Legislature(1997 - 1998)
05/01/1998 01:20 PM JUD
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 196 - WILLS, TRUSTS, & OTHER TRANSFERS Number 0876 CHAIRMAN GREEN said the committee would take up HB 196, "An Act relating to wills, intestacy, nonprobate transfers, and trusts; and amending Rule 24, Alaska Rules of Civil Procedure." He called on Representative Ryan to come before the committee. Number 0876 REPRESENTATIVE JOE RYAN, Alaska State Legislature, said since the hearing on HB 196 last evening, he had contacted people much more knowledgeable on this issue who would be presenting their comments today. Number 0914 RICHARD THWAITES, Chairman, Alaska Trust Company, came before the committee and said he would attempt to respond to some of the questions raised in the committee hearing the previous evening. He noted that someone had handed him something referred to as cliff notes to which he was supposed to respond. He said, "The first one that was opened was on page 15, the top of the page, there was apparently on line 1, intent to strike the words 'and not individually liable' following the word 'trustee' or 'the words', then leaving just the designation as trustee after the signature of a trustee to a contract constitutes prima facie evidence of an intent to exclude the trustee from personal liability and the trustee is not personally liable under the contract." His first comments, directed to the deletions, were, "When as an attorney or whenever we're looking at a particular statute or something like that, and we see the generally accepted terminology, such as if you sign off on a document 'a trustee' or 'as personal representative' that identifies the fiduciary capacity of the individual involved. Very often however, when a judge or someone else looks at this document, the judge will say 'gee, the legislature went one step further to require something additional.' This other language which Representative Porter and I have discussed is to me sort of -- it's kind of like a little consumer red flag there of sorts - that it suggests that maybe there is some real specific intent here. MR. THWAITES continued, "Let me digress a little from that and step back to comment on the Alaska Trust Act and how all of that came to pass last year. This bill is sort of a follow-up to that bill and they've been trying to implement various portions of the probate code in the trust statutes to make it more amenable to implementation by people outside of the state of Alaska. Our intent being to perhaps attract a great deal of revenue in the form of some of the offshore trusts and the like. In doing so, we have found some (indisc.) by the lawyers and trust companies outside the state saying this is a good idea - just how firmly behind this is the state - what traditions are there and so forth that might do that and in particular, the one issue that is raised most often is the full faith and credit clause of the Constitution. This is a clause of the U.S. Constitution that says that a judge in the Texas court down there has to apply Alaska law with regard to an Alaska trust for a Texas resident that is using an Alaska trust. And our thought here would be that gee, for that judge if the legislature stated pretty clearly over and above just the normal kind of language you would see, this is a pretty clear indication of what was intended and that this liability did mean to exclude that. Further, we used originally the word irrebuttable evidence because that is just a flat brick wall - there is no discretion. If we change it to prima facie - and I agree as an attorney certainly prima facie is a more reasonable standard - but it permits the judge to have discretion on what's happening and how it's going to be. The judge has a great deal more leeway interpreting Alaska law if there is some discretion on his part down in Texas to look at this -- and I don't mean to pick on Texas, it's just that was the state I lived in before I came here when I was a little kid -- but that was one of the intents for using that much, much stronger standard. And I agree it is a very, very strong standard. We did the same essential thing last year with HB 266." MR. THWAITES said in HB 266 a standard was set for the court to dissolve a limited liability company only if was impossible to continue the business. The idea was to take the discretion away from the court so the court can't use the other standard, which is it's just impractical to do this and therefore the judge could step in and do that. He said the reason for many of these things is the Internal Revenue Service interprets all of its provisions for whatever it does based on state law, so the IRS's own statutes - the Internal Revenue Code says that anyone interpreting an Alaska trust must apply Alaska state law. He explained that by having that stronger standard in HB 266, that imposed on the IRS the duty to use that standard for valuing those assets which in a family limited partnership or family limited liability situation, it means less tax to the IRS and more money to the taxpayer in the form of the transition to the other person. He said, "Now, our bill did not require that of anyone doing this. In fact we assume as planners that - where it's my family and I doing the planning - we're going to use that stricter standard. But if myself and another partner from a different family - we're probably going to use the impracticability standard because we're going to want one where it's between two families and we have that freedom of flexibility." He explained it was because of those rules that the stronger standards were adopted and this