmed that that is the amendment. MR. GREER remarked that it is a vast improvement. Number 2100 WILDA RODMAN, Staff to Representative Gene Therriault, Alaska State Legislature, stated, "As Mr. Greer mentioned, we did go over with the Department of Law and reviewed the bill; this was her one suggestion for how to clean up the language a little bit. Mary Ellen [Beardsley] would be available to answer your questions on it." Number 2119 REPRESENTATIVE GREEN read from proposed Amendment 1 [1-LS1188\I.1, Bannister, 2/18/00, provided again here for clarity], which stated: Page 9, line 15, following "(a)", through line 17: Delete all material. Insert "A person, including a trustee, may convey real property to a trust whether or not a trustee of the trust is named as a grantee in the instrument of conveyance. A trustee of a trust may convey real property from a trust whether or not a trustee of the trust is named as a grantor in the instrument of conveyance." Page 9, line 18: Delete "or devise" REPRESENTATIVE GREEN referred to the line of the amendment that says a trustee may convey real property. He asked Ms. Beardsley whether the trustor would still maintain that authority. Number 2159 MARY ELLEN BEARDSLEY, Assistant Attorney General, Civil Division (Anchorage), Department of Law, testified via teleconference from Anchorage. She stated her understanding that under the proposed language, once the property is in the trust, only the trustee could then transfer the property out of the trust. The trustor wouldn't have the authority to do so. REPRESENTATIVE GREEN asked why that is good. MS. BEARDSLEY answered that once the trustor has transferred the property into the trust, unless that person is the trustee, it is the trustee who is, in a sense, the owner and controller of that property; the trustor shouldn't be able to exercise the rights of the trustee. Number 2221 MR. GREER added that an analogy would be that if he transferred a piece of property to his corporation, then only the corporation could transfer that property to somebody else subsequently. This trust is a separate entity, and the person responsible for that entity is the trustee. REPRESENTATIVE GREEN indicated he was thinking about a situation where a person might want to do something like in Amendment 1, and yet not let go of the authority regarding real property. REPRESENTATIVE ROKEBERG said there could be title in the name of the estate, not the trustee. REPRESENTATIVE JAMES suggested it would allow someone to put something into the trust, leave it for a convenient length of time, and then take it back out again. She asked why they wouldn't want to allow that opportunity. REPRESENTATIVE GREEN alluded to earlier discussion of modifying the trust to eliminate one of several recipients. MR. GREER pointed out that a trust can be revocable or irrevocable - those are the choices when creating a trust. If one creates a revocable trust, that means someone can put property in the trust one day and put it right back in one's own name the next day. With a revocable trust, he could take his condominium and transfer it into the name of his trust, for example. If he wanted to put it back into his own name, the deed would read: "I, Steve Greer, trustee of the Stephen Greer revocable trust, hereby transfer it back to Steve Greer." MR. GREER continued, saying only the trustee of the trust can transfer property once the property has been placed into the trust. If he has given himself the ability to revoke the trust, obviously he has given up no right of control with respect to that asset. On the other hand, if he makes a gift to somebody, in trust, then he would have given up his right to control that asset. That is, in fact, what a gift is all about: removing assets from ownership and putting it into the ownership of somebody else. If done in the form of a trust, one would transfer it into a irrevocable trust which has someone named as the trustee of that irrevocable trust. TAPE 00-17, SIDE A Number 0030 REPRESENTATIVE GREEN referred to language in the bill that read, "a person may convey or devise real property to or from a trust whether or not the trustee of the trust is named as a grantee or grantor in the instrument of conveyance." He indicated he reads that as meaning that there is not an irrevocable trust. MR. GREER informed the committee that often trusts or deeds say that someone transferred it to "the John Doe trust," for example, to which title companies would provide an exception on the title insurance policy. The title company would say that one cannot transfer to the John Doe trust; one would have to transfer to any individual