Legislature(1997 - 1998)
04/23/1997 01:00 PM House JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE JUDICIARY STANDING COMMITTEE
April 23, 1997
1:00 p.m.
MEMBERS PRESENT
Representative Joe Green, Chairman
Representative Con Bunde, Vice Chairman
Representative Brian Porter
Representative Norman Rokeberg
Representative Jeannette James
Representative Eric Croft
Representative Ethan Berkowitz
MEMBERS ABSENT
COMMITTEE CALENDAR
SENATE BILL NO. 19 am
"An Act relating to enforcement of federal laws relating to fish
and game; and repealing the power and duty of the commissioner of
fish and game to assist in the enforcement of federal laws relating
to fish and game."
- MOVED HCS SB 19(RES) OUT OF COMMITTEE
HOUSE JOINT RESOLUTION NO. 25
Proposing amendments to the Constitution of the State of Alaska to
guarantee the permanent fund dividend, to provide for
inflation-proofing, and to require a vote of the people before
spending undistributed income from the earnings reserve of the
permanent fund; and relating to the permanent fund.
- HEARD AND HELD; SCHEDULED EXECUTIVE SESSION
HOUSE BILL NO. 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."
- HEARD AND HELD
* HOUSE BILL NO. 163
"An Act relating to designating gamma-Hydroxybutyrate as a schedule
IVA controlled substance; and providing for an effective date."
- SCHEDULED BUT NOT HEARD
* HOUSE BILL NO. 234
"An Act relating to assistance for abortions under the general
relief program; and relating to financial responsibility for the
costs of abortions."
- SCHEDULED BUT NOT HEARD
* HOUSE BILL NO. 196
"An Act relating to wills, intestacy, nonprobate transfers, and
trusts; and amending Rule 24, Alaska Rules of Civil Procedure."
- BILL CANCELLED
(* First public hearing)
PREVIOUS ACTION
BILL: SB 19
SHORT TITLE: REPEAL FED ENFORCEMENT DUTIES/F&G COMSNR
SPONSOR(S): SENATOR(S) SHARP, Taylor, Donley
JRN-DATE JRN-PG ACTION
01/03/97 19 (S) PREFILE RELEASED 1/3/97
01/13/97 19 (S) READ THE FIRST TIME - REFERRAL(S)
01/13/97 19 (S) RES, JUD
02/05/97 (S) RES AT 3:30 PM BUTROVICH ROOM 205
02/05/97 (S) MINUTE(RES)
02/06/97 247 (S) RES RPT 6DP 1NR
02/06/97 247 (S) DP: HALFORD, TAYLOR, TORGERSON,
02/06/97 247 (S) LEMAN, GREEN, SHARP; NR: LINCOLN
02/06/97 247 (S) ZERO FISCAL NOTE (DPS)
02/19/97 (S) JUD AT 1:30 PM BELTZ ROOM 211
02/19/97 (S) MINUTE(JUD)
02/20/97 428 (S) JUD RPT 3DP
02/20/97 428 (S) DP: TAYLOR, PARNELL, PEARCE
02/20/97 428 (S) PREVIOUS ZERO FN (DPS)
02/21/97 (S) RLS AT 10:45 AM FAHRENKAMP RM 203
02/21/97 (S) MINUTE(RLS)
02/24/97 469 (S) RULES TO CALENDAR & 1NR 2/24/97
02/24/97 473 (S) READ THE SECOND TIME
02/24/97 473 (S) AM NO 1 OFFERED BY SHARP
02/24/97 473 (S) AM NO 1 ADOPTED Y14 N5 A1
02/24/97 474 (S) ADVANCED TO THIRD READING
UNAN CONSENT
02/24/97 474 (S) READ THE THIRD TIME SB 19 AM
02/24/97 474 (S) COSPONSOR(S): DONLEY
02/24/97 475 (S) PASSED Y15 N4 A1
02/24/97 475 (S) ADAMS NOTICE OF RECONSIDERATION
02/25/97 502 (S) RECONSIDERATION NOT TAKEN UP
02/25/97 502 (S) TRANSMITTED TO (H)
02/26/97 478 (H) READ THE FIRST TIME - REFERRAL(S)
02/26/97 478 (H) RESOURCES, JUDICIARY
04/10/97 (H) RES AT 1:00 PM CAPITOL 124
04/10/97 (H) MINUTE(RES)
04/17/97 (H) MINUTE(RES)
04/18/97 1167 (H) RES RPT HCS(RES) 2DP 4NR
04/18/97 1168 (H) DP: DYSON, OGAN
04/18/97 1168 (H) NR: WILLIAMS, GREEN, MASEK, HUDSON
04/18/97 1168 (H) SENATE ZERO FISCAL NOTE (DPS)2/6/97
04/21/97 (H) JUD AT 1:45 PM CAPITOL 120
04/21/97 (H) MINUTE(JUD)
04/23/97 (H) JUD AT 1:00 PM CAPITOL 120
BILL: HJR 25
SHORT TITLE: CONST. AM: PERM. FUND INCOME & DIVIDEND
SPONSOR(S): REPRESENTATIVE(S) AUSTERMAN
JRN-DATE JRN-PG ACTION
02/26/97 483 (H) READ THE FIRST TIME - REFERRAL(S)
02/26/97 483 (H) STATE AFFAIRS, JUDICIARY, FINANCE
03/11/97 (H) STA AT 8:00 AM CAPITOL 102
03/11/97 (H) MINUTE(STA)
03/13/97 (H) STA AT 8:00 AM CAPITOL 102
03/13/97 (H) MINUTE(STA)
03/15/97 (H) STA AT 11:00 AM CAPITOL 102
03/15/97 (H) MINUTE(STA)
03/17/97 688 (H) STA RPT CS(STA) 3DP 4NR
03/17/97 689 (H) DP: JAMES, HODGINS, DYSON
03/17/97 689 (H) NR: ELTON, BERKOWITZ, VEZEY, IVAN
03/17/97 689 (H) FISCAL NOTE (GOV)
03/17/97 689 (H) ZERO FISCAL NOTE (REV)
03/17/97 689 (H) REFERRED TO JUDICIARY
03/21/97 789 (H) CORRECTED STA CS SUBMITTED
04/21/97 (H) JUD AT 1:45 PM CAPITOL 120
04/21/97 (H) MINUTE(JUD)
04/23/97 (H) JUD AT 1:00 PM CAPITOL 120
BILL: HB 199
SHORT TITLE: COMMUNITY PROPERTY
SPONSOR(S): REPRESENTATIVE(S) RYAN, Therriault
JRN-DATE JRN-PG ACTION
03/18/97 736 (H) READ THE FIRST TIME - REFERRAL(S)
03/18/97 737 (H) L&C, JUDICIARY
04/18/97 (H) L&C AT 3:15 PM CAPITOL 17
04/18/97 (H) MINUTE(L&C)
04/21/97 1211 (H) L&C RPT 3DP 1NR
04/21/97 1211 (H) DP: RYAN, HUDSON, COWDERY
04/21/97 1211 (H) NR: BRICE
04/21/97 1212 (H) 2 ZERO FISCAL NOTES (COURT, DCED)
04/23/97 (H) JUD AT 1:00 PM CAPITOL 120
WITNESS REGISTER
JOSEPHINE HARDY, Legislative Secretary
to Senator Bert Sharp
Alaska State Legislature
Capitol Building, Room 516
Juneau, Alaska 99801
Telephone: (907) 465-3004
POSITION STATEMENT: Presented sponsor statement for HCS SB
19(RES).
DALE BONDURANT
HC 1, Box 1197
Soldotna, Alaska 99669
Telephone: (907) 262-0818
POSITION STATEMENT: Testified on HCS SB 19(RES).
JOHN GLASS, Colonel, Director
Division of Fish and Wildlife Protection
Department of Public Safety
5700 East Tudor Road
Anchorage, Alaska 99507-1225
Telephone: (907) 269-5509
POSITION STATEMENT: Provided department's position and answered
questions regarding HCS SB 19(RES).
CLIFF STONE, Legislative Assistant
to Representative Alan Austerman
Alaska State Legislature
Capitol Building, Room 434
Juneau, Alaska 99801
Telephone: (907) 465-2487
POSITION STATEMENT: Presented sponsor statement for HJR 25.
REPRESENTATIVE JOE RYAN
Alaska State Legislature
Capitol Building, Room 420
Juneau, Alaska 99801
Telephone: (907) 465-3875
POSITION STATEMENT: Sponsor of HB 199.
RICHARD S. THWAITES, JR., Attorney at Law
Law Offices of Richard S. Thwaites, Jr.
500 L Street, Suite 301
Anchorage, Alaska 99501
Telephone: (907) 277-1595
POSITION STATEMENT: Testified in support of HB 199.
JONATHAN BLATTMACHR, Partner
Milbank, Tweed, Hadley and McCloy
One Chase Manhattan Plaza
New York City, New York 10005
Telephone: (212) 530-5066
POSITION STATEMENT: Testified in support of HB 199.
