Legislature(1995 - 1996)
02/09/1996 01:10 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 459 - TRUSTS & PROPERTY TRANSFERS IN TRUST Number 084 REPRESENTATIVE VEZEY introduced HB 459 for discussion as sponsor. He stated that this legislation resulted as an effort to help create a financial industry for Alaska. This legislation would give Alaska the strongest trust laws in the country with the possible exception of Missouri and it fits well in the overall legal structure of Alaska. Alaska has no sales tax or an income tax, hence transfers of money are not excessively taxed. The major changes this bill would establish, firstly, that it creates a trust that is irrevocable, it is not invadable by creditors, and at the same time it is set up to prevent any attempts at fraudulent transfers. Secondly, it allows trusts to be set up in perpetuity. REPRESENTATIVE VEZEY likened the formation of these trusts to that of the formation of a corporation. The economic growth of the United States is tied to the creation of corporations. The idea of the corporate structure has existed since Roman times. As the United States began to grow the need for the corporate structure to allow for the accumulation of large amounts of capitol, limiting the liability of the investors and providing for continuity became stronger and stronger. After the Civil War the laws surrounding special status privileges associated with corporations were abolished to create more equality. Anyone could then start a corporation, which would be treated the same as any other. REPRESENTATIVE VEZEY went on to add that in 1868 the United States adopted the 14th amendment. Subsequent to this, the Supreme Court overturned what amounted to 2000 years of legal precedence by stating that a corporation was entitled due process just like a legal person. The rest is history. Representative Vezey stated that Alaska has an opportunity as parallel to this illustration, in that the laws governing trusts have become convoluted over the years so that a trust is no longer a legal entity unto itself, it is not necessarily sheltered from creditors. Trusts can still be invaded and they cannot continue on in perpetuity such as a corporation can. This bill attempts to create the concept that a trust is a legal entity just like a person, and exist in perpetuity. REPRESENTATIVE VEZEY felt as though this trust concept could be a tool for the state to bring investment capitol to the state. Even though not all this capitol would stay in Alaska, just the business of handling this money could create an industry to rival Wall Street. He noted that there is a need for this service. This is why large sums of money leave the United States to bank accounts in the Cayman Islands and the Bahamas, etc. He added that there were complicated legal concepts related to these trusts which would need explanation and he then turned the discussion over to Mr. Thwaites. Number 497 REPRESENTATIVE CON BUNDE questioned the effectiveness of the Missouri statutes regarding these trusts. REPRESENTATIVE VEZEY pointed out that there is an uncertainty in the minds of the investment community regarding the interpretation of the Missouri statutes, therefore people are not willing to gamble on the security that they'd like to think they're getting there. Number 565 RICHARD THWAITES, ESTATE PLANNING ATTORNEY, testified regarding HB 459. Mr. Thwaites has been an estate planning attorney since the early 70's and has worked for First National Bank of Alaska in their trust department and is currently a fellow of the American College of Trust and Estates Council. There are seven fellows in the State of Alaska. This organization recognizes the long standing tenure of those practicing in the area for at least ten years. It is required that a fellow either write or teach regarding estate law and then they are elected to the national organization. MR. THWAITES stated that in this capacity the fellows have discussed the evolution of trust law as it exists in the United States today. In the past ten years there has been a redevelopment of stricter laws, which this present bill addresses. MR. THWAITES continued that this particular bill focuses on an asset protection type of trust, very similar to off shore jurisdictions such as the Cayman and Cook Islands. Recently, the State of Alaska extended limited liability company protection to entities which were formally operating as partnerships. If these entities chose to opt for the correct format, there is some additional liability protection afforded them. This trust devise takes this same concept and carries it over to individuals. It is possible that individual assets, which are not connected to fraudulent transfers or subject to any claims, can be placed irrevocably into a trust. This does mean though that the settlor (person creating the trust) no longer has any say in the management of the trust, other than initially creating it. MR. THWAITES offered that the evolution of law in the United States and England has been if the irrevocability can go back to the settlor, this trust would be considered invadable. This proposed devise permits the settlor or creator to be one of the class of beneficiaries which can receive benefits from the irrevocable trust. This concept is currently attracting what is thought to be hugh sums of dollars offshore. The estimate given by members of the U.S. House of Representatives and Senate who deal with the committee who write the tax laws of the United States, said that last year alone about $460 billion dollars went offshore. MR. THWAITES has talked to a lot of practitioners throughout the country and so far he has not found anyone who doesn't