Legislature(1997 - 1998)
04/18/1997 03:21 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 199 - COMMUNITY PROPERTY Number 865 VICE CHAIRMAN COWDERY announced the committee would hear HB 199, "An Act relating to the property, transactions, and obligations of spouses; relating to the augmented estate; amending Rule 301, Alaska Rules of Evidence; and providing for an effective date," sponsored by Representative Ryan. Number 889 REPRESENTATIVE RYAN informed the committee that HB 199 will allow an option in Alaska of people by signing a good faith agreement to take some or all of their assets and place them in community property status. The basic law of Alaska will remain individual property and this is strictly an option. He informed the committee that there are advantages to taking this option. Representative Ryan said, "If you have some assets with unrealized gains and you know that if you sell these assets you're going to pay the maximum capital gain tax of 28 percent and you decide rather than do that, you have a good relationship, you plan on living together until you die - you're wife and husband. When one of the partners dies, the basis is what for the value of the asset is that in which it was purchased and any appreciation of that, on behalf of the estate of the person who died, has no tax liability. So that asset can be sold, the gains realized without paying the federal government any taxes. Also, for the surviving spouse, their half of the estate, their half of the wealth of that assets gets the same step up in basis with no tax liability. So this is a provision in the law that goes back to I think 1932, with the Simons case that was argued before the supreme court that community property states now enjoy. Unfortunately, most community property states, there are nine of them, make community property mandatory. There are a lot of people, especially in this day and age, who don't for some reason or another don't spend their lives together and when they get divorced, there is a lot of acrimony because of the value of the assets and what the distribution splits will be and so forth. Community property provides -- to have community property provides that each partner in the marriage owns half of whatever is there. So that if there were a disillusion of a marriage, the judge would award 50 percent here, 50 percent here, it's a done deal. There is no reason for anybody to sit and argue about what the value is or that one partner should get more than the other or less than the other or however these things go in family law. This is a thing of community property - says, `Boom, you get half and half' and there is no other way you can do anything about it. We've talked to Judge Karen Ott and she says that she already does a lot of litigation on this because people come from other states that are community property states and they have acquired an asset in that state so that when a divorce comes along, the court already deals with community property because the property having been acquired under community property or if there is a dissolution of marriage, it still has to be divided as community property. So the courts are well familiar with this. It's not going to cause a problem to anyone. "We can allow, thorough the passage of this legislation, people who live in the other 41 states that don't have a community option to create a trust in Alaska under the generous trust laws that we just passed and signed by the Governor April 1, to take assets and to put them in a trust in Alaska and denominate the `miscommunity' property so that they will, in fact, have the advantage of a step up in basis and we will have the advantage of managing those assets and/or at least administrating them which I believe will be a good opportunity to bring capital to Alaska for investment and, if nothing else, the management and the administration fees will be quite substantial. So what we're doing is we're bringing in environmentally clean business. We have no downsides. We're going to put a lot of people to work. If you don't particularly like the state planning attorney and/or accountants, then you may have a problem with this bill, but other than that you ought to remember these people make substantial amounts of money and they're going to spend it in the communities where they live and that is going to go to provide jobs in many other related businesses. So we have everything to gain on this piece of legislation and really nothing to lose because we're not requiring anybody to do anything. We're offering people a choice. With that, I conclude my testimony. There are some people that are much more knowledgeable about this than I, I think on teleconference, and perhaps they can explain it a little better." Number 1170 JONATHAN BLATTMACHR, Partner (Attorney at Law), Milbank, Tweed, Hadley and McCloy, testified via teleconference from Anchorage. He informed the committee he is a member of the Alaska, California and New York Bars and practices in all three jurisdictions. He said the thinks Representative Ryan did an excellent job of explaining the bill. It is purely a voluntary system. If the husband and wife care to they can enter into the agreement and they can designate all of their assets or specify which ones they want treated as community property. That means they will own 50/50 and in the event of death or divorce, it will pass 50/50 to each of them. When they die, the surviving spouse will receive an exceptionally good tax break. He said it is a great thing to enact. Number 1231 BOB MANLEY, Attorney at Law, testified via teleconference from Anchorage. He noted he is member of an Anchorage law firm, Hughes, Thorsness, Powell, Huddleston and Bowman and has been working in the estate planning and probate area