RICHARD W. HOMPESCH II, Attorney at Law
Hompesch and Associates, PC
Denali Financial Center
119 North Cushman Street, Suite 400
Fairbanks, Alaska 99701
Telephone: (907) 452-1700
POSITION STATEMENT: Testified in support of HB 199.
LINDA HULBERT, Insurance Agent
110 Cushman Street
Fairbanks, Alaska 99701
Telephone: (907) 452-4400
POSITION STATEMENT: Testified in support of HB 199.
ACTION NARRATIVE
TAPE 97-61, SIDE A
Number 0001
CHAIRMAN JOE GREEN called the House Judiciary Standing Committee
meeting to order at 1:00 p.m. Members present at the call to order
were Representatives Green, Bunde, Porter and Rokeberg.
Representatives Croft, Berkowitz and James arrived at 1:05 p.m.,
1:06 p.m. and 1:15 p.m., respectively.
SB 19 am - REPEAL FED ENFORCEMENT DUTIES/F&G COMSNR
CHAIRMAN GREEN announced the first item of business was Senate Bill
No. 19 am, "An Act relating to enforcement of federal laws relating
to fish and game; and repealing the power and duty of the
commissioner of fish and game to assist in the enforcement of
federal laws relating to fish and game." A brief sponsor statement
had been presented on April 21, 1997.
JOSEPHINE HARDY, Legislative Secretary to Senator Bert Sharp,
presented the same sponsor statement given April 21.
Number 0130
REPRESENTATIVE CON BUNDE asked whether Ms. Hardy was addressing the
committee substitute passed out of the House Resources Standing
Committee.
MS. HARDY said yes. She advised members that back-up materials in
committee packets from the Department of Law and the Department of
Public Safety should be disregarded. Those addressed concerns
about a previous version of the bill.
Number 0208
CHAIRMAN GREEN asked: If this action is taken, does Senator Sharp
feel this will adversely affect reciprocity with the federal
government relating to their looking after the state's interests in
other areas?
MS. HARDY said the state has usually helped past the three-mile
limit, for example; that would not change. In other areas, taking
away this mandate will do no harm in working with the federal
government. It will simply give the commissioner discretion.
Number 0295
CHAIRMAN GREEN said his concern was more than the three-mile limit.
The state scratches the federal government's back in certain areas,
which the federal government reciprocates elsewhere. He asked
whether the sponsor had considered that this could irritate the
federal government into refusing to assist the state.
Number 0340
MS. HARDY replied that eliminating this statute does not mean there
will be no assistance by the state. That is only when state and
federal laws are in conflict.
Number 0365
REPRESENTATIVE BUNDE asked Representative Porter, "If a sworn
officer in fish and game observes a federal violation of fish and
game laws, isn't he, by his oath of office, duty-bound to act on
that observation?"
REPRESENTATIVE BRIAN PORTER replied that the officer would be
empowered to do so. However, policy can be set by the
commissioner. Noting that both the Department of Law and the
Department of Public Safety had expressed problems with the bill,
he asked whether representatives from those departments were
present.
CHAIRMAN GREEN advised members that Colonel Glass had not yet
joined the teleconference.
REPRESENTATIVE PORTER stated his understanding that the bill, by
deletion of this provision to return to common law, would allow a
state officer to enforce federal law if policy, time and
circumstance required it. Federal fish and game enforcement
officers and state Division of Fish and Wildlife Enforcement
officers get agreements throughout the state, informal and formal,
regarding mutual assistance; they often come to each other's aid in
the field. Representative Porter assumed it was not the intent of
the sponsor to interfere with those kinds of safety issues.
Number 0509
MS. HARDY explained that although both departments had problems
with a previous version of the bill, those concerns had been
satisfied through HCS SB 19(RES). Repealing the mandate simply
gives discretion to the commissioner in allowing the department to
enter into agreements, memoranda of understanding and enforcement
protocols. It removes the "hammer" if the department does not feel
comfortable or appropriate in assisting.
Number 0555
REPRESENTATIVE BUNDE asked whether this would preclude a state
enforcement officer from charging someone under a federal statute.
He noted that sometimes federal penalties are greater than the
state's, and it is possible to charge someone with violation of the
Lacey Act, which he understands to have no statute of limitations.
MS. HARDY said the answer would be no.
Number 0623
REPRESENTATIVE ERIC CROFT read from AS 16.05.050, which says, "The
commissioner has, but not by way of limitation, the following
powers and duties". He stated his understanding that they were
taking away the duty but not the power.
CHAIRMAN GREEN agreed. He indicated that he questioned whether by
removing that duty, they were also removing the power; but he noted
that apparently the sponsor's representative was saying no. He
then asked whether this removed power from the ADF&G and whether
if, in their normal, routine duties, ADF&G personnel find a
violator, they can still act if they so wish.
REPRESENTATIVE PORTER pointed out that the Department of Fish and
Game (ADF&G) contains biologists, whereas the Division of Wildlife
Protection enforces fish and game laws and regulations. He said
fish and game enforcement officers work for the federal government.
He acknowledged it is confusing.
REPRESENTATIVE BUNDE stated that he needed to have questions
answered by Colonel Glass.
Number 0760
REPRESENTATIVE ETHAN BERKOWITZ said he saw nothing in his packet
regarding what the Department of Law thinks of this. In
particular, he wanted to know the district attorneys' opinions.
MS. HARDY stated that the Department of Law's concerns have been
satisfied with the current version of the bill.
REPRESENTATIVE BERKOWITZ said he was concerned about the Criminal
Division's response. He asked whether they had addressed this.
MS. HARDY said no.
CHAIRMAN GREEN asked whether Representative Berkowitz wished to
offer the amendment included in the packets.
REPRESENTATIVE BERKOWITZ said no; he was withdrawing it.
Number 0826
DALE BONDURANT testified via teleconference from Kenai, saying he
was deeply involved in the subsistence priority issue. He referred
to the McDowell case and said the Alaska Supreme Court had found
that the subsistence priority cannot be determined by where
Alaskans reside. They had stated that the common use clause
imposes upon the state a duty to manage fish, wildlife and waters
for the benefit of all the people. The minimum requirement of that
duty is a prohibition against special privileges.
MR. BONDURANT said for the "Alaska fish and wildlife to continue to
manage and enforce these public resources, contradictive to this
ruling, is a violation of the supreme court findings and the
constitution of the state." He said one year ago, the Alaska
Federation of Natives (AFN) took a written position that they would
no longer even discuss the subsistence issue with the state of
Alaska but would deal only with the federal authorities.
MR. BONDURANT said continuing to support management enforced
contrary to the state constitution violates Article VIII and,
possibly more importantly, Article I, Section 1, which says in
part, "all persons are equal and entitled to equal rights,
opportunities, and protection under the law; and that all persons
have corresponding obligations to the people and to the State."
MR. BONDURANT concluded that it is time to abide by the Alaska
Supreme Court and the state constitution and stick to enforcing
those requirements.
Number 1030
REPRESENTATIVE BUNDE asked Colonel Glass, now on teleconference, to
comment on the bill.
JOHN GLASS, Colonel, Director, Division of Fish and Wildlife
Protection, Department of Public Safety, verified that they were
addressing the committee substitute, then stated, "The bill, in its
entirety, as it presently stands, we have no objections to
whatsoever. It will not affect our abilities to continue doing the
work that we have been doing, and we'll be able to continue to do
so under the present wording of this bill."
REPRESENTATIVE CROFT asked what objection there was previously and
how that was cured.
COLONEL GLASS responded, "The other amendments that were on this
bill originally is where our objections were. We were afraid it
was going to impose upon us a situation where we would not be able
to continue working with the federal agencies as we do currently,
use of the Lacey Act, et cetera, enforcing some of the rules and
regulations that we handle."
CHAIRMAN GREEN noted that an earlier version contained a
prohibition, as opposed to not having a duty.
Number 1096
REPRESENTATIVE CROFT asked whether Colonel Glass's interpretation
was that elimination of subparagraph (1) left his division the
ability, but not the duty, to assist the U.S. Fish and Wildlife
Service.
COLONEL GLASS said as currently written, the bill affects only the
ADF&G. The Division of Fish and Wildlife Protection obtains
enforcement authority under Title 18, not through the commissioner
of the ADF&G under Title 16.
REPRESENTATIVE CROFT asked whether an ADF&G representative would
testify.
CHAIRMAN GREEN indicated none was scheduled to appear.
REPRESENTATIVE CROFT inquired whether Colonel Glass believed this
meant the ADF&G no longer would have the duty to act, but would
have the power.
COLONEL GLASS estimated that up to 99 percent of the enforcement is
done by the Division of Fish and Wildlife Protection, rather than
by the ADF&G. He commented, "And I asked Director Regelin to
respond to that during our last hearing in the House Resources
Committee, and I never did hear exactly how much they do."
Number 1170
REPRESENTATIVE BUNDE reported, based on his personal experience
fishing, that a fisheries biologist may come by who also checks
licenses and who could write a ticket if there was a violation. He
asked whether that person would be precluded from bringing a charge
under the Lacey Act, for example.
