Legislature(2003 - 2004)
04/02/2003 01:05 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
= bill was previously heard/scheduled
HB 212 - POWERS OF APPOINTMENTS/TRUSTS/CREDITORS Number 2110 CHAIR McGUIRE announced that the next order of business would be HOUSE BILL NO. 212, "An Act relating to trusts, including trust protectors, trustee advisors, transfers of property in trust, and transfers of trust interests, and to creditors' claims against property subject to a power of appointment." CHAIR McGUIRE, speaking as the sponsor of HB 212, informed the committee that HB 212 is a product of work done since 1997, when the legislature passed the original trust Act, which put into place a policy that the trust industry would be a part of Alaska's economy. There have been good results from this, she opined, noting that every year, there are modifications to the original Act in order for Alaska to remain competitive with other states. Number 2047 VANESSA TONDINI, Staff to Representative Lesil McGuire, House Judiciary Standing Committee, Alaska State Legislature, explained that a proposed committee substitute (CS) represents a continuing attempt to keep Alaska's trust laws competitive with other states, such as Delaware. Alaska has a unique tax structure in that it's virtually nonexistent, and in order to take advantage of this, in 1997 the Alaska State Legislature decided to venture into the trust industry. The trust industry has brought jobs and money to the state and this has resulted in a capital base increase for investment purposes. Ms. Tondini said that the trust Act has been a success by all accounts; however, in order to remain competitive, Alaska must stay on top of the changes made by other states. MS. TONDINI explained that HB 212 makes changes to the [law pertaining to spendthrift trusts] and adds the ability to have a trust protector and trust advisor, similar to Delaware law. The aforementioned abilities allow the settlor to have as much control as possible when the settlor decides to give a gift or create a trust. Number 1957 MS. TONDINI, in response to Representative Anderson, explained that the only change encompassed in the CS is in Section 7. Language was added to the section dealing with subjecting appointed property to the claims of the donee's creditor. The original bill merely stipulated that the power of appointment is permitted under [paragraphs] (1)-(2), only mentioning the donee's estate. Basically, the language added is as follows: "is permitted by the donor of the power to appoint the property to the donee, the creditors of the donee, the donee's estate, or the creditors of the donee's estate;". She explained that the language was changed in order to conform this section so that it also applies to inter vivos powers of appointment because the donee's estate would only be applicable under testamentary power of appointment. Number 1895 STEPHEN E. GREER, Attorney at Law, informed the committee that his practice is limited to estate planning. Mr. Greer clarified that HB 212 isn't special interest legislation, rather this legislation is meant to refine Alaska's present trust law. Since this law was originally passed in 1997, there has only been one amendment in 1998. However, Delaware has amended its statute six times. Mr. Greer also informed the committee that there is widespread support for HB 212. Number 1787 REPRESENTATIVE SAMUELS moved to adopt the proposed committee substitute (CS) for HB 212, Version 23-LS0471\I, Bannister, 4/1/03, as the work draft. There being no objection, Version I was before the committee. Number 1767 DOUGLAS BLATTMACHR, President, Alaska Trust Company, simply announced support for HB 212, which he believes will improve Alaska's trust laws and help the state continue to attract trust business. Number 1748 ROBERT MANLEY, Member, Hughes Thorsness Powell Huddleston & Bauman, LLC, informed the committee that he has been practicing as a trust and estates attorney for about 25 years. He specified that he is only representing himself. Mr. Manley noted his support of HB 212. He explained that his clients use trusts to reduce estate gift tax and to preserve family assets. MR. MANLEY directed attention to Section 1, which offers statutory confirmation for the office of trust protector and trust advisor. A trust protector is commonly used in trusts. A trust protector, he explained, acts as a court of appeals for the surviving spouse if the institutional trustee is unreasonable. This trust protector is particularly important in perpetual or long-term trusts. He said this [change] and others make Alaska's trust law better. Number 1640 JONATHAN BLATTMACHR, Partner, Milbank, Tweed, Handley & McCloy, informed the committee that he is a member of the Alaska, California, and New York Bar [Associations]. He said that his firm has had dozens of clients who have created trusts in Alaska. This legislation will allow Alaska to stay in the forefront of the trust business, which is a free and clean business no matter the location. The aforementioned is why so many jurisdictions are trying to better their laws. Even New York is considering making changes, including possibly eliminating its income tax on trust income. Alaska already enjoys that. Mr. J. Blattmachr urged the committee's