Legislature(1997 - 1998)

05/01/1998 01:20 PM JUD

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
txt
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.              
                                                                               

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