COLONEL GLASS replied, "No, I don't believe they would, as long as
it is -- it would not be against what the federal mandate would be,
no." Although he could not speak directly for the ADF&G, he had
never known them to bring charges under the Lacey Act. He
explained, "That has always been ours, because most of those are on
guided hunts, which we have the ability to police."
Number 1224
REPRESENTATIVE BERKOWITZ stated, "Colonel, I don't want to put you
in an awkward spot, but it seems to me that this bill doesn't do
anything."
COLONEL GLASS responded, "Representative Berkowitz, it does not do
anything to us directly; no, it does not, sir. It is directly
aimed at Fish and Game."
REPRESENTATIVE BERKOWITZ said it seemed to be just another way of
telling the federal government that the state is unhappy with
federal management of fish and game.
COLONEL GLASS replied, "In my opinion, that's exactly what it is,
sir."
Number 1260
REPRESENTATIVE PORTER made a motion to move the bill from committee
with individual recommendations. There being no objection, HCS SB
19(RES) moved from the House Judiciary Standing Committee.
HJR 25 - CONST. AM: PERM. FUND INCOME & DIVIDEND
Number 1273
CHAIRMAN GREEN announced the next item of business was House Joint
Resolution No. 25, proposing amendments to the Constitution of the
State of Alaska to guarantee the permanent fund dividend, to
provide for inflation-proofing, and to require a vote of the people
before spending undistributed income from the earnings reserve of
the permanent fund; and relating to the permanent fund. The
committee had heard testimony from Representative Austerman,
sponsor, on April 21, 1997.
Number 1302
CLIFF STONE, Legislative Assistant to Representative Alan
Austerman, read the sponsor statement into the record:
"Within the Constitution of the State of Alaska, all income from
the Alaska permanent fund is deposited into the general fund and
available for appropriation. The legislature, by statute, has
created an earnings reserve account, from which dividends and
inflation-proofing are paid. Funds then remaining in the earnings
reserve account are called undistributed income or leftover
earnings.
"Historically, this undistributed income has been deposited back
into the principal of the permanent fund by the legislature. Last
year, the legislature deposited $1.8 billion of undistributed
interest earnings back into the corpus of the permanent fund,
leaving a balance of about $100 million in the earnings reserve
account.
"Under current law, the permanent fund dividend and inflation-
proofing could be eliminated by a simple majority vote of the
legislature and subsequent approval by the Governor.
"A constitutional amendment is the only way to guarantee the
permanent fund dividend program continues and provide for
inflation-proofing of the Alaska permanent fund itself and to
require a vote of the people before any spending of the
undistributed income can take place.
"With both the permanent fund dividend and inflation-proofing
permanently protected by the constitution, Alaskans might feel more
comfortable about considering other uses for undistributed income
in the earnings reserve account."
MR. STONE stated the sponsor's intention is to create a dialogue to
inform Alaskans of the difference between the permanent fund
dividend and the permanent fund itself. He indicated when
"permanent fund" is mentioned, people only think about the
dividend. With this resolution, the sponsor hopes that during this
interim and the next session, people can become educated statewide
about how the permanent fund is set up, what constitutionally must
be put back into the corpus, how it is inflation-proofed and how it
is that Alaskans have a permanent fund dividend. Then people may
feel comfortable with the legislature's looking at that earnings
reserve account and making decisions for its use in state
government other than depositing it back into the corpus of the
fund.
Number 1470
REPRESENTATIVE BERKOWITZ asked whether Mr. Stone was saying that
current constraints prohibit the best investment possible for the
fund.
MR. STONE replied that the permanent fund itself is being managed
by some of the best people available.
Number 1500
REPRESENTATIVE BERKOWITZ said that was not his question; in fact,
he was praising the management. He suggested the impact of this
would be to "unleash them" somewhat, which would enhance the return
to the state from the permanent fund.
MR. STONE responded that he believed all the resolution attempts to
do is place in the constitution the dividend and inflation-
proofing. Currently, those are in statute. Theoretically, someday
the legislature may decide to take the dividend and inflation-
proofing, wiping them out. If those were in the constitution, they
would be safeguarded a little better.
CHAIRMAN GREEN said as the resolution is worded, it has no effect
on activity and investment restrictions now placed on it. He
stated, "And, I think, dealing with perhaps better rates of return
on some types of investment - some certain stocks are a little
higher-risk/higher rewards, if you're right - those restrictions
that have recently been changed would still be changed ... by the
majority."
MR. STONE said that was his understanding.
Number 1580
REPRESENTATIVE BUNDE said as long as he had been in the
legislature, there had never been a move to spend the earnings of
the permanent fund. Many people had been frightened of doing that,
even though he understands that as the permanent fund was initially
proposed, the earnings in excess of the dividend were to pay for
state services. He asked whether Mr. Stone knew of any movement
afoot to spend the earnings.
MR. STONE said no.
REPRESENTATIVE BUNDE commented, "And so, this may be putting
suspenders on the belt."
MR. STONE replied that he believed Representative Austerman's
thought was that future legislatures may be more free-wheeling and,
to make up for a fiscal gap, may be willing to restrict the
dividend program itself, unless it is in the constitution.
REPRESENTATIVE BUNDE suggested this is an attempt to bind future
legislatures. Acknowledging the intent to guarantee continuation
of a dividend and to require inflation-proofing, he asked whether
a further intent is to disallow spending of the earnings.
MR. STONE said no, the earnings reserve would still be at the
discretion of the legislature. The idea is that if Alaskans
understand that their permanent fund dividend is constitutionally
protected, they might feel more at ease in allowing a future
legislature to spend that earnings reserve account to set up an
endowment, for example.
Number 1685
REPRESENTATIVE BUNDE asked whether under HJR 25, excess earnings
could be spent without a vote of the people.
MR. STONE replied, "The original resolution did read that way, but
this new, revised resolution takes that restriction away. After
meeting with the permanent fund folks and through the House State
Affairs, some consideration was made. And so, a CS came forward to
not have that restriction in there."
REPRESENTATIVE BUNDE referred to subsection (b) of Section 3, which
says in part, "Income from the permanent fund shall be deposited
into a separate account". He asked whether they were setting up a
"permanent fund within the permanent fund."
MR. STONE said no; the earnings reserve account is the separate
account to which they are referring.
Number 1760
REPRESENTATIVE JEANNETTE JAMES noted that she had worked
extensively on this issue in the House State Affairs Standing
Committee. She said as far as a deposit into a separate account,
subsection (b) puts into the constitution what is already in
statute.
REPRESENTATIVE JAMES said the one change they made was where it
indicates the reserve account can be spent for the permanent fund
dividend program and inflation-proofing, both as provided by law.
This does not preclude the legislature from changing the way the
dividend is calculated; it just protects its existence. Depending
on future interest rates and the cost of inflation-proofing, there
could be insufficient money for both in the earnings reserve
account. There could not be something set up in the constitution
that the legislature would be unable to do. Therefore, they were
not defining the dividend program or the inflation-proofing.
REPRESENTATIVE JAMES continued, "The other part that was in this
bill - which was, then, also, that the rest of the leftover could
not be spent by the legislature without a vote of the public
because of its being in the constitution - seemed to be unwieldy,
because that wouldn't even let us put it back in the fund. It
wouldn't let us do anything without putting it out to the people
for a vote. And then, of course, we would get a vote based on not
whether we could spend it or not, but whether we could spend it for
that, and that that would have to be part of that issue."
REPRESENTATIVE JAMES said it is an educational tool as much as
anything else. People don't want any of the permanent fund spent
because they believe it will affect their dividends. Conversations
over this constitutional amendment will allow the legislature to
let people know exactly how this works. She agreed that funds
remaining after dividends and inflation-proofing will have a higher
likelihood of being spent by the legislature without public outcry
than the way it currently is. Representative James asked whether
she had correctly evaluated the intent.
MR. STONE said yes.
REPRESENTATIVE JAMES noted that investment of money in the earnings
reserve differs from investment of money in the fund itself; the
former is invested for short-term, rather than long-term, gains.
Number 1902
CHAIRMAN GREEN said as he reads it, there would be inflation-
proofing, determined by inflation rates. Although the dividend
would have to be maintained, it could be any amount, even one
dollar, as determined under current law.
MR. STONE concurred. He said in talking with Jim Kelly of the
Alaska Permanent Fund Corporation, there had been very good returns
these last few years. He stated, "And it's based on five-year
segments, to kind of allow for those roller-coaster rides." In the
future, there may be a less "bullish" market and the dividend
itself may actually decline.
CHAIRMAN GREEN recalled that the original purpose for the permanent
fund was to take care of the cost of government during the lean
years of oil revenue.
MR. STONE said that seems to have been lost.
CHAIRMAN GREEN asked for confirmation of that being the original
intent.
MR. STONE said he would have to look at that. However, he had
heard that the original intent was to provide money to help support
government as oil money dries up.
REPRESENTATIVE PORTER said he remembered that precisely. He noted
that he had further questions.
