Legislature(2003 - 2004)
04/14/2003 01:01 PM Senate JUD
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 87-PRINCIPAL AND INCOME
MR. BRIAN HOVE, staff to Senator Seekins, explained that SB 87
updates the Principal and Income Act of 1984. It provides rules
for the determination of whether trust or estate receipts should
be considered income or principal.
CHAIR SEEKINS said this bill would bring Alaska to the very
cutting edge of how trusts can be managed to give more
flexibility to the trustee. He noted the summaries from legal
services that would be useful for the committee to read.
MR. DAVID SHAFTEL said he is part of an informal group of
attorneys and trust officers that have spent the last six years
working to improve trust and estate statutes for Alaska
residents primarily, but also for non-residents that want to use
Alaska law in their estate planning. He pointed out that other
states have actually copied Alaska statute. SB 87 is Alaska's
version of the 1997 Uniform Principal and Income Act that was
adopted in 1962. The 1997 version has been enacted by about 30
other states and five other states are pending. This version is
modeled after the Pennsylvania version.
The new version adds a modern business entity tax investment
concept to the 1962 act. One of the general problems in the
principal and income area is that often trusts have been
designed so that the income of the trust would be paid out to an
income beneficiary(s) and the principal of the trust would go to
other beneficiaries at a later point. However, there is a built-
in conflict with that type of a structure. The trustee gets
pressure from the income beneficiaries to invest in income
producing assets and also gets pressure from the remainder
persons to invest in equity assets that will grow the remainder
and hold down what is distributed as income.
The new version enacts several remedies to this problem. The
first is "the power to adjust," which allows the fiduciary to
invest the assets of a trust to maximize the total return. If
too little income is produced because of this process, the
fiduciary has the power to adjust by taking some of the
principal and allocating it as income.
The second remedy is to convert an income producing trust to a
modern type of trust called a unitrust. A unitrust doesn't
simply pay out the income earned because it defines income as a
percentage of the total assets of the trust as it is valued each
year. That percentage can be varied if the trustee goes to court
and asks for approval for a different percentage; a beneficiary
can do the same. Four percent is considered a neutral amount
that would allow growth of the principal and also provide a
larger distribution to the income beneficiary.
SENATOR ELLIS arrived at 1:12 p.m.
SENATOR THERRIAULT asked if the unitrust uses a percentage
market valuation methodology.
MR. SHAFTEL replied that is correct.
SENATOR THERRIAULT asked how moving principal to income would be
overseen.
MR. SHAFTEL replied the concept is that if there is a strong
equity market, the trustee could get a better overall return for
both the income beneficiaries and the remaining persons by
investing the entire estate in equities. The equities could grow
in one year, but it would all be unrealized growth with no
income. The trustee would set a fair percentage for distribution
to the income beneficiaries as income. Certainly, the
beneficiary has the discretion to review.
SENATOR THERRIAULT asked if the income beneficiary would have to
sell the equity instrument to realize the income.
MR. SHAFTEL replied yes.
SENATOR OGAN said the new language on page 2, line 1, "Shall
administrate a trust or estate in accordance with the governing
instrument even if there is a different provision in this
chapter." looks like a blank check.
MR. SHAFTEL explained many of the provisions are default
provisions and allow the leeway for the person creating the
trust to draft it with different rules. The default rules are
designed by the Uniform Commissioners to answer questions that
haven't been answered in the trust instrument; it's not that
there would be abuse.
SENATOR OGAN said language on page 2, lines 6 - 8, is more
troublesome. It reads: "An inference that the fiduciary has
improperly exercised the discretionary power does not arise from
the fact that the fiduciary has made an allocation contrary to
the provision of this chapter."
That appears to mean that if someone accuses a fiduciary of
improperly exercising the power that's contrary to this chapter,
they are not guilty.
MR. SHAFTEL explained they are saying your trust allows for
different rules and discretion is exercised under those
different rules. The mere fact that there's a Uniform Act that
provides the rules does not establish that your trustee
following the rules in your trust has abused his or her
discretion. It goes back to the default concept that we're going
to provide reasonable rules it you don't have any.
This bill has one subject that deals with the tension between
income and principal beneficiaries and the other provisions deal
with a variety of different kinds of receipts and disbursements
and provide default rules.
MR. RICH HOMPESCH, trust and estate attorney, expressed support
for SB 87 and agreement with Mr. Shaftel's testimony.
MR. STEVE GREER, attorney stated support for SB 87. He said the
current act governs wills and this legislation would establish
rules governing revocable trusts. This is needed because the
nationwide trend is to use revocable trusts in estate planning.
MR. PETER BRAUTIGAM a trust and estate attorney supported SB 87
saying this has been long overdue.
MR. JONATHAN BLATTMACHR said he is a member of the Alaska,
California and New York Bars and practices primarily in New
York, but does a fair amount of practice in Alaska as co-
counsel. He supports SB 87 describing it as a much more flexible
act that has been designed to coincide with the modern theory of
portfolio management.
SENATOR THERRIAULT motioned to pass SB 87 from committee with
individual recommendations. There was no objection and it was so
ordered.
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