Legislature(1999 - 2000)
03/22/2000 01:14 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 369 - PROPERTY EXEMPTIONS REPRESENTATIVE GREEN announced that the next order of business would be HOUSE BILL NO. 369, "An Act relating to property exemptions under the Alaska Exemptions Act; and providing for an effective date." Number 0210 JOHN MANLY, Staff to Representative John Harris, Alaska State Legislature, testified on behalf of the sponsor of HB 369. He explained that HB 369 changes the "exemption statute," which is Title 9, Chapter 38. Basically, HB 369 would increase the dollar amounts of specified assets that would be protected under this exemption statute. Furthermore, it provides new protection to assets that are not covered under the current law. He pointed out that "AS 09.38, exemption statute, delineates what assets are protected from creditors when a person is sued and loses and has a judgment entered against him; it can also apply in some cases of bankruptcy if the person opts to take state exemptions as opposed to federal exemptions." MR. MANLY specified that HB 369 will increase the homestead exemption to $250,000 per individual. Currently, the homestead exemption is set in statute at $54,000, although it has been increased to $63,000 per the formula in statute. The legislation would also increase the exemption for the cash value of life insurance policies and/or annuity contracts owned by the individual to $250,000. Furthermore, HB 369 provides an unlimited exemption on the proceeds of a life insurance contract or an annuity paid to a beneficiary that is not the person seeking protection under the exemption act. MR. MANLY pointed out that HB 369 increases the ability to trace assets that an individual could have claimed as an exemption from six months to two years. He noted that the new exemptions proposed in HB 369 are located in Section 4. Those exemptions address the reserves held by a condominium association. These reserves are usually held for maintenance and such and would be protected against some lawsuit against the association. Section 5 provides an exemption for a government employee's deferred compensation plan in order that a deferred compensation plan would have the same protection as a 401K plan, for example. He noted that Section 6 has a limited cash and liquid asset exemption of up to $8,075. Number 0335 REPRESENTATIVE GREEN inquired as to what that is based on. MR. MANLY said he believes that [limited cash and liquid asset exemption amount] is related to the Internal Revenue Services' (IRS) allowance. However, he deferred to Mr. Greer. MR. MANLY moved on to Section 13, which addresses how certain revocable trusts are treated. When HB 369 was heard in the House Labor & Commerce Committee, the Department of Labor & Workforce Development (DOLWD) discovered a problem with the reference to indexing in Sections 11 and 12 of the bill. He explained that on page 4, line 24, the bill references the index for January of 1998, but there is no index for January because the indexing is performed for the first half of the year and the second half of the year. There is also an average annual index. The amendment would propose that [the reference to January be changed] to the average annual index as would also be the case for the other two occurrences on page 4. On page 5, DOLWD had a problem with how the additional portion of the percentage increases. He indicated that the department recommended the deletion of the following language in Section 12(b)(1), "portion of the percentage change in the index in excess of a multiple of 10 percent is disregarded". It was felt that this phrase would cause the adjusted dollar amounts to understate inflation to a greater amount over time. The suggestion was to replace the deleted language in Section 12(b)(1) with the following language, "the dollar amounts only change in multiples of $100" and thus one would be rounding to $100 each time. REPRESENTATIVE ROKEBERG noted that the Anchorage [index], the proxy for the Alaska Index, "seems to have been raising it to a lesser degree, historically over the last two decades, than the All U.S. Average, All Urban Index. So, there seems to be a preference to use that because it shows somewhat less inflation." Representative Rokeberg said that this [HB 369] does clean it up. Number 552 REPRESENTATIVE ROKEBERG moved that the committee adopt [Amendment 1], labeled 1-LS1266\G.1, Bannister, 3/22/00, which reads as follows: Page 4, line 24: Delete "index for January of" Insert "annual average of the index for [JANUARY OF]" Page 4, line 26: Delete "index for January of" Insert "annual average of the index for" Page 4, line 31: Delete "index for January of that" Insert "annual average of the index for the year preceding [JANUARY OF] that even-numbered" Page 5, lines 2 through 6: Delete "(1) the portion of the percentage change in the index in excess of a multiple of 10 percent is disregarded and the dollar amounts change only in multiples of 10 percent of the amounts appearing in this chapter on the effective date of this Act for the dollar amounts in AS 09.38.010, 09.38.020(f), and 09.38.025(a) and (d) and on August 26, 1982, for the other dollar amounts in this chapter; and" Insert "(1) the [PORTION OF THE PERCENTAGE CHANGE IN THE INDEX IN EXCESS OF A MULTIPLE OF 10 PERCENT IS DISREGARDED AND THE] dollar amounts change only in multiples of $100 [10 PERCENT OF THE AMOUNTS APPEARING IN THIS CHAPTER ON AUGUST 26, 1982]; and" There being no objection, [Amendment 1] was adopted. Number 0577 STEVE GREER, Attorney, informed the committee that what prompted HB 369 is essentially a provision found in Section 4 of the bill. He related the following disaster, which could have left hundreds of people disposed from their homes. Mr. Greer noted that he lived in a condominium complex known as Foxwood Condominiums. A couple of years ago the [Foxwood Condominium] association hired a painter, who covered a lighting fixture without letting the paint fully dry, which led to a fire. The entire building, eight units, went up in flames. One unit was occupied by a tenant who did not have renter's insurance and thus, in an attempt to cover his/her losses, the renter sued the painter. The painter was bonded and the lawsuit went on to include the condominium association as well as the individual board members on the association, who happen to be retired folks. MR. GREER continued. This lawsuit went to a jury trial and fortunately, the resulting judgment was less than the amount of the insurance which the condominium association had. If that had not been the case [and the judgment had been more than the amount of the insurance held by the condominium association], all of the reserves would have been up for grabs. Mr. Greer pointed out that each month, people pay a certain amount into the condominium association. That money is analogous to a trust account. This could have been a disaster. Therefore, this situation prompted this legislation in order to protect these reserves. Upon review of the remaining exemption amounts, it was felt that the exemptions should be updated as that had not occurred since 1982. MR. GREER turned attention to the dollar amount for the homestead exemption. As was indicated earlier, 13 states provide more protection than Alaska does for its citizens even though it is more expensive to live in Alaska versus other states. Of these 13 states, five provide unlimited exemptions. Although an unlimited exemption for a homestead was discussed, it was determined that would probably not ever happen. Therefore, a dollar amount of $250,000 was proposed. He explained that in 1997 Congress said that if one sells a principal residence, $250,000 per person can be excluded of capital gains. The thought was if that is the level the federal government set for a principal residence, then the same limit should be used for the purposes of the homestead exemption in Alaska. However, now there is a U.S. Senate and a U.S. House of Representatives bankruptcy bill pending before Congress. The bills have been referred to a joint committee for resolution. The U.S. Senate bill sets a limit of $100,000 person while the U.S. House of Representatives bill sets a limit of $250,000. MR. GREER pointed out that HB 369 would also raise the amount of the cash value of an insurance policy from $12,000 per person to $250,000 per person. This increase is very important because as people age, they become uninsurable. If one cannot keep an insurance policy, there will be no insurance to pay to beneficiaries in the case of an untimely death. This change would also apply to annuities as annuities and insurance products are practically treated the same under the IRS code. He pointed out that typically, annuities are meant for retirement and the money cannot be withdrawn before the age of 59.5 without a 10 percent penalty. The current law provides protection for retirement benefits, except with respect to government employees. He noted that presently, deferred compensation plans [of government employees] under Section 457 are not protected. Therefore, HB 369 includes that as well. Number 0967 REPRESENTATIVE GREEN referred to page 1, line 7, and asked if the $250,000 homestead exemption was to apply to each individual or for the homestead in total. MR. GREER answered that it [the $250,000] is meant for each individual. REPRESENTATIVE GREEN said the language in Section 1(a) seems to say that the maximum for the homestead is $250,000. MR. GREER said he could see that, although he knew the intent. REPRESENTATIVE JAMES interjected that [the language] is existing law. MR. MANLY pointed out