Number 1981
REPRESENTATIVE CROFT stated his understanding that HJR 25 has no
say about the rate of dividend, the particular investment strategy
or the calculation of what adequate inflation-proofing is. It
requires inflation-proofing and continuation of the dividend
program, as provided by law, as the legislature sees fit.
MR. STONE said that is correct. This in no way would change the
way the fund is managed. It would simply protect,
constitutionally, the dividend program and inflation-proofing. It
was also intended to create the educational atmosphere mentioned by
Representative James.
Number 2025
REPRESENTATIVE BUNDE asked whether inflation-proofing would take
priority over the dividend. He further asked whether anyone was
present from the Alaska Permanent Fund Corporation.
MR. STONE replied that he believed the way it is set up currently,
the dividend program comes first. He noted that it is spelled out
in statute.
CHAIRMAN GREEN said if there is a downturn significant enough so
they could essentially only cover inflation-proofing, since that is
specified, then dividends would have to go down.
MR. STONE said that is correct.
CHAIRMAN GREEN stated, "So, they would take precedent."
Number 2062
REPRESENTATIVE BERKOWITZ asked whether financial analysts had
looked into this and, if so, what they had to say.
MR. STONE said that was a good point. He had been talking with Mr.
Kelly from the Alaska Permanent Fund Corporation. Some Internal
Revenue Service (IRS) questions had been raised regarding how this
would affect the distribution and the permanent fund itself if this
is constitutionally protected, rather than statutorily protected.
He stated, "The IRS is not letting us know how they would rule on
such a case. But they're very concerned over at the Permanent Fund
Corporation about ... such a ruling."
REPRESENTATIVE BERKOWITZ referred to correspondence from Ron
Lorensen (included in packets) discussing the IRS questions. He
asked whether those questions had been pursued further in relation
to this resolution.
MR. STONE said not that he was aware of. But even before this
resolution came to light, there were questions about the IRS tax
implications with the permanent fund itself, because it was never
intended to be just a dividend program. The fund itself was
supposed to be utilized in some way to help support government.
So, the IRS has been looking at this for some time. He said Mr.
Kelly would be the person to address that question.
Number 2141
REPRESENTATIVE BERKOWITZ commented that he was leery of rushing to
making a change if it would jeopardize the tax status of the
permanent fund. He suggested it would be prudent to have a firm
grip on the consequences.
CHAIRMAN GREEN asked whether there was an estimate of when that
response may come. He noted that dealing with the federal
government can be a lengthy process.
MR. STONE replied, "Apparently they're not talking. They're
letting the state make that decision."
CHAIRMAN GREEN asked whether the concern with the IRS would be
greater if this was protected statutorily rather than
constitutionally.
MR. STONE said apparently it was vice versa. He suggested that the
Alaska Permanent Fund Corporation and its counsel could provide a
better answer.
REPRESENTATIVE PORTER requested consideration of an executive
session and commented, "I can't think of anything that could have
a greater impact on the state than this question."
Number 2207
CHAIRMAN GREEN noted that if they went into executive session,
their questions would require a response by someone from the Alaska
Permanent Fund Corporation.
REPRESENTATIVE CROFT indicated he had attempted to call Ron
Lorensen and had left a message. He had also called Eric
Wohlforth, an attorney who is a trustee on the board; Mr. Wohlforth
had preferred that Representative Croft talk through counsel.
Representative Croft agreed that an executive session would be best
when the appropriate people could be present.
Number 2323
CHAIRMAN GREEN announced the committee would hold HJR 25 over and
hear it in executive session, probably on Monday, April 28.
HB 199 - COMMUNITY PROPERTY
CHAIRMAN GREEN introduced the next item of business, House Bill No.
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."
Number 2415
REPRESENTATIVE JOE RYAN, sponsor, explained, "There is an income
tax advantage if a person has assets with unrealized gains in
community property. This bill was designed, among other things, to
allow married Alaskans to obtain the income tax advantages
available to residents of community property states and to produce
business in Alaska." He specified that the bill does not mandate
community property in Alaska.
TAPE 97-61, SIDE B
Number 0006
REPRESENTATIVE RYAN noted that packets included a facsimile from
Robert L. Manley relating to federal statutes and the community
property step-up in basis for a surviving spouse's one-half share
of community property. He read from the second page of that fax,
which says, "Both the decedent's and the surviving spouse's half
interests in community property receive a new basis, if at least
half of the community property was includible in the decedent's
gross estate."
REPRESENTATIVE RYAN provided an example. A person buys stock at
$10 per share; the basis for that would be the $10 at which it was
purchased. The stock appreciates over the years as a large,
unrealized gain. If the person sells the stock, he or she would be
subject to a capital gains tax on the realized gain at the time of
sale. However, if that person was prudent enough to leave it in an
estate and lived in a state that allows a community property option
or that had community property, the federal government says that
when one partner dies, the new basis is current market value, with
no tax liability on that half of the estate or on the surviving
spouse's half of the estate. Representative Ryan commented, "So,
in effect, what you get is Uncle Sam takes a beating on the taxes
and you get the realized gain without a tax liability."
REPRESENTATIVE RYAN explained that nine states currently have
community property. Wisconsin structured theirs so that although
everything is community property, the parties may opt out.
CHAIRMAN GREEN asked whether that was for both parties.
REPRESENTATIVE RYAN replied, "Yes. Alaska, we plan on having
individual property as the basis. And you have to opt in, and you
can opt out at a later time. It's very flexible. This is just
like a Chinese menu: one from Column A, one from Column B, so that
nobody's required to do anything. You have to ask. You have to
set up this good-faith agreement. There's many conditions which
... you are required to follow to set up this agreement. And you
can place any or all of your assets, nominate them as community
property."
REPRESENTATIVE RYAN pointed out that gifts, inheritances and so
forth are excluded and remain individual property. The bill only
applies to property for which both spouses decide to take
advantage.
REPRESENTATIVE RYAN referred to the new trust law signed by the
Governor on October 1. He said this allows people from the other
41 states that have no community property option, who put assets in
a trust in Alaska, to nominate the assets as community property.
They could take advantage of the step-up in basis and yet live in
another state. He suggested that would bring a lot of investment
money to Alaska because it would have to be held here, administered
here and, he hopes, invested here or managed here for investment.
REPRESENTATIVE RYAN explained, "And that's the purpose basically
behind this bill, is to try to offer some advantages similar to
what some of the offshore things have, where they have zero tax
liabilities and so forth, so in America we can offer you a zero tax
liability that you can't get anywhere else unless you happen to
live in one of the other nine states that have a community property
law. But those states, community property is mandatory; Wisconsin
allows you to opt out. In Alaska, it's a choice. If you want to
participate, you're allowed to. If you don't want to participate,
no one forces you to do anything."
REPRESENTATIVE RYAN said he is promoting the bill because it
appears to be a good opportunity to get needed capital for Alaska.
He added that there are many undeveloped resources in the state.
Number 0173
CHAIRMAN GREEN noted that his grandfather used to say if something
seems too good to be true, it probably is. It seemed beyond
comprehension that the IRS would allow putting stock under
community property in Alaska, for example, and if one spouse
preceded the other in death, both halves would be tax-free. He
stated, "And the other thing that I'm concerned about is, if that
is held in another state that does have state taxes associated with
earnings, that they could bring that up here, in a taxless state,
that the state would even allow that."
Number 0221
REPRESENTATIVE RYAN again read from the second page of the fax from
Mr. Manley, indicating it was from Section 1014 of the Internal
Revenue Code: "Both the decedent's and the surviving spouse's half
interests in community property receive a new basis, if at least
half of the community property was includible in the decedent's
gross estate."
REPRESENTATIVE PORTER said in reading the information provided, he
understood it to mean that the survivor would reap the benefit of
the tax savings on the inherited half, but for the half retained as
a survivor, the basis remained what it originally was.
REPRESENTATIVE RYAN replied, "Both halves, Representative Porter.
Both halves. That's the thing that's so nice about this." He
referred to item (6) on the final page of the fax and said this has
been in existence since December 31, 1947. It is a federal statute
that applies to "the property that represents the surviving
spouse's one-half share, et cetera, et cetera, under the community
property laws of any state or possession of the United States or a
foreign country." He could imagine that IRS employees may not be
too pleased with this.
Number 0316
CHAIRMAN GREEN asked: If it has been that way since 1947, why has
it not been enacted in community property states?
REPRESENTATIVE RYAN replied that indeed it has been the case in
community property states. Referring to Chairman Green's earlier
question about how another state could allow this, he explained
that when a person sets up a trust, that person pays gift tax on
what is put into the corpus of the trust and it no longer belongs
to that person. He stated, "The beneficial interest could be
assigned in the indenture and/or with the body of the trust, and
the trustee can be instructed as to how those distributions would
like to be had but not necessarily, because these are
discretionary. The trustee has discretionary powers."
REPRESENTATIVE RYAN continued, "But if you name the surviving
spouse the sole beneficiary of the trust, the property is in there.
The first person dies, ... and both have a beneficial interest.
The step-up in basis takes place. There's no tax liability. And
then the distributions go to the surviving spouse."