who is trustee of the John Doe trust. There must be the words "trustee of the trust" in there first, he explained. He pointed out that the language to which Representative Green had referred is meant to correct that problem. This change would benefit everyone, including title companies. CHAIRMAN KOTT announced that the amendment would be faxed to Mr. Greer's office. The committee took a brief at-ease, less than a minute. Upon coming back to order, Chairman Kott asked Mr. Greer if the amendment included what he thought it was supposed to include. Number 0306 MR. GREER answered, "Yes, exactly." REPRESENTATIVE GREEN pointed out that Section 11 adds a new section to AS 34.25. He asked whether the existing AS 34.25 has a different meaning or is silent on this matter. MR. GREER clarified that no section under AS 34.25 [now] addresses this problem. Therefore, the language was viewed as a welcome addition. REPRESENTATIVE GREEN asked if this language would do anything other than make it clear what has been meant all along. MR. GREER agreed that the language merely clarifies what has been meant all along. CHAIRMAN KOTT asked if there any comments on Amendment 1. Number 0413 REPRESENTATIVE JAMES made a motion that the committee adopt Amendment 1 [1-LS1188\I.1, Bannister, 2/18/00, language provided earlier in this document]. There being no objection, it was so ordered and Amendment 1 was adopted. Number 0438 REPRESENTATIVE ROKEBERG made a motion that the committee adopt a conceptual Amendment 2, which read as follows: Page 3, line 28, after "annual" Insert "discount" He also requested that the drafter determine whether "discount" needs to be defined in the definitions section. REPRESENTATIVE GREEN asked if Representative Rokeberg would want "or" inserted as well. REPRESENTATIVE ROKEBERG replied "no" and informed the committee that it is commonly known as the discount rate. He stressed the need to be clear. REPRESENTATIVE GREEN asked, "Do you want to make it read the same where it's used before?" MR. GREER noted that he had copied different terms from the 12th Federal Reserve District's website. The term that the 12th Federal Reserve District used was the "discount window borrowing rate." REPRESENTATIVE ROKEBERG reiterated his preference to use the word "discount," as it is a common term. He requested that Mr. Greer and the drafter add a definition [of "discount"] in this section and use the Federal Reserve's actual "term of art." Number 0704 REPRESENTATIVE ROKEBERG restated his previous motion regarding conceptual Amendment 2, which would insert "discount" on page 3, line 28, after "annual". Conceptual Amendment 2 would also include a definition of "discount" in the definition section; that definition would use the Federal Reserve's actual definition. He requested that Mr. Greer fax the committee a copy of the website. MR. GREER said that he would do so. He noted that the website posts a number of different rates. He reiterated that the rate that he had in mind was the "discount window borrowing rate." Number 0796 MS. BEARDSLEY offered a technical correction [later labeled Amendment 3]. She referred the committee to page 3, line 23, where "(a)" should be inserted before the word, "Interest". The next section, Section 4, also deals with AS 13.16.550, she pointed out; however, Section 4 begins with subsection (b) and refers to subsection (a). CHAIRMAN KOTT announced that the committee would return later to Ms. Beardsley's issue. He then returned attention to Representative Rokeberg's motion to adopt conceptual Amendment 2 and asked if there was any objection. There being no objection, it was so ordered and conceptual Amendment 2 was adopted. Number 0916 CHAIRMAN KOTT brought attention back to Amendment 3, clarifying that it would insert "(a)" on page 3, line 23, before the word "Interest". There being no objection, he announced that Amendment 3 was adopted. MS. RODMAN directed the committee to page 6, line 20, where the first "in" will be changed to "is" in the next version, as that was a drafting oversight. REPRESENTATIVE JAMES commented that it could be corrected now. REPRESENTATIVE ROKEBERG made a motion that the committee adopt Amendment 4, which read as follows: Page 6, line 20, Delete the first "in" Insert "is" There being no objection, it was so ordered and Amendment 4 was adopted. Number 0991 REPRESENTATIVE ROKEBERG made a motion to move SSHB 275, as amended, out of committee with individual recommendations and attached fiscal notes. There being no objection, CSSSHB 275(JUD) was moved from the House Judiciary Standing Committee.
| Document Name | Date/Time | Subjects |
|---|