support of the legislation. He echoed earlier testimony that [the trust industry] is one in which one must constantly keep ahead and thus this won't be the last time that there will be a request to make changes to better Alaska's law. REPRESENTATIVE GRUENBERG noted that committee members should've received comments from the Alaska Child Support Enforcement Division (CSED). Basically, he remarked, the CSED speaks on behalf of one class of creditors: those who are owed child support. However, he believes that many of the CSED's comments reflect the views of other creditors. Representative Gruenberg surmised that the CSED views one of the problems with HB 212 as being that it allows people to shield their assets from legitimate creditors. Since the only contact the settlor or donor has to make with Alaska is to create a trust in Alaska, people with no contact at all with the state could use the state as a haven for avoiding creditors. Therefore, Representative Gruenberg noted he was concerned with some of the provisions allowing people to use [trusts] as a shield for creditors, because the bar is raised for proving fraud in various areas. MR. J. BLATTMACHR recalled his involvement in Alaska's original legislation in 1997 when he met with a number of departments, including those charged with the duty of [collecting] child support. The existing law, he remarked, specifies that no one can create an Alaskan trust and avoid the claims for child support if that individual is behind in child support payments. Furthermore, with these type of trusts, no matter whether they are created in Alaska, Delaware, Rhode Island, or Nevada, one cannot receive a discharge in bankruptcy for child support in the United States. Therefore, even if a parent decides to catch-up on his/her child support, that parent can't then place his/her assets in a trust in Alaska in order to never pay any more child support. MR. J. BLATTMACHR said that won't work because there is an explicit provision in the United States bankruptcy law that says child support, alimony, and eight other categories, including intentionally harming someone, cannot be discharged. The ability to obtain the child support at some point, even after the child is of majority, [is still there] because the trust will be in Alaska and before the court. The court could specify that whenever this individual receives a distribution - the individual who is behind in child support payments - there must be notice to the child welfare division, to the custodial parent, and to the child if the child is an adult. Therefore, those assets can be attached. He noted that he met with [CSED in 1997] and the division withdrew its opposition once the aforementioned was explained. MR. J. BLATTMACHR turned to the general question of taking advantage of creditors. Throughout the United States, in every state, a person can transfer assets to someone else either outright or in trust. Once those assets are transferred, those assets are no longer [available] for the claims of that person's creditors unless the creditor can prove it was a fraudulent transfer. For example, in 1994 when Mr. J. Blattmachr's firm first started making money, he took his extra profits and placed them in trust for his wife. This was before Alaska's trust Act was enacted, so he created the trust under New York's laws. This means that the assets are completely immunized against his creditors and against his wife's creditors - since she didn't create the trust - unless the creditor can prove that it was a transfer to defraud a known creditor. Alaska law essentially says the same thing. MR. J. BLATTMACHR noted, however, that Alaska has allowed for a pure discretionary beneficiary, which would forever prevent permanently subjecting the assets of the trust to the claims of creditors. The aforementioned is in line with the federal law specifying that a pension plan is forever protected from claims of creditors. Therefore, he said, he didn't believe [HB 212] does anything extraordinary. The changes made [in the CS] include clarifying during litigation where the burden of proof will fall, and providing the judge an easier time in determining whether there is a fraudulent claim. The [CS] also changes the charitable remainder trust, which is a trust that an individual creates which will ultimately go to charity, such that the interest in the charitable remainder trust is protected from claims of creditors. Charitable remainder trusts are a creature of federal law, and although it's possible that federal law would provide protection, [the desire with the CS] is to make that clear in Alaska. Number 1107 DAVID SHAFTEL, Estate Planning Attorney, began by informing the committee that he is a member of the informal group of estate planning attorneys that have worked on improving the trust statutes in Alaska. A number of good statutes have been enacted since 1997 he opined. He relayed that the informal group feels that this particular statute continues to clarify in Alaska law as it relates to trusts. As a practicing estate planning attorney who deals with clients daily on these matters, Mr. Shaftel said that the residents of Alaska have benefited tremendously from the legislature's work in this area. He related that all [of the members of the