REPRESENTATIVE RYAN continued, "So, under those circumstances,
another state cannot come and say that you have messed with the
estate or you've taken property or anything else, because the
property didn't belong in that estate. The property belongs in the
trust, in Alaska, under our laws. And the gift tax was paid when
it was settled up, and it no longer belongs to these people as
such; they just hold a beneficial interest."
CHAIRMAN GREEN asked whether some of the wording between the IRS
statutes in the fax was Mr. Manley's.
REPRESENTATIVE RYAN said he understood it was actual wording from
the federal law and the IRS code. He noted that two people signed
up to testify were estate planning attorneys.
Number 0435
REPRESENTATIVE PORTER asked whether this provision is law in other
states.
REPRESENTATIVE RYAN said it is, in nine states, usually those
states that "came under not the English common law but from the
Napoleonic code."
REPRESENTATIVE PORTER asked whether those were not community
property states but states with the community property option.
REPRESENTATIVE RYAN replied, "No, these are community property
states. Wisconsin has a community property option, inasmuch as
you're required to accept community property, and then, if both
parties agree, they can opt out."
REPRESENTATIVE PORTER asked whether Alaska would be the only state
with this particular provision.
REPRESENTATIVE RYAN responded, "That allows you to opt in. No
requirement to do it, but you can take advantage of it if you
choose."
CHAIRMAN GREEN asked whether this would allow opting in and then
opting back out.
REPRESENTATIVE RYAN replied that if both partners agree, they can
opt back out.
CHAIRMAN GREEN posed an example of people opting in and out, "with
varying sacks full" of money and suggested that would be extremely
complicated to administer. He asked: And we're sure that that's
okay with both the IRS and the states in which these people may
reside?
REPRESENTATIVE RYAN suggested the two estate planning attorneys
could answer that question. He stated, "And one final thing: In
case there is a divorce, the assets are split 50/50 because each
partner owns half of whatever is designated as community property."
CHAIRMAN GREEN asked: If it were put in trust, would that mean
there were two trusts created? Or could one partner opt out, take
his or her share, pay the tax and go?
REPRESENTATIVE RYAN replied, "Once you create this trust, you've
given it away. It belongs to the trustee. It no longer belongs to
you; it's not your property."
CHAIRMAN GREEN asked whether if that was split, there would be two
trusts.
REPRESENTATIVE RYAN replied that a person named as beneficiary
would still have the beneficial interest. He cited an example
where he gives someone $10,000, and says, "This is yours. And you
manage it. But ... if you make a profit on it, I want you to come
back and give me some of it from time to time, as you decide when
I should receive it." He could not ask for that $10,000 back
because it was a gift.
CHAIRMAN GREEN responded, "Okay, but the questions we were driving
at now were if it's community property and both spouses are living
but they get a divorce. They've agreed to put this thing in the
trust, but now they get a divorce, and you say it's split in the
middle."
REPRESENTATIVE RYAN suggested that the attorneys answer that.
CHAIRMAN GREEN asked whether Dick Thwaites had heard those
questions.
RICHARD S. THWAITES, JR., Attorney at Law, testified via
teleconference from Anchorage, affirming that he had heard them.
However, he requested that Jonathan Blattmachr speak first, saying
he himself would address questions specific to Alaska.
Number 0610
JONATHAN BLATTMACHR, Partner (Attorney at Law), Milbank, Tweed,
Hadley and McCloy, testified via teleconference. He stated, "This
provision which, as Representative Ryan has pointed out, has been
in effect since the end of 1947, came about on account of certain
disparities which existed under the federal tax law between people
who resided in community property states like California and those
who resided in other states such as New York. That's the reason we
have (indisc.) joint income tax return and why Congress allowed a
marital deduction for state tax purposes, which was originally
limited to one-half of the estate of the first spouse to die. This
provision contained in Section 1014(b)(6) was supposed to just kind
of neutralize the playing field for people in community property
states."
MR. BLATTMACHR continued, "On January 1, 1982, the estate tax
marital deduction became unlimited. And probably this provision,
1014(b)(6), should have been changed, because it does provide that
if a couple owns some community property, when the first person
dies, the inherent profit is forgiven not just on the one-half
which is includible in the estate of that spouse but even the
survivor's one-half. And it's such an advantage that Wisconsin, in
the mid-1980s, opted into a community property system. The IRS
promptly thereafter conceded, in an official ruling, that it meant
that people in Wisconsin who owned community property would be
entitled to this double income-tax-free step-up in basis (indisc.).
It's possible that would be changed, but it is a law, and it
applies in every state."
MR. BLATTMACHR continued, "In addition, Alaska and New York and, in
fact, most of the other non-community property states, in order to
preserve this advantage for people who move there and who own
community property from other states, have enacted a law known as
the `Uniform Disposition of Community Property in Death Act.' So,
if someone comes to Alaska from the state of Washington, which is
a community property state, Alaska preserves the community property
nature of those assets in the event of death; so, if the husband
dies first, the family - the surviving spouse - gets this double
step-up in basis. And so, whether the IRS likes it or not, that is
what the federal law is. And the federal law almost always
determines the state income tax consequences as well. Of course,
if the couple lives in Alaska, it doesn't (indisc.) an income tax."
MR. BLATTMACHR continued, "So, it appears that it will work. As
Representative Ryan said, it's an `opt-in' rather than an `opt-out'
system, which Wisconsin has. In addition, it can be troublesome
for married couples in some circumstances to trade their assets.
But in this case, there's going to be an explicit agreement as to
what is or non-community property. And, as a consequence, it's
probably easier record-keeping than exists right now." He said a
judge in Alaska who does quite a bit of family law and divorce work
has advised Mr. Thwaites that she quite regularly deals with
community property already, because so many people who move to
Alaska have brought community property with them.
MR. BLATTMACHR specified that he is admitted to the bar in Alaska,
California and New York.
CHAIRMAN GREEN asked about Mr. Blattmachr's testimony that "it
appears it will work." He asked whether Mr. Blattmachr had
received something substantive from the IRS in support of that.
MR. BLATTMACHR explained, "When Wisconsin did this, the IRS, within
a year or two, officially conceded that it did work to make
property owned by Wisconsin couples community property for purposes
of this step-up-in-basis rule. The law appears to be very clear
that ... if it is community property under the law of any state or
possession of the United States or a foreign country, it's entitled
to this treatment. This would make it community property under the
law of the state of Alaska. And it would appear, based on that,
that it should work. But until you have a court rule on it, one
can never be sure of the effect of a law."
CHAIRMAN GREEN asked: What might happen if we get these millions
of dollars up here and the court holds that it doesn't work?
MR. BLATTMACHR replied, "Well, then, the people are back where they
were before." He cautioned that there are real-world consequences
of converting assets into community property. He explained, "If a
husband owns a million dollars' worth of assets and he converts
them into community property, he has now made a gift of one-half of
his property to his wife. She will own it. She can do with it as
she pleases, including bequeathing it, at her death, to whomever
she wishes." Based on conversations with his clients, Mr.
Blattmachr guessed that only people in long-term, stable first
marriages would take the risk of converting their assets to
community property because of this real-world effect in their
lifetimes, especially if there was a divorce.
Number 0901
CHAIRMAN GREEN said he had mentioned to the sponsor the possibility
that a judge would bequeath half to each party in a divorce. He
asked whether each half would then remain in trust or whether one
party could opt out. He expressed concern about an IRS ruling on
something so fluid.
MR. BLATTMACHR replied that right now, that basically exists in the
other community property states. For example, when California
couples marry, everything they acquire thereafter is community
property. But often couples elect for more assets to come in,
including property brought to the marriage or inherited, or gifts
they receive, which under basic California law are not part of the
community property. However, because of the income tax advantage,
the couple will opt in. Sometimes they will opt out later. Mr.
Blattmachr stated, "And again, this provision, Section 1014(b)(6),
is quite explicit: Whatever is treated as community property under
local law gets this tax-free treatment."
MR. BLATTMACHR continued, "In fact, California has a rule known as
`quasi-community property.' It basically says that if a couple
from a non-community property state like Alaska moves to
California, at the death of them - the first of them - their
property which is not community property is treated as quasi-
community property, and it's treated as though it had been
community property all along, when the first spouse died. And the
IRS - and I know this (indisc.) an experience in administering
California estates - the IRS does permit the double step-up in
basis there. So, it appears that the fact that the couple can
change it anytime they want doesn't change the nature of its
actually being community property."
MR. BLATTMACHR continued, "I want to point out two important
distinctions when something is community property. (Indisc.) of
Alaska, and most other states which don't have community property,
like New York and Florida, when a couple divorces, the judge can
award any percentage of the property the judge wants to the husband
and any percentage the judge wants to the wife. But with community
property, one-half is the wife's and one-half is the husband's, and
the judge has no power to change that."
MR. BLATTMACHR continued, "The second thing is what happens at
death. Under the law of Alaska and most non-community property
states, a certain percentage of the estate of the first spouse to
die goes to the surviving spouse. For example, in Alaska, as a
general rule, if a man dies with $900,000 in his estate, his wife
must get at least one-third. Now, that right of the wife to get a
portion of his estate, with respect to the husband's half of the
community property, doesn't happen." He said half of the assets
would be hers already, and the husband could do whatever he wants
to with respect to the other half. For example, he could leave it
to children of a prior marriage or to charity. The wife cannot
demand any portion of his half. She gets her half, and that is it.