have three to ten clients who would instantly want an Alaska family trust. The dollar sums on the east coast are substantially larger than ones in Alaska, which these are in the $50 to $80 million dollar range. Mr. Thwaites pointed out that an allowance in the present language should be made to include specifically the national banking associations, such as National Bank of Alaska, First National, etc. to ensure that they are also protected. MR. THWAITES added that Bob Manley, of Hughes, Thorsness crafted suggested language into the present draft of legislation before the committee, which would specifically include the national banks and also to provide more of a nexus to the state of Alaska. The place of administration would be in the state of Alaska so that someone couldn't necessary hire a straw man who would deal (indisc.). The situs of the trust would be in Alaska, the administration of the trust would be in Alaska. This would be a very attractive devise just because of the rule against perpetuities and the fact that this trust is an asset protection trust. MR. THWAITES stressed additionally, the fact that Alaska lacks an income tax makes it a really attractive devise alternative for (indisc.) outside. The trust companies in Alaska would set a fee schedule to administer these trusts and it is anticipated that this number could substantially exceed that of the permanent fund in a very short period of time. He also suspected that this devise would make it's way into the trust publications throughout the company very quickly. Mr. Thwaites also noted the high level of interest from other states regarding the establishment of this legislation. MR. THWAITES summed up by stating that this legislation deals with asset protection trusts. As an asset protection trust it does shelter the assets according to the person creating the trust. Under this legislation, the state of Alaska recognizes this concept and protects this right. Number 1010 REPRESENTATIVE GREEN made a motion to move to adopt version (M) of CS HB 459 as the committee's working document. Hearing no objection it was so moved. He went on to propose a hypothetical situation to aid in understanding this legislation better. Representative Green asked if it was possible that an individual who owns a factory, to avoid litigation, sets up a trust with one of their children along with an agreement to split the interest made with an instrument such as proposed by this legislation. He asked if this would be possible. MR. THWAITES stated no, because Representative Green had indicated that there was an agreement in conjunction to this trust. If there was a verbal or written agreement to do so, this would negate the terms of the trust. The child could at their discretion return the interest to the settlor, but not at the command of the settlor. Number 1030 REPRESENTATIVE GREEN asked how many states have a rule against perpetuity. MR. THWAITES believed that it was all but two, Idaho and Missouri. He said there might be one other. He added that this rule of perpetuity in and of itself is not sufficient to do what's proposed in this present legislation. He used the example of South Dakota creating the credit card rules to attract business to their state and likened this trust law to this same concept. Alaska does not presently have complex sets of trust laws which allows this legislation to match nicely into it's present structure. This was the problem in Missouri, they have too many other trust statutes and the language drafted to allow asset protection trusts was ambiguous. These two factors contributed to a low sense of protection. MR. THWAITES added that the rule against perpetuity would stay in Alaska statute, but this trust concept would provide an exception to this rule. Number 1209 CHAIRMAN PORTER handed the leadership of this meeting over to Vice Chairman Green since he was required to testify before the Senate Judiciary committee about tort reform. Number 1230 REPRESENTATIVE VEZEY asked Mr. Thwaites to clarify the difference between the present committee substitute before them and the legislation they had been working on as being found on page 3, line 25 (C) which dealt with national banking associations. MR. THWAITES answered yes, lines 25 through 28 on page 3 and also the clause dealing with the place of administration, located on page 2, line 14. He went on to further clarify that these banking institutions would be state banks headquartered in Alaska, exercising trust powers and they would have their principal place of business in Alaska. He noted that there are a number of state banks who have chosen not to exercise trust powers. They would need to apply to the regulatory powers to do so. REPRESENTATIVE VEZEY noted that under the section located on page 3, line 25 that a state bank under Alaska statutes or an Alaskan bank chartered under the National Banking Association federal laws can utilize these trust laws, not a bank from New York for example, who is not registered here in the state of Alaska. Number 1453 REPRESENTATIVE BUNDE asked Mr. Thwaites to give an estimate of how this legislation would impact the state of Alaska, how many jobs, how much money the state would realize, etc. MR. THWAITES offered that he was could not accurately project these numbers, but did note in Alaska Business Monthly that the total assets of the Alaska banks combined is $5 billion. When discussing this concept with a banker in Great Falls, Montana this banker estimated that they could see in a very short time an estimated $200 billion in Alaska from formulating these trusts. Mr. Thwaites projected that there would be an increase in trust departments to handle this business