for approximately 20 years. He said he thinks HB 199 is a great bill because freedom and flexibility of property ownership will be provided. People can opt in to the community property regime and take advantage of the income tax benefits. He said by passing the bill, the legislature would be providing freedom and flexibility of arrangements to people because they could say in a community property agreement that property will be divided in some other fashion or in divorce court if that ever happened (indisc.). People are being given more options. Mr. Manley said it will be good for commerce in Alaska because he thinks it will bring in more trust activity. He referred to the Trust Act and said there is a requirement that any community property trusts for non-Alaskan residents have an Alaska trustee with some portion of the administration in Alaska. Alaska should see more activity in the trust area and the formation of new trust companies. He urged the committee to support the legislation. Number 1330 DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska Trust Company, testified via teleconference from Anchorage. He said his organization totally supports HB 199. Mr. Blattmacher said he and his wife just moved back to Alaska and would like to have the option of their property being considered as community property to take advantage of the taxing. Number 1355 REPRESENTATIVE HUDSON said he believes this has a selective option capability as well. He asked if he is correct in saying that a couple could select any portion of their assets to be owned by this community allowance. MR. BLATTMACHR said that is correct. They could opt for any amount, any particular piece of property or all of their property. REPRESENTATIVE HUDSON asked if this occurs in any other state. MR. BLATTMACHR explained in other states where they have it, the spouses can elect out. They can elect for certain assets to be elected out, but HB 199 provides for an election which provides much less turbulence with respect to property rights and provides a lot more flexibility. In the states where community property currently exists, a husband and wife may agree to a separate the property regime rather than have community property for all their assets or for specifically identified ones. Number 1425 VICE CHAIRMAN COWDERY asked whether the property could include escrows or stocks. MR. BLATTMACHR explained it can include any assets such as stocks, bonds, a home, commercial real estate, et cetera. He noted one of the great advantages is that often people who have real estate have taken depreciation deductions which are provided for under the income tax law. By the time the first spouse dies, the basis is extremely low and yet the survivor will still have a very large potential income tax liability. He said, "If the husband died, and the husband and wife have owned the asset and half is included in the husband's estate, the wife is stuck with her extremely low basis. In fact it can, in a tax sense, actually be less than zero. But by electing for it to be community property, when the first spouse dies, 100 percent of the inheritance profit is forgiven, so the surviving spouse can turn around and sell it without any capital gains tax at all." Number 1507 RICH HOMPESCH, Attorney at Law, testified via teleconference from Fairbanks. He noted he has been an attorney in Alaska for almost 13 years and practices in the area of probate, estate planning and taxation. Mr. Hompesch said when he was in law school and first learned about the difference in income tax treatment between community property and non-community property, he never did understand the reason why there is such a difference and nobody has been able to explain it to him. Mr. Hompesch said he thinks there is an injustice in the tax code. Surviving spouses in Alaska will pay more income taxes than surviving spouses in California, Washington and the other community property states. He said HB 199 corrects this injustice and allows Alaskans to elect certain (indisc.) community property. Mr. Hompesch said in his estate practice, about 85 percent of time he represents women who are surviving spouses. This legislation will help those women save in income taxes. He noted the clients that he has discussed this bill with like it. Mr. Hompesch urged the committee to pass HB 199. Number 1600 LINDA HULBERT, Insurance Agent, New York Life Insurance Company, testified via teleconference from Fairbanks. She noted she was an educator in Alaska for 20 years and has been a life insurance agent for the last 8 years. Ms. Hulbert told the committee that she spends a lot of her time helping people plan for retirement, in that she writes wills to help them plan to protect themselves against risk. Many times there aren't a lot of assets and there is the concern about what is going to happen to the second spouse. With life expectancies extending, what is going to be there to help a second spouse upon the death of a spouse. She said the bill presents a tremendous opportunity to help both people with significant assets and those people who do not have many assets. Ms. Hulbert said she would like to urge the committee to pass the legislation because she feels it is very important for all Alaskans, no matter what their income level is. VICE CHAIRMAN COWDERY asked whether anybody else wished to testify. There being no further witnesses to testify, he called for a brief at-ease at 3:55 p.m. The meeting was called back to order at 4:00 p.m. Number 1673 REPRESENTATIVE BRICE made a motion to move HB 199 out of committee with the zero fiscal notes and individual recommendations. Hearing no objection, HB 199 was moved out of the House Labor and Commerce Standing Committee.
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