MR. BLATTMACHR continued, "So, there is a real change in what
happens to the property during lifetimes. And people should be
advised of that before they jump into a community property
agreement. And most Alaskans will be doing it by agreement. They
will just continue to own it; there will not be a trust. If they
have it in a trust, it will be owned one-half by the husband and
one-half by the wife, as community (indisc.), or legal title will
be held by the trustee. And what happens in the event of a divorce
or a death will be determined by the terms of the trust."
Number 1097
REPRESENTATIVE PORTER commented, "My wife, the accountant, has
always told me there's a thin line between tax avoidance and tax
evasion." He asked what the ramifications would be if a couple
established community property and opted in, or established a
trust, for property that had previously been the property of one
spouse, and then, for whatever reason, they opted back out. He
further asked whether the original owner of the asset would have a
tax consequence for being gifted the portion that was transferred
to the other spouse and then back.
MR. BLATTMACHR explained, "The answer generally is no, because
transfers to a husband and wife are free of income tax and gift tax
consequences. However, if your spouse is not a U.S. citizen - for
example, if an Alaskan is married to a Canadian citizen - there is
basically no marital deduction allowed. So, if a husband is an
American who lives in Alaska and the wife is Canadian, and the
husband took a million dollars and made it community property, he
would be making a gift to her of $500,000 and would have to pay
gift tax. So, there could be consequences in those circumstances."
MR. BLATTMACHR continued, "But if it's a married couple who are
both American citizens, there will be no income or gift tax
consequences of either making the asset community property or
changing it back to separate property. And, again, I know that
because I've practiced for many years under California law, where
people do come in and out of community property."
Number 1202
CHAIRMAN GREEN cited an example where two Americans have low-cost
stock and opt into a trust. The stock appreciates significantly as
community property, then one spouse dies. He asked, "The other one
gets it all and then opts out?"
MR. BLATTMACHR replied, "No, once the first spouse dies, the
community nature of the property ends. So, if you and your wife
owned the stock in community property and you die, she would own
her half and you would bequeath your half to whomever you wanted
to. If you'd left it to her, she would simply own 100 percent. If
you'd left it to a child, your wife would continue to own her one-
half, which she owned before your death, and your child would own
the other half. And they would not own it in community property.
They would own it by what's known as `tenants in common.'"
CHAIRMAN GREEN inquired about the appreciation value.
MR. BLATTMACHR replied that both the half that the wife previously
owned and the half the child received upon the husband's death
would have all of this inherent income tax liability forgiven.
CHAIRMAN GREEN asked, "Even if we opt out?"
MR. BLATTMACHR replied, "If you opt out before death, no. If you
opt out, it will not be community property. And then only the
(indisc.) includible in your estate would get the step-up in basis.
It would have to remain community property through the death of the
first spouse to die for this to work."
CHAIRMAN GREEN asked, "Community property or in the trust? Or
both?"
MR. BLATTMACHR responded, "If you're Alaskans, you're not going to
put it into a trust. Alaskans presumably will do this merely by a
written agreement where they declare certain of their assets to be
community property. And under the bill, that's known as a
`community property agreement.' The community property trust will
probably be used by people where only one of them is an Alaskan and
the other one is not, or where neither is an Alaskan but they want
their assets to be treated as community property under Alaska law."
CHAIRMAN GREEN said, "Now she lives a long time and we opt out."
MR. BLATTMACHR stated, "If you opt out, then you're not going to
get the benefit of the tax-free step-up in basis." He cited an
example.
CHAIRMAN GREEN asked about couples who have not died but have opted
out.
MR. BLATTMACHR said then there would be no change in basis at all.
Nothing would happen to the basis until someone died. The tax
benefit only occurs upon the death of the first spouse to die, and
only to the extent that the assets at that time constitute
community property under the law of any state.
Number 1395
REPRESENTATIVE CROFT cited an example where someone is married in
Washington, a community property state. At the time of marriage,
the husband had stock that he got for nothing when he founded a
company now worth $20 billion. Therefore, the stock's basis had
been zero but was now $20 billion. He dies and his wife sells all
the stock for $20 billion. Representative Croft asked: She pays
what tax?
MR. BLATTMACHR replied, "Zero."
REPRESENTATIVE CROFT asked: For the same situation in Alaska, if
the court divided the marital property 50/50 and she sold it all,
would she pay taxes on $10 billion?
MR. BLATTMACHR replied, "That is correct. Again, I know this
sounds like a very peculiar rule, and this area of the tax-free
step-up in basis is an area where I do a lot of practice. There is
even an historic exception for people who live in non-community
property states, with property jointly owned with rights of
survivorship, which was required by the couple before 1977. And
like many areas of the tax law, these rules are there for historic
reasons. And it's difficult to justify them today, but if they are
available and being made to be available to the citizens of a
particular state, it just may be appropriate to give them an
opportunity to (indisc.)."
Number 1515
REPRESENTATIVE CROFT stated his understanding that the theory on
this is: "We don't have to figure out the public policy rationale
for this federal statute; we should just allow our citizens and any
other citizens to take advantage of it."
MR. BLATTMACHR said that is what he believes is being recommended
by the sponsor. He noted that no one is forced to take advantage
of this. He emphasized that it would result in significant changes
in ownership. If a man put $20 billion from a company into a
community property format, his wife would own half of it.
MR. BLATTMACHR stated, "Of course, today an Alaskan couple could
sit down and decide that they wanted to own their assets under a
regime which would mirror precisely what it would be under
community property; they would do that by agreement. But because
it is not community property under Alaska law, even though the
agreement treats it that way, they would not get this potential
income tax benefit."
MR. BLATTMACHR pointed out that the change in basis at death can
also be a reduction in value. For example, if someone bought stock
at $150 but it was worth $90 when that person died, his or her
family would inherit a basis of $90 rather than $150. He
cautioned, "So, people are going to have to be careful as to what
they decide to treat as community property. Any asset which has
gone down in value, or they think might decline in value,
presumably would not be covered by the community property
agreement. It would only be those assets where they ... had
appreciated or that they were confident that appreciation would
hold would they do it; at least, I think that would be the case."
REPRESENTATIVE CROFT stated, "And Jonathan, we had a discussion in
my office about the power to invade the separate property. You
said at one point that the courts in California have no power to
change the 50/50 division. That's not the way I remembered it from
... the California bar. But whatever the case there, here we have
a very limited ability to invade the separate property, usually the
premarital estate. It's much more limited than the ability to
divide equitably marital property. But there are situations where,
because it's so unjust, the small amount that's left in the marital
estate, for some reason, that a court takes premarital assets to
make that up. I take it that this would define ... the portion
allocated into community property, in effect, as 50/50 separate
property for purposes of invasion for equitable reasons."
MR. BLATTMACHR replied, "That is exactly correct. So, again, you
are basically saying that whether there's a death or a divorce, or
a contrary agreement at a later time, this asset is owned by the
husband and wife 50/50. And the husband gets half and the wife
gets half, and that's it."
MR. BLATTMACHR said presumably a couple would receive counseling
about this, and he emphasized that couples need to know the
consequences. He stated, "Also under the bill, because this was
provided for in Wisconsin law, the (indisc.) can modify the rules
that are contained. For example, if the couple says, `Well, you
know, we think that the Alaska courts do such a great job in
allocating assets between a husband and wife that we don't want to
have it automatically split 50/50, so we'll provide in this
agreement that even though we're saying it's community property, if
we get divorced, the court can allocate it in an equitable fashion,
as it sees fit.'"
MR. BLATTMACHR continued, "Now, I can't tell you whether or not
that will eliminate the community property nature so the tax
benefit will be lost. The IRS has never ruled in a court and, as
far as I know, has never ruled on that. But a couple could do
that; if they said, `We want the courts to be able to equitably
divide it,' they could. But if they want to increase the
probability of getting this income tax benefit which is available
to people in community property estates, presumably they will label
certain of their assets community property and ... have Alaska
community property law apply in its full force on that."
Number 1820
REPRESENTATIVE BUNDE asked: Why the "opt-in" system, rather than
the "opt-out" system that Wisconsin has?
MR. BLATTMACHR said that was an important, interesting and
insightful question. He noted that he practices in both a
community property state, California, and the non-community
property states of New York and Alaska; he has also lived as a
married person in both situations.
Number 1856
MR. BLATTMACHR stated, "I think community property is a much more
rational system because it truly treats the marriage as a
partnership, and everything that's acquired during the marriage,
other than inheritances and gifts during that time, belongs to the
partners, the husband and wife, 50/50. And that, to me, makes very
good sense. You have the same rule of ownership at divorce as you
do at death, whereas under Alaska law and New York law, the
husband's and wife's interest in the property is different in
divorce than it is in death. And I find it difficult to justify
that. In fact, a divorcing spouse may get more than one who has
been a loyal husband or wife for 50 years and his or her husband or
wife dies and they get less."