informal group] recommend this legislation. REPRESENTATIVE GARA noted that in his district there is a ground swell of support for this legislation. Number 0933 RICH HOMPESCH, Attorney, informed the committee that there is support for this legislation in Fairbanks. He concurred with the comments of the previous witnesses. There is no doubt that Alaska has seen an increase in its trust business since 1997, he remarked, and relayed his belief that this legislation will further nurture the trust industry in Alaska. Number 0884 RICHARD THWAITES, Estate Planning Attorney; Chairman, Alaska Trust Company, informed the committee that he has been an estate planning attorney in Alaska for 29 years and has been involved with the development of the original trust legislation. He remarked that the trust industry is a competitive industry, and that more and more practitioners are coming to Alaska and using the Alaska trust system. This legislation helps Alaska stay [at the top of the trust industry], he added. REPRESENTATIVE GARA returned to the situation in which there isn't enough money to pay a child support obligation when a trust is created. Although he said that he feels comfortable that it's not a problem, he requested that Mr. Thwaites comment on the matter. He asked if his understanding is correct that before a trust is signed and authorized in this state, an affidavit of solvency is signed, and that the Affidavit of Solvency includes a paragraph in which the applicant swears that he/she has no debts beyond their ability to pay and that creating a trust won't thwart the individual's ability to fulfill his/her financial obligations. He asked if that paragraph is signed for each trust in the state. MR. THWAITES answered that the Affidavit of Solvency document included in the committee packet is one the Alaska Trust Company requires before accepting a trust for administration. He opined that generally speaking, an estate planning attorney should have some such document. He pointed out that the document used by the Alaska Trust Company specifies that no more than half of an individual's resources are being placed in a trust. He noted that there is a similar concept in the securities law for a qualified investor. There is no intention, he said, for these [trusts] to be used to defraud creditors. Furthermore, the cost of establishing and administering these trusts is fairly significant and, thus, it isn't something that a smaller estate would undertake. Number 0603 REPRESENTATIVE GARA asked if it's standard to receive some assurance [similar to that provided by the Affidavit of Solvency] before a trust is entered into. MR. THWAITES noted that there are five competitors in the [trust] industry in Alaska and due to privacy laws, he couldn't speak to the practices of the competitors. He specified that [the Alaska Trust Company] has always [used the Affidavit of Solvency document]. MR. SHAFTEL pointed out that if the transfer results in the settlor being insolvent, that in itself is a strong form of evidence that the trust was created with an intent to evade creditors. With regard to the practice of attorneys, Mr. Shaftel relayed his belief that since 1997, [practically all] of the estate planning attorneys in Anchorage have used the Affidavit of Solvency and have required financial statements with CPA verification as well as an agreement from the client which specifies that all of the representations of the client's financial condition are accurate. He relayed his belief that the practitioners are very careful that the trust isn't used to evade existing creditors. MR. GREER concurred with Mr. Shaftel's comments. He recommended that those having questions with regard to the Alaska experience with self-settled trusts read Mr. Shaftel's article on the matter. CHAIR McGUIRE noted that Mr. Shaftel's article is part of the committee packet. Number 0356 MR. J. BLATTMACHR concurred with Mr. Shaftel that if an individual makes a transfer and renders himself or herself insolvent, that's a per se a fraudulent transfer. For example, if an individual with debts of a million dollars takes assets worth $300 million and transfers them to an Alaska trust, the individual has made a fraudulent transfer and the trust, under Alaska law, will not provide any asset protection. That is the rule throughout the United States and hasn't been changed by prior Alaska legislation or this legislation. Additionally, in order to perform an Alaska trust, the individual has to be up to date with child support payments. Therefore, this legislation would seem to encourage people to catch up. MR. J. BLATTMACHR said that from experience with his own practice, virtually all banks, trust companies, and attorneys insist upon a statement of solvency because assisting someone in bankruptcy fraud is a go-to-jail crime under federal law and makes the [attorney] secondarily liable for damage done to creditors. Therefore, every attorney that he knew of who performs asset protection is extremely careful to ensure that there is nothing that will render a particular creditor insolvent, because of the possibility of being civilly liable for it and the possibility of going to jail. Every year people are prosecuted in the U.S. and sent to prison for bankruptcy fraud. MR. D. BLATTMACHR