that the key language in Section 1(a) is "the individual's interest in property", which would key the amount to the individual. MR. GREER asked if this problem could be resolved by the following: on page 1, line 7, following "exemption", insert "for the individual's interest". REPRESENTATIVE JAMES said that she read this language to mean that the maximum homestead exemption is $250,000. She did not think that two joint owners of a homestead would receive $250,000 each. MR. GREER clarified that the intent was to have each individual receive $250,000; a marriage penalty was not intended. REPRESENTATIVE JAMES related her understanding, then, that a property with a $500,000 value can be exempted by two parties. MR. GREER replied yes. However, if one person is liable, then only that individual can protect his/her interest to the amount of $250,000. REPRESENTATIVE GREEN said that would be a fairly sizable protection; is that what the committee desires? Number 1180 REPRESENTATIVE GREEN pointed out that there was a recommended amendment, Amendment 2, which read as follows: Page 1, line 7, following "exemption" Insert "for the individual's interest" There being no objection, the adoption of Amendment 2 was ordered. REPRESENTATIVE ROKEBERG noted that the bill packet should contain letters from some Anchorage accountants, who believe that a $500,000 exemption for a married couple's house is too high. This is a public policy issue. He said, "The combination of the $250,000 in cash value of insurance and a $500,000 in real estate value and a few other little things, you could -- I would ask Mr. Greer, how much can you stash in a year and go bankrupt?" MR. GREER clarified that Representative Rokeberg's example [of a $500,000 exemption] suggests that both couples are liable for the damage. He specified, "It is really $250,000 per person for the household exemption." Therefore, one could have $500,000 cash value in insurance plus $250,000 worth of equity in a home, which could be protected. REPRESENTATIVE CROFT interjected that there could be $8,000 in miscellaneous and all one's retirement accounts. MR. GREER noted that the $8,000 comes from the bankruptcy code and the [money from one's] retirement accounts is currently the law. Mr. Greer remarked that this is, no doubt, a public policy issue in which one would be saying that one is in support of someone being able to keep their home. REPRESENTATIVE GREEN commented that when a painter comes to his home and the house burns down, the painter is fairly well protected. MR. GREER said, "That's the other aspect of this thing." REPRESENTATIVE ROKEBERG reiterated that this is a public policy issue in regard to what degree would the aggregate of exemptions be allowed as use for shelter purposes for potential bankruptcies. Number 1334 DAVE SHAFTEL, Attorney, testified via teleconference from Anchorage. He pointed out that HB 369 and the particular provisions in it have been discussed at length over the past couple of years both among the informal group of attorneys as well as the Estate Planning Section of the Alaska Bar Association. This has also been discussed before the Anchorage Estate Planning Council, which is a mixed membership of attorneys, CPAs, trust officers, insurance brokers, securities brokers and financial planners. Mr. Shaftel said that he has heard very few negative comments as most comments surrounded the need to update and adjust these provisions. He noted that there is quite a bit of information in regard to what other states have done, which he believes Mr. Greer has. He also noted that there are a handful of states that have unlimited exemptions in regard to both the personal residence and life insurance. There are other states that have specific dollar limitations that vary. Currently, Alaska is at the low end of these exemptions. REPRESENTATIVE CROFT acknowledged that the $8,075 was chosen because it matched federal law, and the $250,000 exemption is suggested because it would match federal law as well. However, it is indexed to the Anchorage consumer price index (CPI), in effect. He surmised, "These are going to go off-line from the federal, gradually, right?" He asked if any of the federal numbers are indexed and if so, on what index? MR. GREER replied no. REPRESENTATIVE CROFT suggested that a solution could be to set the [homestead] exemption at $250,000, but not index [that amount]. Therefore, the amount would be tied to the federal law and it does not continue to grow unless "we" decide it should. Number 1537 MR. MANLY interjected that Chris Miller, DOLWD, has recommended that indexing be eliminated altogether as it is burdensome and confusing in the statutes. Mr. Manly commented that he did not believe Representative Harris would mind if indexing was eliminated. REPRESENTATIVE ROKEBERG said that the indexing is