MR. BLATTMACHR continued, "But the change to community property
from the system Alaska has always had is a very significant one.
And there were many members of the Wisconsin bar I knew who felt it
was unfair to say, (indisc.), a Wisconsin couple which has been
married for 45 years and said, `You thought your property was owned
this way? Guess what: We're changing it in the legislature, and
you have nothing to say about it unless both of you agree to opt
out of the system.' So it seems like it will have less of an
impact in the state to have an `opt-in' system. But I certainly
think one could make a rational case, which the Wisconsin
legislature did, is that in studying the matter, one could go to an
entire community property system and mandate it on (indisc.), even
though the two have been married for decades and decades."
REPRESENTATIVE BUNDE asked: If this is such a good deal, why make
it available only to those who are clever enough to figure it out
and perhaps hire a trust attorney to help them get there? He also
asked why Mr. Blattmachr was willing to invest his time.
MR. BLATTMACHR replied that he was doing it for several reasons.
First, he plans to take advantage of it himself because in due
course, he will move to Alaska. He said it is a great deal and
that the tax-free step-up in basis is the most important tax
savings mechanism in estate planning.
MR. BLATTMACHR said second, he has numerous clients in long-term
marriages who will benefit from this bill. Some are wealthy
Alaskans and some live elsewhere but have told him they will "run
to create trusts and transfer their assets to Alaska."
MR. BLATTMACHR stated, "And that brings up the third reason. I
would like to see Alaska's state of financial markets increase
significantly. And I was one of the principal draftsmen of the
Alaska trust bill, and I'm the principal (indisc.) for this bill.
And I believe that those bills will result in the shifting of
financial services business to Alaska. And I think that that would
be great for the state." He said he had no sponsor, no one was
paying him to do this, and he had paid his own way to Juneau the
previous week. He concluded, "I just personally think it's a good
thing for everybody."
REPRESENTATIVE BUNDE agreed that this not only would possibly be
good social policy, but it was also an economic development issue.
Number 2187
REPRESENTATIVE BERKOWITZ inquired about the law firm Mr. Blattmachr
is with.
MR. BLATTMACHR said Milbank, Tweed, Hanley and McCloy is a large
international law firm with 10 or 11 offices worldwide. They
represent many wealthy individuals and handled the estate of
Jacqueline Kennedy Onassis, for example. They also represent a
number of large corporations in the United States.
REPRESENTATIVE BERKOWITZ asked who opposes this bill.
MR. BLATTMACHR replied, "I don't believe there is anyone who
opposes this bill. In fact, as with the Alaska trust act, I think
the major concern that I had is that they will very quickly catch
our ball." He suggested other states would opt for it. For
example, the California legislature may offer people from out of
their jurisdiction to create community property trusts within their
jurisdiction, because they will be interested in getting the
business. "And it may be that California, with such a high income
tax, will tend to frighten people away," he commented. Mr.
Blattmachr said he does not believe there is any down side.
However, someone from his law school had suggested the consequence
will be that Congress will repeal Section 1014(b)(6), because that
will make this available to every American.
CHAIRMAN GREEN inquired about the history of the provision.
MR. BLATTMACHR responded that there was a man named Mr. Seaman (ph)
who resided in California. Under California law, half of Mr.
Seaman's income, the moment he earned it, belonged to his wife
because it was community property.
TAPE 97-62, SIDE A
Number 0006
MR. BLATTMACHR explained that Mr. Seaman reported half of his
income on his income tax; his wife reported the other half.
Because income tax rates are progressive, getting increasingly
higher as income increases, he and his wife paid less income tax
than they would have had he reported all his income on his own
return.
MR. BLATTMACHR stated, "The IRS said, `Well, it may be true that
under California law, your wife owned half the income, but this is
a federal tax system, and federal law is supreme, so you couldn't
split your income.' That case went to the Supreme Court of the
United States, and the Supreme Court held that what Mr. Seaman had
done was perfectly proper and the federal tax law had to respect
the property rights as they existed under state law."
MR. BLATTMACHR continued, "That also gave people a big advantage
when it came to death, because if Mr. Seaman had an estate of a
million dollars and he lived in New York, he would have to pay
estate tax on the whole million. But living in California, and
because this million dollars would be community property, he'd only
have to report $500,000 on his return. And his wife would have
already owned the other half, and there'd be no estate tax."
MR. BLATTMACHR continued, "When the income tax rates leapt so high
during World War II, when, I think, the income tax got up to 91
percent and the estate tax up to 77 percent, almost all states in
the United States decided that they would become community property
states, to give their citizens the same tax break that people in
California and Texas and other community property jurisdictions
were enjoying."
MR. BLATTMACHR continued, "Well, the IRS, in a fit of sanity, came
to the Congress and said, `Look, rather than make all these states
convert to community property' - and I believe that two states, in
fact, did, Pennsylvania and Kansas, and New York was going to -
they said, `why don't you adopt the concept of the joint income tax
return, which will have the effect of splitting the income 50/50
between the husband and wife and also allow a 50 percent estate tax
marital deduction for assets other than community property?'
Congress did that, and that became effective on January 1, 1948."
MR. BLATTMACHR continued, "Then the community property lawyers came
back and they said, `Wait a minute. We now have a disadvantage.
If Mr. Seaman dies as a resident of New York with his million
dollars, because (indisc.) will be in his estate, there'll be 100
percent tax-free step-up in basis on the million. But he'll only
pay tax on half because he can leave $500,000 to his wife free of
estate tax, whereas if Mr. Seaman died in California, only $500,000
is in his estate; so, there's only a $500,000 step-up in basis.'"
MR. BLATTMACHR continued, "`So, what we think you want to do is to
put people in community property states on par with the wealthy men
- people with property in their own names - in non-community
property states. We think you ought to allow both halves of the
community property [to be] stepped up for income tax purposes when
the first spouse dies.' And Congress adopted that. And that's why
that thing says, `for decedents dying after December 31, 1947.'"
MR. BLATTMACHR continued, "When the unlimited marital deduction
came down on January 1, 1982, probably somebody should have thought
through that this (indisc.) provision under 1014(b)(6) for
community property probably should be eliminated. But it wasn't.
And then Wisconsin lawyers got together and said, `Well, why don't
we convert to community property? That way, the residents of our
state will get this benefit.' And they did that around 1985."
MR. BLATTMACHR continued, "But most of the states haven't done it
because they regard community property as too big a change to the
property rights which currently exist between their married
couples. Again, this bill will allow Alaskans, if they don't want
to take advantage of this or feel that community property is not
the right system for them - as it may not be for a couple in a
second or third marriage, with children from prior unions - they
won't have to do it. But for those who think it's a good system,
they'll go ahead and do it."
Number 0342
CHAIRMAN GREEN asked why a state like Texas would not have enacted
this and why it was coming so late in Alaska's statehood.
MR. BLATTMACHR replied, "I don't think anybody ever thought about
it before. It sounds terribly immodest of me, but when I discussed
this with a different professor last Sunday night, he said, `This
is absolutely ingenious. Why hasn't anybody ever done it before?'
And I just can't tell you why."
Number 0384
REPRESENTATIVE JAMES referred to the relationship between the trust
program set up in Alaska, the community property exemption, and the
fact that people will come to Alaska. She asked Mr. Blattmachr to
explain the advantage of going into the trust with community
property. She also mentioned the possibility of other states
following Alaska's example and the advantage of setting up the
trust, relating to the law of perpetuity.
MR. BLATTMACHR replied, "Well, I apologize if I've kind of confused
things. The Alaska trust act, which ... became effective on April
2, really has nothing to do with the community property bill or the
community property trust. The Alaska community property act does
effectively eliminate the rule against perpetuities. And there are
other states currently trying to play `catch-up ball.' I
understand that Texas is thinking about repealing its."
MR. BLATTMACHR continued, "I got a call two weeks ago from the
Washington state bar association, asking (indisc.) the tax
consequences of it, because there's a very peculiar federal tax
known as the `generation-skipping' tax, which sometimes can be
affected by the rule against perpetuities. And I've written
extensively about that, and they were calling me about that. But
they are thinking of recommending, to their legislature, repeal of
the rule against perpetuities. So, I think on that one, as well as
this community property bill, there may be `catch-up ball' by the
other states. But one of my goals - and I hope the legislature
agrees with it - is to try and keep Alaska in the forefront, to
keep it an extremely desirable jurisdiction in which to do estate
planning and financial business."
Number 0565
REPRESENTATIVE CROFT said his concern, talking with the sponsor and
Mr. Blattmachr, was this 50/50 division. He had talked to local
family lawyers about the ability to do this anyway, but without the
tax benefit. A married couple could decide to divide an asset
50/50 and the court would generally enforce it. Representative
Croft asked whether Mr. Blattmachr had the bill in front of him.
MR. BLATTMACHR said no.