offered his understanding that most institutions use the [Affidavit of Solvency] document or one similar to it. Number 0189 REPRESENTATIVE GRUENBERG asked if there is currently a requirement in law that the settlor file an Affidavit of Solvency. MR. THWAITES answered, "Not that I'm aware of." REPRESENTATIVE GRUENBERG pointed out that with real estate transactions, the legislature has required a disclosure statement to be given to the buyer for the purpose of protection against real estate fraud. [The Affidavit of Solvency] would provide various protections. Therefore, he asked if those behind this legislation would have a problem with requiring that the settlor maintain such an affidavit on file, with its filing being a continuing Affidavit of Solvency and, thus, requiring any change to be disclosed under oath. MR. THWAITES said he didn't want Alaska to have a list of negative checks against Alaska's trust industry in its competition with Nevada, Rhode Island, and Delaware. REPRESENTATIVE GRUENBERG countered that he didn't want to have a lot of people defrauding creditors, which he viewed as higher public policy. MR. J. BLATTMACHR remarked that requiring the grantor to put in an Affidavit of Solvency at the inception of the trust would be potentially good for Alaska. However, he said he thought one would be crazy to do it if it would render the individual insolvent, because of the possibility of going to jail. Furthermore, it's a fraudulent transfer and the creditor can get [the funds] under the law of all states. He opined that making someone prove that he/she is solvent before being allowed to create a trust demonstrates the seriousness of the matter to someone who might be considering such an option for the purpose of evading creditors. TAPE 03-29, SIDE A Number 0025 MR. J. BLATTMACHR noted, however, that it may not be helpful to require a grantor to continue to give such affidavits of solvency. As long as a grantor creates a trust in good faith, without intention to defraud, and is not insolvent at that time, the fact that he/she later becomes insolvent is ignored under the law. Thus, although it might be good to require an affidavit proving solvency when initially establishing a trust, to require one periodically afterwards would not be practical, since it would not have any legal impact. MR. THWAITES agreed. CHAIR McGUIRE opined that requiring an affidavit initially is a good suggestion and furthers the legislation's intent. REPRESENTATIVE GRUENBERG, after noting that it is very difficult to litigate fraudulent transfer cases and prove an intent to defraud, turned to the concerns provided in writing by the Child Support Enforcement Division (CSED), specifically the concern pertaining to Section 3, page 3, lines 11-12. The CSED document says in part: Section 3 of the bill increases the proof required to prove intent to defraud creditors. Currently, we only have to prove that the person intended in part to defraud creditors. ... If the bill passes, we will have to prove that defrauding creditors was the primary intent .... REPRESENTATIVE GRUENBERG posited that the CSED is concerned that use of the phrase, "made with the primary intent to defraud" raises the burden of proof. MR. J. BLATTMACHR opined that the CSED's concern is irrelevant because, in order to create an effective "Alaska trust" to begin with, one must be up to date with child support payments. He acknowledged, however, that perhaps that phrase may make it harder for a general creditor to prove that the transfer was made with the intent to defraud. REPRESENTATIVE GRUENBERG asked whether, in order to set aside the fraudulent conveyance under Alaska law, it must be shown that the primary intent was to defraud, or whether all that is needed is to show that it was an intent in part. Number 0360 MR. GREER said that under Alaska law, the burden of proof is a preponderance of the evidence. The reason for inserting the word primary, he explained, is that rarely will an individual admit to a fraudulent conveyance. Instead, what it comes down to is letting the trier of fact determine whether or not certain badges of fraud exist. He mentioned that according to the First Nat'l Bank v. Enzler case, there are a number of factors that can be badges of fraud, one of which is simply a transfer to a child. He opined that insertion of the term primary was not intended to raise the burden of proof beyond a preponderance of the evidence; rather, it simply clarifies that the trier of fact is allowed to weigh all of the circumstances. Thus, for example, if it is found that a trust was created for the benefit of a child, that fact, in and of itself - that it was a transfer to a child - would not be sufficient to constitute a fraudulent conveyance. REPRESENTATIVE GRUENBERG noted that Version I, on page 4, lines 29-30, keeps the current standard of a preponderance of the evidence. He relayed that his concern is not about the quantum of proof - which is a preponderance of the evidence rather than the standard of clear and convincing that is used in Delaware - and it is not about the badges of fraud. Instead, his concern, he said, is that under HB 212, "you're going to have to prove ..., to set it aside, that the primary intent was to defraud a creditor." He