which would create revenue. MR. THWAITES also offered that because the United States has the full faith and credit of the military, even people outside of the United States might come to Alaska to do business. The potential is virtually unlimited. Number 1570 REPRESENTATIVE BUNDE then asked if the trust capital in Alaska would be brought to bear on Alaskan projects as well. MR. THWAITES said there would probably be some spin-off, but not that great. REPRESENTATIVE BUNDE asked how if an income tax did goes through in Alaska, would this affect the influx of trust business. MR. THWAITES thought that if this legislation came on line before income tax goes into effect, then the perpetuity feature, the credit shelter protection, and the security of the military would still be desirable features in and of themselves. He also pointed out that the income tax proposed in Alaska would not rival the tax now levied in the state of New York, for example. Number 1630 REPRESENTATIVE VEZEY made the argument that any tax to be discussed would be a personal income tax, which in no way would affect the corpus of the trust or the earnings until they were distributed. MR. THWAITES said that this would not be the case. This type of trust would be deemed a grantor trust, meaning, as the income is earned, federal tax would have to be paid on this money. Because the federal government would be required to pay taxes, the state of Alaska would receive the other tax. Mr. Thwaites raised an additional issue, that after passage of this legislation, the IRS would need to pass a private letter ruling on this type of trust. He noted that a firm in New York was ready and willing to pursue this procedure at their expense if this legislation passed. MR. THWAITES offered that the current law would not tax the trust. Whatever fees were raised under the administration of a trust would be subject to any tax a bank would have to pay, if these banks are in fact required to pay these taxes as noted. Number 1734 REPRESENTATIVE CYNTHIA TOOHEY asked about those banks such as the Key Bank with corporate offices in Seattle, would they be allowed to administer trusts under this legislation. MR. THWAITES responded that not the Seattle version of Key Bank, but the Key Bank of Alaska would be able to. Other banks such as Chase Manhattan or the Bank of Tokyo could come to Alaska and apply to open an Alaskan bank and perhaps form a holding company. These banks would be subject to a lot of regulatory processes, at least the way the law is presently structured. Number 1796 REPRESENTATIVE FINKELSTEIN asked what these trusts were subject to. What can be used to get at these trusts, say for example, a criminal proceeding, something which comes out of a divorce proceeding. He asked what superseded the nature of the limits of this trust. MR. THWAITES offered that the fraudulent transfer statute would supersede these trusts, in other words, any asset going into the trust would have to be free of any claim. For example, if Representative Finkelstein gave some property to Mr. Thwaites trust, Representative Finkelstein would have no claim back against this property, except by virtue of what these assets were. If this property was free and clear of any claims, none of Representative Finkelstein's creditors could claim this property as long as it was given without a fraudulent transfer and there were no liens or encumbrances against it. MR. THWAITES also made an important clarification about the invasion of creditors. If the trustee chose to pledge or collateralize assets of the trust against one of the beneficiary's bank loans, this bank would then be able to foreclose against those (indisc.) assets in satisfaction of a defaulted loan. The individual and the trustee have to make an affirmative decision and the bank has to make an affirmative decision that it won't loan the money without requiring this collateral, so everybody is in an equal bargaining position. Basically the way the trust is set up, the creditors of the person who set up this trust wouldn't have any rights to it. Number 1895 REPRESENTATIVE FINKELSTEIN stated that assuming there's no issue of collateral, he asked if there were any legal proceeding which would give a party access to this trust, for instance, a conviction of various crimes, restitution for these crimes, or ill gotten money. MR. THWAITES stated that ill gotten money wouldn't be eligible. The trust could be penetrated for this at any time. The money has to be clean, there has to be no intent to convey for fraudulent purposes, say to avoid a crime or restitution order, this would not be allowable. If a situation happened fairly contemporaneous with the establishment of the trust, there would be probably be a presumption that this trust was set up for this reason and the invaders could probably free the assets. REPRESENTATIVE FINKELSTEIN asked about a divorce proceeding where someone set up in advance a trust, would these assets be inaccessible to these court proceedings regarding the division of marital assets. MR. THWAITES responded that maybe yes, maybe no. If the spouse has a claim or an interest in the corpus of the trust, then it's probably invadable. Alaska has different divorce laws. The courts presume marital property under a similar concept of community property. The mere fact that someone is married, without a prenuptial agreement, then it's presumed that this trust is co- owned by both spouses. A divorce would undoubtedly split the trust into two parts. He said this would be true even in a third party situation. If a spouse had a claim against assets assigned to a trust, depending on the nature of the claim, the spouse would not be