is sort of a continuation of that. MR. THWAITES stated that it is possible to use prima facie and it works. It does give the judge a little more discretion if the judge in some other jurisdiction is going to interpret what the Alaska law means. Number 1257 REPRESENTATIVE PORTER commented that apparently there had been a misunderstanding with the drafter because the language in the proposed draft is not what was discussed. He said he would not have had a problem with wording that said signing as trustee is prima facie and signing as trustee not individually liable (indisc.) under the standard of irrefutable, but for some reason the drafter put them both as irrefutable which doesn't make any sense. REPRESENTATIVE CROFT said he understands the distinction that's being made, but it was being compared to the limited liability company statute where a high standard had been set where it can't be dissolved unless it's impossible to continue its business, but it's still a judge determining impossible based on all the evidence presented. In this case, there's a determination of intent where the judge is not allowed to weigh any evidence, not matter how compelling. It appeared to him there's a great difference between setting a high standard and allowing evidence whether it meets that very high standard and simply allowing no evidence at all. It seems common that standards are set at various levels and sometimes set a very high standard, but it's extremely rare to say irrefutable, irrebuttable evidence - in fact that may be an oxymoron. MR. THWAITES said he thought Representative Croft was right. He added, "Even when you say irrebuttable evidence, there are still determinations that can be made by the court vis a vis whether or not they've met the standards once within that year. I believe that at least in this initial thrust here that we're doing, we did try to go to the strictest one we could find thinking it would help us in encouraging other trustees to co-trustee and bring their business to the state and so forth if they knew much of this language was focused at fixing, very definitively, that liability." REPRESENTATIVE CROFT remarked there's preponderance, clear and convincing, and beyond a reasonable doubt, but this can be every doubt in the world, but a judge will not hear it. He noted that usually in the civil areas, clear and convincing is used when the ante is upped another notch, which he wouldn't have a problem with. He does, however, have a problem with no evidence at all. MR. THWAITES said he thought there was somewhat the same concept with self-proving wills. CHAIRMAN GREEN asked, Dick, on that point if you were the client and I were the attorney putting this together, would you sign something they've made an irrebuttable (indisc.). MR. THWAITES replied, "Yes, I might very well do that - I might do that because I know that you have a fiduciary obligation to me and that in your fiduciary obligation to me as the trustee, you're going to have to do these certain things, but I wouldn't want outside interests or other heirs that I wanted to write out of the will or other parties to come back in and make a challenge. I'd want to make it extremely difficult and I would want to lock it up as well as I could. And in hiring you as the attorney to do so, I really do want you to make it as ironclad as I can." Number 1585 REPRESENTATIVE JAMES asked if she was correct that because the trust is so tight in this case, any kind of conflict will be aimed at the trustee? Is that one of the reasons such strong protection is needed for the trustee? MR. THWAITES said yes, it is that the trust is often where the money is located. He added, "Common law you may recall or not recall - equity versus the law - they wouldn't allow access and we've basically adopted old English common law rules, so we have the at law provision and the equity provision. The equity provision is what prevailed and allowed us to go after the trustee and then the trustee turns around and seeks reimbursement from the trust later on." He thought it was that historical quirk that has necessitated this all these years. As a follow-up to Chairman Green's earlier question, he said there are some existing trusts where he wouldn't give this kind of release. Number 1713 REPRESENTATIVE BERKOWITZ referred to the irrebuttable standard and asked if that would preclude a determination based on equity where the contract could be voided or exclude liability? MR. THWAITES' response is indiscernible. REPRESENTATIVE BERKOWITZ said, "This is a form of contract action and we're distinguishing this type of contract action from other types of contract action for policy reasons, but if you're entering the trust, the contract would normally be voidable for duress or fraud and in a normal contract you could get back at that evidence. But if you have that rebuttable standard, it seems insurmountable." MR. THWAITES said he believed the irrebuttable standard only goes to the personal liability of the trustee, not to the underlying (indisc.) the trust. REPRESENTATIVE BERKOWITZ said if there's no personal liability, there's no disincentive. MR. THWAITES replied, "I think that in this particular section, this is on a contract - an action on a contract against the trustee in their representative capacity and we're not doing anything with regard to the trustee in the representative capacity. In other words, they are still liable in that representative capacity; they're just not personally liable so we wouldn't go back to the trustee and say out of the trustee's personal assets, the trustee must reimburse in this particular