said that he could not recall whether, under the Enzler case, other cases, and current law, it must be proven that the intent to defraud is a primary intent. He said that his feeling is that the CSED is correct, and that currently, as long as there was "an intention" to defraud, the conveyance can be set aside. MR. GREER replied: It can only be set aside if it's shown by a preponderance of the evidence that it was the intent of the settlor, in transferring the assets to the trust, ... to defraud [the] CSED. If they can establish that, by a preponderance of the evidence, then that transfer can be set aside. That's how I see the law now, and how I continue to see the law even under this bill. Number 0578 REPRESENTATIVE GRUENBERG said, "So ... if that were one of many intentions, ... under current law it would be sufficient if you could show that that was an intention; it would not, under current law, have to be the primary intention. Right?" MR. SHAFTEL remarked that for 70 to 80 percent of his clientele, asset protection is always a concern, as are tax reduction and asset management. The point is, he added, if someone has multiple intents, one of which is asset protection, he/she will say that asset protection for a relative or spouse is one of his/her intentions. Thus, if that is enough to set aside a transfer, he warned, that does away with a lot of bona fide estate planning. He opined that HB 212, including this provision, closes gaps in the current law relating to trusts and the protection that trusts provide, and clarifies the areas of that law that are of concern to those associated with the trust industry. He opined that current law is ambiguous and could be construed a number of different ways. He said that if one's primary intent is to defraud a creditor, then that transfer should be set aside; however, if asset protection is just one of ten different intentions, for example, then it should not be enough. REPRESENTATIVE GRUENBERG turned to the word "defraud" on page 3, line 13. He opined that the distinction between "defraud" and "asset protection" is not simply a "nice" distinction. Defrauding means to act dishonestly with the intent, basically, to steal money or [avoid a creditor's claim]; it does not mean, in the general sense, to protect money from potential future creditors. For this reason, he indicated, he is concerned because the language now stipulates that the intent to actually defraud a bona fide current creditor must be a "primary" intention. MR. SHAFTEL opined that HB 212 would provide clarity in the very area that Representative Gruenberg has concerns about. He suggested that current language could allow a trier of fact to go astray and set aside a transfer simply because asset protection was goal. REPRESENTATIVE GARA asked whether, if the language was altered to read "intent to defraud" instead of "primary intent to defraud", that would interfere with Alaska's ability to be competitive in the trust market. MR. THWAITES remarked that it would hinder Alaska's ability slightly because other states' statutes are a little clearer, adding that the goal of this legislation is to keep up with those other states. Number 0989 CHAIR McGUIRE made a motion to adopt Conceptual Amendment 1: "I want to allow the bill drafters an opportunity to work it [into] the right place, but, essentially, it will say, 'A settlor of a trust is required to sign an affidavit of solvency prior to the creation of a trust.'" REPRESENTATIVE GRUENBERG said he strongly supports Conceptual Amendment 1, but cautioned that the term "affidavit of solvency" will have to be carefully drafted so that it is similar to what "we have been given." CHAIR McGUIRE agreed, and assured members that committee staff would ensure that all aspects of such an affidavit are considered. REPRESENTATIVE GARA objected for the purpose of discussion. He posited that they were trying to get at the same thing, but said that if one could envision someone who is trying to defraud a beneficiary of a child support payment, one could also envision that that same person would try to get a trust drafted before child support kicks in. Therefore, he opined, "you would want to include that the person will have to state under oath that they're not planning to defraud an anticipated child support payment. CHAIR McGUIRE said, "I like it - good friendly amendment - I like it." [Conceptual Amendment 1 was treated as amended.] REPRESENTATIVE GARA added: "But I don't think we have to include that whole trust document. I think just the concepts that you've discussed can be written down much more briefly than incorporating a whole affidavit." CHAIR McGUIRE agreed. She asked whether there were any further objections to Conceptual Amendment 1 [as amended]. There being none, Conceptual Amendment 1 [as amended] was adopted. REPRESENTATIVE GRUENBERG said he still has concerns about the intent language on page 3, lines 11-13, because it is so difficult to prove fraud in the courtroom. He asked that the legislation be held over for the purpose of allowing him an opportunity to discuss this issue further with the [interested parties]. CHAIR McGUIRE agreed to hold HB 212 [Version I, as amended] over until [the next meeting].
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