precluded from obtaining this interest. Number 2010 REPRESENTATIVE FINKELSTEIN stated he didn't understand what made this particular trust irrevocable, especially because it's subject to all of these proceedings. He wondered why more states did not pass such legislation if it was such a good deal. MR. THWAITES answered that most of the trust law in the other states is based on an evolution of this change. Most other states have income tax and they aren't choosing to allow this severance to take place. What makes it irrevocable is that if someone has free and clear property and they choose to sever their interest in this property they can place into this trust of which they could still be a class of beneficiary. This is clearly one of the benefits a person would have, although they wouldn't have any control over the trust as to where it goes and what happens to it under this statute. Mr. Thwaites stated that he didn't understand why other states haven't incorporated these trusts, unless it's just that there's a competing interest back and forth between various parties not to do this. He cited the problem with Missouri's trust legislation again and spoke about other states which have made varying attempts to incorporate this type of legislation. Number 2095 REPRESENTATIVE BUNDE asked Mr. Thwaites to elaborate on the involvement of the IRS and the firm which had offered to undertake at their expense the necessary the procedures required of the IRS. MR. THWAITES stated that for an investor to set up one of these asset protection trusts they would want some assurance from the IRS that this trust was legitimate. He went on to add that they crafted this legislation to meet the IRS requirements thus far, but he believed the IRS would issue a private letter ruling confirming that this is a grantor trust. What this letter does is confirms that the income from this trust would automatically pass through and be taxed to the beneficiaries as an individual. One of the benefits of this, is that presently, the tax rate for a trust is 39.6 percent for anything over $7500 a year. A grantor trust is taxed at the individual rate. It is a nice package to be able to hand over to an investor that this trust is approved by the state of Alaska, it's approved by the trust company, as well as, the IRS. Number 2165 REPRESENTATIVE VEZEY asked if the majority of the state's do have an income tax. MR. THWAITES stated that Nevada does not and South Dakota repealed it in favor of a lottery. Their Supreme Court set this aside and they may go back to an income tax. REPRESENTATIVE VEZEY then asked if a beneficiary acquires assets from an estate, would a trust prevent the state from taxing these assets again. MR. THWAITES stated that these assets would be taxed again. A grantor trust provides for taxes attributable to the estate of the decedent. He added that there's a generation skipping transfer tax. This transfer tax would undoubtedly be applied to an asset protection trust. This is why they would want a private letter ruling to see how the IRS would handle this type of trust. Arguably in the Cook Islands, many people avoid both the income tax and the estate tax by just not paying it or declaring it. The private letter ruling would clear up the issues of how the IRS will deal with this trust taxability wise. The intent is not to shelter it from taxes, but to provide in essence, a protection for the assets which a family can receive much the same way a corporation does or a limited liability company has done for partnerships and such. MR. THWAITES add that he believed not only would the income of the trust be taxed, but also the entire value of the trust when it is transferred. He noted as an example, irrevocable trusts to third parties, such as to children. There is a gift tax which is the same as the estate tax, that is assessed at the time of the gift goes into the trust. This tax is already paid up front or the deduction is given credit up front. There is a limit of a one time transfer of $600,000 to a trust, tax free. Anything above this would be subject to tax of 39 percent. This money would not be subject to an estate tax until this child passed the trust onto someone else. He also noted the example of a trust with a life estate remainder to the next generation, this trust would be subject to the $1 million generation skipping transfer. This $1 million transfer could go to a grandchild with a child in-between without paying a tax. Number 2360 BOB MANLEY, ESQ., testified by teleconference from Anchorage in support of HB 459 as a private individual. He stated that HB 459 would promote local financial institutions and provide additional job opportunities. It would increase the corporate income tax base, because the banks will make more money and hence there will be greater tax revenues into the state of Alaska. This will be a way to keep this type of money in the United States rather than it being diverted to foreign shores. BOB MANLEY also noted that this legislation could turn Alaska into a magnet for this type of capitol. The proposed amendments in the working draft are important to make this concept work and that Alaska is ensured some benefits from this type of opportunity. TAPE 96-17, SIDE B Number 040 BRIAN BRUNDIN, ESQ, CPA, testified by teleconference from Anchorage in support of HB 459 as a private citizen. He noted that he had been conducting estate planning for the last 29 years. This legislation would help Alaskan's further protect their property. Number 144 REPRESENTATIVE FINKELSTEIN asked for any help Mr. Brundin could give about a potential downside to this type of trust, in other words, hiding assets which would be counter to