action." He said the most notorious case on this is an environmental case in New Jersey where the trustee was held liable for the environmental clean-up costs personally and those costs exceeded the value of the estate by some $2 million. Suddenly, all the trustees said "no more land" and in fact we're still operating in a large part today with the demeanor that they will not handle a trust where there is land or real estate involved without all of these disclaimers and so forth involved. REPRESENTATIVE BERKOWITZ remarked it seemed to him that prima facie affords the trustee (indisc.) protection and that would seem to qualify as adequate for the policy consideration (indisc.). MR. THWAITES said he believed it does and as he mentioned previously, he thinks that standard of prima facie is okay. Number 2031 REPRESENTATIVE PORTER said, The way it's configured right now, it's just dealing with the signature as trustee. Considering that that generally is meant to indicate the lack of personal liability, would the standard of - instead of rebuttable - clear and convincing would be helpful?" MR. THWAITES said it's better than the prima facie evidence. Number 2090 REPRESENTATIVE PORTER made a motion to delete "prima facie" and insert "clear and convincing" on page 15, line 2. CHAIRMAN GREEN asked if there was objection to the amendment. Number 2140 REPRESENTATIVE CROFT offered a friendly amendment to read, "constitutes evidence of the intent to exclude the trustee from personal liability that may only be overcome by clear and convincing evidence to the contrary." MR. THWAITES said he would defer to the drafter of the legislation. Number 2218 REPRESENTATIVE JAMES asked if that could be considered a conceptual amendment? REPRESENTATIVE CROFT said, "I would conceptually be deleting irrebuttable and putting in the idea that it can only be overcome by clear and convincing evidence. So, I guess technically, that's a friendly amendment to Representative Porter's amendment." CHAIRMAN GREEN asked if there was objection to the friendly amendment to the amendment? REPRESENTATIVE JAMES wondered if this would be drafted by the drafter in Legislative Legal Services. CHAIRMAN GREEN assured her it would be the intent for the drafter. There being no objection, Amendment 1 was adopted. Number 2280 REPRESENTATIVE RYAN remarked, "From reading this, this is purely discretionary thing on the part of the person who set up the trust (indisc. - coughing) and what they're basically saying by absolving the trustee of the liability is that I'm willing to have my trust be responsible for the action, not the trustee." Number 2366 REPRESENTATIVE JAMES said she didn't think the maker or the owner of the trust is necessarily involved in this contract. MR. THWAITES explained this is an action against the trustee in its representative capacity and this language can be used in the document to make sure the trustee is not going to be held personally liable. He added if that language is used, then it is an rebuttable presumption that can't be switched around. REPRESENTATIVE PORTER noted, "But in the beginning of this, it is that when a trustee makes a contract that is within the trustee's powers as trustee, so he is the trustee and now he's making a contract with trust funds with a third party ...." MR. THWAITES said the second comment .... TAPE 98-80, SIDE A Number 0001 MR. THWAITES ... which was a clarification of the diminution in value or increase in value of a trust through a tort action by the trustee on page 15, line 11. He noted that it had been suggested adding in that if a trustee has incurred personal liability for a tort committed in the administration of the trust and that tort increases the value of the trust property. He said that is a clarification that he certainly has no problem with. It's a clarification and the intent is that if for some reason there is an increase in the value, the trustee has the right to use that increase to pay off that liability of that tort. If there is an excess amount of liability, the trust still keeps the amount; it doesn't go to the trustee. If there is an insufficient amount, the trustee presumably still has an obligation to kick in for the insufficiency. But it leaves the trust in the whole capacity - potentially with a profit if the tort was not adequately compensated by the (indisc.). Number 0129 REPRESENTATIVE CROFT asked what kinds of tort increase the value of the trust property? MR. THWAITES said clearing off a piece of real estate without the right or authority to do it, might be example, where then because it was cleared the land became worth more, but there was a covenant in the restrictions that the land couldn't be cleared to the detriment of the other owners and for some reason the land now became worth $10,000 or $15,000 more because it was ready to be used. Number 0274 REPRESENTATIVE ROKEBERG referred to Section 13.36.195 on page 16, regarding whether a trust could be created by an oral statement and asked Mr. Thwaites to comment. MR. THWAITES said, "We do have and can have what's referred to as an instructive trust which is very often either by action or oral conduct of parties." REPRESENTATIVE RYAN pointed out a number of rural communities don't have the facilities for an attorney to establish a trust and people make oral wills and oral trusts under the circumstances and they're acted upon on the basis that they're oral. Number 0441 REPRESENTATIVE ROKEBERG said he didn't think there were any provisions for an oral will in Alaska. MR. THWAITES responded yes, there is under a military circumstance. For example, a wounded soldier can make