already in place and the amounts are a moving target annually. Therefore, he surmised that there could be a delay in the disposition of a case pending verification of the numbers. MR. MANLY noted that he believes with the bill as written, the numbers would change in October of even-numbered years. REPRESENTATIVE CROFT pointed out that what [is in statute] is a $54,000 statute that really was $63,000; one just had to know that or find someone who did because of the lack of clarity in this statute. Therefore, he preferred to have a statute that specified the amount and if the amount increases at the federal level, there can be discussion at that time in regard to whether to increase the state's amount. REPRESENTATIVE GREEN indicated that such a scenario made sense to him. MR. GREER noted that he did not have it [indexing] in the bill to begin with, but Teresa Bannister, Attorney, Legal and Research Services Division, added the indexing provisions. If it takes deletion of the indexing to make HB 369 more palatable to the legislature, then he suggested its deletion. Number 1719 REPRESENTATIVE ROKEBERG moved that the committee adopt a conceptual amendment to delete Sections 11 and 12 and the attendant statutory conforming draft that would be necessary with the removal of the CPI provisions. There being no objection, it was so ordered and Amendment 3 was adopted. REPRESENTATIVE GREEN pointed out that Amendment 3 in effect deletes Amendment 1. REPRESENTATIVE ROKEBERG agreed. REPRESENTATIVE KERTTULA related her understanding that the underlying statute, which maintains the index, is not being removed. She said, "We're not putting in Sections 11 and 12 of the bill." REPRESENTATIVE ROKEBERG specified, "That's right, just as related to the bill." REPRESENTATIVE KERTTULA pointed out, then, that the index would still remain in the underlying statute. The CPI is still in statute. She commented that there could be deep drafting impacts. REPRESENTATIVE CROFT suggested that a committee substitute (CS) be brought back before the committee. REPRESENTATIVE GREEN interjected that the CS would need to be [based] on the intent of removing indexing. REPRESENTATIVE KERTTULA indicated it would be helpful to have someone speak to how this works with indexing in the statute. REPRESENTATIVE GREEN announced that the committee would take a brief at-ease at 2:40 p.m. and he called the committee back to order at 2:42 p.m. Number 2030 REPRESENTATIVE ROKEBERG moved that the committee rescind its action in the adoption of Amendment 3 for the purposes of reading Amendment 3. There being no objection, it was so ordered and the committee rescinded its action in the adoption of Amendment 3. REPRESENTATIVE ROKEBERG moved that the committee delete the CPI clause as set forth in Sections 11 and 12 "so as not to directly effect or change those provisions within the bill before us and not other sections of the chapter." REPRESENTATIVE KERTTULA asked if the desire is to leave the CPI as it is and let it continue to impact everything or is the desire to remove the homestead [CPI]? REPRESENTATIVE ROKEBERG specified, "It was the insurance and the issues that are covered in the bill that are capped." REPRESENTATIVE KERTTULA turned to the medical savings in regard to the deferred compensation. If that is extended to the entire bill, then those sections are impacted. REPRESENTATIVE ROKEBERG commented that those are unlimited. MR. MANLY informed the committee that Mr. Miller, DOLWD, said the following: "The frequency of statutory intervention calls into question the necessity/efficacy of subsection 115 of the Act; it's deletion is recommended." Mr. Manly said that Mr. Miller is recommending the deletion of [AS] 09.38.115(a) and (b). REPRESENTATIVE KERTTULA pointed out that would take it out for everything and she was unsure as to what that would impact. REPRESENTATIVE CROFT suggested that be done in a CS. REPRESENTATIVE GREEN said he understood Representative Rokeberg's amendment to [apply] only to the references in HB 369 and not all of [AS] 09.38.115(a) and (b). REPRESENTATIVE ROKEBERG agreed that would be the motion before the committee. He suggested that there could be a CS that would take it [the index] out entirely and that could be reviewed by the sponsor. Number 2273 REPRESENTATIVE ROKEBERG restated his motion to delete the CPI provisions in Sections 11 and 12 of HB 369 to impact only those sections in the bill. There being no objection, it was so ordered and Amendment 3 was adopted. REPRESENTATIVE GREEN announced that two CSs will be prepared for the committee. One CS will include [Amendment 3], which only affects HB 369, and the other CS will include the deletion of the CPI [altogether]. Representative Green further announced that HB 369 would be held.
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