the public interest. MR. BRUNDIN noted that there is a potential that anyone can misuse anything. He noted that people come to him now and request things that might be legally possible, but he doesn't do them. He added that he didn't think there was an advantage to be gained to someone trying to get around certain situations. In an irrevocable trust a person has to relinquish control of their funds. These have to be funds they can afford to let go of. REPRESENTATIVE FINKELSTEIN cited a drug dealer, where under the circumstances it can't be proven that the money was ill-gotten. He asked if there would there be some advantage gained by these individuals if the legislature passed this bill. MR. BRUNDIN answered that he didn't see it. Number 324 REPRESENTATIVE VEZEY pointed out that this type of trust especially protects assets against an irresponsible beneficiary. This type of trust helps protect assets for multiple generations. REPRESENTATIVE BUNDE added that this trust also provided an opportunity to trade control of money for a guarantee of it's sanctity. Number 411 REPRESENTATIVE FINKELSTEIN stated that he still had a sense that there is another side to this issue. With the limited witnesses, he said it was hard to determine what this other side was. He asked if someone from the administration would be testifying. He went on to use the example of bankruptcy in lieu of setting up this type of trust. He wondered if someone could knowingly set up one of these trusts as a way to avoid creditors. CHAIRMAN PORTER reminded Representative Finkelstein of the legislation they dealt with last session regarding the Uniform Fraudulent Transfers Act, regarding these types of issues. One of the disagreements related to this legislation was whether it should be considered a fraudulent transfer when someone puts money into a trust and an obligation was incurred after this deposit. It was generally agreed that no, it shouldn't. If someone puts this money into a trust for the stated purpose of the trust, some future event should not allow this person to be penalized. The same thing applies here. In the instance of drug money, the proof required should be whether the money is tainted, not the strength of the trust. Number 555 REPRESENTATIVE FINKELSTEIN again used the example of someone in a high risk business venture who gets out from under their obligations by setting up a trust such as the one outlined. This issue is very complex and he was convinced that there was still a downside to this legislation. Number 592 REPRESENTATIVE TOOHEY stated that she chose not to believe that every trust transaction is between a bank and a drug dealer. There are people out there who are making legitimate, good, honest money that want the security of a trust like this. REPRESENTATIVE FINKELSTEIN noted that in order to figure out how something can be misused, someone needs to look at the worse case scenario. He stated that they didn't want to set up a situation for people trying to avoid proper responsibility. CHAIRMAN PORTER stated that proper notice had been given on this legislation in order for individuals to testify, including the respective state departments. Number 645 REPRESENTATIVE FINKELSTEIN also noted the lack of a fiscal note from the Department of Commerce. He noticed that there was one from the Department of Law though. REPRESENTATIVE VEZEY responded that the request for a fiscal note was transmitted to the legislative liaison and governor in accordance with the practices established by the government. Number 674 REPRESENTATIVE FINKELSTEIN said that they do require fiscal notes from the affected agency regardless of a procedure breakdown. CHAIRMAN PORTER added that the Department of Administration decides which agencies are affected by a particular bill. REPRESENTATIVE FINKELSTEIN asked what department deals with Section 13. MR. THWAITES stated that the probate code, trusts and estates, etc. is handled by the Department of Law and legislation which affects banks, etc. comes under the jurisdiction of the Department of Commerce. Number 755 REPRESENTATIVE FINKELSTEIN offered an amendment to this legislation to insert the word "majority" instead of "some or all" on page 2, line 11 and page 3, line 1. He stated it seemed that if only one percent is required that it's a sham. There should be some sort of minimum in the inclusion of assets in Alaska. REPRESENTATIVE VEZEY commented that this would be counterproductive to the intent of the bill. He noted that they were not here to act as financial advisors as to where these funds should be invested. Number 820 MR. THWAITES added that there was a reason behind using the phrase "some or all" because there are families that have rather large estates including large office buildings, etc. Since this real estate for example, could not be moved to Alaska and since real estate is a potential asset, hence the phrase "some or all" was crafted. This is why they allowed for the major administration of these trusts be required in the state of Alaska, meaning for the purposes of fees, any asset, including real estate would be used to compute the fees an Alaska trustee would receive. Number 955 REPRESENTATIVE FINKELSTEIN withdrew his amendment. Number 1021 REPRESENTATIVE VEZEY made a motion to move CSHB 459(JUD) from the House Judiciary Committee with individual recommendations and fiscal notes as attached. Hearing no objections it was so moved. REPRESENTATIVE FINKELSTEIN noted for the record that he clearly has the least experience with this legislation and the least confidence in understanding what they are doing with it. He said he would attempt to further understand this legislation as it proceeds.