an oral will in the presence of two witnesses. REPRESENTATIVE ROKEBERG clarified there are no oral wills provided other than the exception given by Mr. Thwaites. There are, however, oral trust covenants. MR. THWAITES said yes, it is possible to create an oral trust - the actual term is a constructive trust - and there's a real evidentiary question because you've got to have clear and convincing evidence that there was a trust established. It's not an easy thing to do. REPRESENTATIVE ROKEBERG asked if a dying declaration would be an example of that and is there any case law? MR. THWAITES didn't believe there was any case law. He said there was an attempt in the 1994 uniform probate code revisions to adopt a will and a trust format like this, but it was not adopted by this legislature at the recommendation of the probate section of the [Alaska] Bar Association and a few other people. REPRESENTATIVE ROKEBERG asked, "Doesn't this provision allow that (indisc.) Are we not expanding significantly here our trust law to allow that? MR. THWAITES said he didn't believe this is expanding what's already there. REPRESENTATIVE BUNDE asked if an oral trust could possibly be considered one that was created and recorded electronically on a video tape? Number 0646 MR. THWAITES replied, "Actually the video is on the verge of being an admissible document now days and the video will for example, we normally to cover ourselves will go ahead and write a written document and then on the video confirm that for purposes of clarifying capacity and what the intent of the party was." He said the courts have discussed the possibility of accepting faxes and other electronically transmitted devices as a mechanism for filing in order to speed things up. REPRESENTATIVE ROKEBERG reiterated his concern because of the reference on page 16, line 25, that says, "by oral statement to the trustee at the time of creation of the trust if the trust is created orally" which implies there's a legal oral trust. He asked if there was any authorization for that in statute or case law. MR. THWAITES said he didn't think there was any case law in this state, but there is case law in other states. He added, "In fact, we've used the constructive trust format in real estate contracts and other situations where it was an oral agreement - we were able to get by the statute of frauds somehow." REPRESENTATIVE ROKEBERG inquired if there is any prohibition in Alaska's statute of frauds about the creation of a trust other than deeds of trust regarding real estate. MR. THWAITES said the statute of frauds has a list of types of documents that require that certain evidence is excluded if you don't meet the requirements of the statute of frauds. He added it can be met by something less than a formal trust document - it can be met by something on a napkin, for example, or in the form of perhaps a dying declaration there are exceptions to the rule. He couldn't specifically recall any at the moment. Number 0805 REPRESENTATIVE ROKEBERG asked if Alaska's statute of frauds specify that a trust be established in writing? MR. THWAITES didn't know specifically. REPRESENTATIVE ROKEBERG was of the opinion that question needed to be answered before any action was taken on this legislation. He asked if there was any language in HB 196 that provides that Alaska could accept the provisions of another state's law in order to administer the trust according to the law of that jurisdiction about effecting our law in the state of Alaska? MR. THWAITES said there was nothing in HB 196; he believed it was contained in Article XIV of the U.S. Constitution. He further stated the holographic will is valid in Alaska so if an Alaskan makes a holographic will here and dies a resident of the state of Washington, the state of Washington which does not recognize holographic wills, will recognize the Alaska will in that instance. REPRESENTATIVE ROKEBERG said it appeared to him that probably the rationale for doing this is to make sure (indisc. - mumbling). MR. THWAITES replied, "Well, I guess the limitation in (a) relates to only the provisions of (1), (2) and (3) of this section. It says an (indisc.) settlor may not relieve a trustee from the duties, restrictions and liabilities imposed in the other section, so we're talking only about duties and restrictions and liabilities imposed by the trustee under 36.105 - .295 -- or altering or denying the trust any or all the privileges and powers conferred in those same sections or adding duties, restrictions, liabilities, privileges, or powers, to those same sections - and I believe those are the sections in the provision that relate to those general powers." Number 1015 REPRESENTATIVE BUNDE said, "On this point, I'm not sure why you would want the oral provision, but as has been frequently stated, there's always a huge case of proof if you attempt to use this oral provision. So I don't see that we're creating a problem - creating victims. You can't take care of every extenuating circumstance in statute and if this is some remote possibility that they need, knowing well that's it's going to be almost impossible to prove - or very difficult at least - I'm not having a problem, but Representative Rokeberg is having one and I'd be willing to look to an amendment on the floor if ...." REPRESENTATIVE ROKEBERG commented he didn't want to hold the bill up. Number 1082 REPRESENTATIVE PORTER made a motion to move CSHB 196 as amended with individual recommendations and attached fiscal notes. CHAIRMAN GREEN asked if there was objection. Hearing none, CSHB 196(JUD) passed from the House Judiciary Standing Committee.