Number 0565
REPRESENTATIVE CROFT stated, "You had a number of disclaimers that
had to be on the community property agreement or be waived after
reasonable disclosures. And I proposed to Representative Ryan that
we add a fourth. You had three: fair and reasonable disclosure of
the property of the other spouse; a written consent waiving that
disclosure; and that the spouse didn't have notice of the property
or financial obligations. ... All three are dealing with the
assets. It's sort of a prenuptial-type of disclosure, `Here's how
much I have.'"
REPRESENTATIVE CROFT continued, "I'm concerned that we disclose, to
Alaskan couples in particular, some aspect of the legal jump that
they're making, from equitable distribution in a marital property
state to a basically 50/50 distribution in a community property
state, with some limited way to change that. Do you have any
objection to requiring that, before they enter into these community
property agreements, there be something about the legal jump
they're making?"
MR. BLATTMACHR said no, he did not. He recommended making it as
clear as possible what would be required. One possibility would be
requiring the community property agreement or trust agreement to
contain an explicit heading in bold letters, cautioning that the
parties should be aware that it could significantly change the
ownership of property between the couple, including entitlements of
property in the event of a divorce or death.
Number 0780
REPRESENTATIVE CROFT asked for confirmation that currently there is
no such requirement in the bill.
MR. BLATTMACHR said that is correct. He explained that he derived
the bill from the Uniform Marital Property Act (UMPA), which was
adopted, with some slight modifications, by Wisconsin. He believed
all the requirements cited by Representative Croft were contained
in the UMPA and the Wisconsin act. Mr. Blattmachr said giving a
couple an extra warning that they were about to do something
significant, with a real-world financial impact during their
lifetimes, was certainly commendable.
Number 0840
REPRESENTATIVE PORTER asked whether any other states currently have
the ability of a nonresident to establish something like this to
avoid taxes. He further asked, "And if not, why wouldn't IRS go
after us on that point?"
MR. BLATTMACHR said that was a good question. He stated, "Believe
it or not, I've had a number of California lawyers ask me for a way
in which they could offer California community property to non-
Californians. And, in fact, from time to time, couples do move to
a community property jurisdiction such as Texas, which has no
income tax and no additional state tax, to get that benefit."
MR. BLATTMACHR continued, "I think that this will work, but I don't
think it's a matter so much of IRS attacking it. I think it's that
the other states, once they realize the simplicity of doing this,
and the fact that it will bring business and assets to their state,
will jump on it like a duck on a bug. I mean, there's just no down
side."
MR. BLATTMACHR said this will, in fact, be community property under
the state of Alaska. And that seems to be all that 1014(b)(6)
requires for it to be effected. He said he obviously could not
guarantee that people from outside of Alaska would get this tax
break. However, for those in long-term, happy marriages who trust
each other anyway, there appears to be little harm in trying. He
concluded, "And it does appear to be that, under both the code and
the treasury regulations interpreting it, that it will work."
Number 0962
REPRESENTATIVE NORMAN ROKEBERG referred to the attached materials
and asked Mr. Blattmachr to clarify what appeared to be a partial
definition: "If at least one-half of the whole community property
interest of such property is includible in determining the value of
the decedent's gross estate ...." He expressed concern about what
"at least one-half" means.
MR. BLATTMACHR replied that he understands there are some
jurisdictions, such as in South America, where "the husband and
wife are equal but the husband's a little more equal." For
example, the husband might own 60, 70 or 80 percent, whereas the
wife might own less.
MR. BLATTMACHR stated, "And Congress, I understand, when it enacted
this, said, `We don't want you guys going back to your estates and
giving the wife, for example, a 1-percent interest in the asset
(indisc.) community property. And then, if that 1 percent is in
her estate, the other 99 percent would get this 100-percent-tax-
free step-up in basis. So, it was a safeguard to do that."
MR. BLATTMACHR continued, "The way it would work under Alaska law,
the husband and wife would each own 50 percent. So, we would meet
that `at least 50 percent' standard. It would be exactly 50
percent."
REPRESENTATIVE ROKEBERG stated his belief that under provisions of
HB 199, which assets go into the trust could be designated. He
asked whether that was correct and whether the purpose of that was
to be able to designate assets.
MR. BLATTMACHR said that was correct. In the community property
agreement or community property trust, couples can pick and choose.
Number 1099
REPRESENTATIVE ROKEBERG asked whether, under HB 199, a prenuptial
agreement could mandate an opt-in for community property, with the
further mandate that in the event of a divorce, an opt-out would
occur prior to the divorce.
MR. BLATTMACHR said that was a two-part question. First, HB 199
explicitly says that a couple can enter into a community property
agreement before marriage. However, it will be effective if and
when they marry. Second, Mr. Blattmachr did not believe a
provision to opt in but mandate an opt-out in the event of a
divorce would work. Although as a matter of contract law, he
supposed that could be done, it would not operate like community
property. Therefore, he did not believe it would be treated as
community property for federal income tax purposes.
Number 1190
REPRESENTATIVE ROKEBERG asked whether there was a provision for
contracting certain classes of assets in the bill.
MR. BLATTMACHR said yes, designations could be class-by-class. For
example, stocks but not bonds could be community property, or
residences but not nonresidential real estate, however the couple
wanted to designate their assets.
REPRESENTATIVE ROKEBERG stated, "I would be a lot more comfortable
if my scenario would be allowable here, and there seems to be some
question about that. Maybe we should look at the law of prenuptial
agreements in the state of Alaska and codify it to go along with
this. If I had more time, I might look at an amendment."
MR. BLATTMACHR restated that although a couple could legally do
that under contract law, he was not sure it would be treated as
community property by the IRS.
Number 1272
CHAIRMAN GREEN, noting that Mr. Blattmachr had said "property,"
asked whether whatever became community property and subject to
this trust could be property outside of Alaska.
MR. BLATTMACHR said that is true. In fact, today if a California
couple uses their community funds to buy a piece of real estate in
New York, that is treated as community property under California
law. He cited a personal experience.
CHAIRMAN GREEN asked, "What about the state with the real property
in it? You're talking about an IRS agreement. But what about, for
example, if it were in California or some state that has a
significant property tax and other taxes?"
MR. BLATTMACHR said if someone owned a piece of property in
Oklahoma, whether it was transferred to a trust, corporation or
partnership, the municipality would have the power to continue to
impose real estate taxes or an estate tax. For example, the
Commonwealth of Pennsylvania does not permit an unlimited marital
deduction. However, if a Californian, Alaskan, or New Yorker owned
property there, Pennsylvania would impose its inheritance tax on
that. The Supreme Court has ruled that a state may impose a
(indisc.) tax on lands physically located within its borders, even
if the owner resides in a different state.
Number 1404
CHAIRMAN GREEN commented that all this addresses is the IRS.
Number 1412
REPRESENTATIVE PORTER stated, "I'm given to understand that the IRS
has a large bucket of case law and regulation that they usually
look at as, `these kinds of things are shams or abusive
avoidances,' and don't let you have it. Aren't we getting kind of
close to that with the ability to select which assets we want to
put in and how long we want to keep them in? And why wouldn't they
look at that as just an unnecessarily-too-good-a-deal-way to avoid
taxes?"
MR. BLATTMACHR replied that first is the real-world impact. Each
spouse owns half of the community property. To opt out assets
previously designated as community property requires both spouses'
consent. For assets worth considerable money, he did not see that
as being easy. In addition, from practicing in California, he knew
that couples often opt in additional property for exactly the
reasons Alaskans might, the step-up in basis. When a couple in a
long-term, happy marriage comes to see a lawyer, often that lawyer
will ask what assets they own that are not community property and
then explain that if they want this income tax benefit, they should
convert those into community property through an agreement.
MR. BLATTMACHR advised members that sometimes there are also estate
tax reasons to make community property into separate property, such
as avoiding the estate taxation of certain life insurance. And
that is done every day. "And I've never heard of the IRS even
suggesting that it could challenge it on the ground that somehow
the taxpayers are unfairly manipulating the ownership of their
property to get an unwarranted tax break," he concluded.
Number 1531
CHAIRMAN GREEN indicated he had questions regarding the IRS. He
announced it was not his intention to move HB 199 that day.
MR. THWAITES testified via teleconference that from his practice in
Alaska as an estate planning attorney and doing probates, this bill
would favorably affect one or two clients a week. Through probates
over the years, he had observed many times when Alaskans would have
benefited by the dual step-up in basis. Mr. Thwaites believed
having that option would be a wonderful opportunity for most Alaska
residents.
Number 1585
CHAIRMAN GREEN agreed and indicated that the committee would not
unduly hold the bill.
MR. THWAITES mentioned that he had done audits with the IRS
relating to capital gains treatment of property, such as for an
"ARCO couple" who came up from Texas. When that couple rolled over
capital gains from their Texas home to Alaska, the IRS had
recognized the dual step-up in basis for the Alaska home, where
that uniform act had been used.
Number 1617
REPRESENTATIVE ROKEBERG asked whether this bill would affect the
existing provisions of Alaska statute as they relate to tenancies
by the entirety and other "co-tenancy allowables" in Alaska.
MR. THWAITES replied, "No, it would not. It would add an
additional category, which is the category of community property."
REPRESENTATIVE ROKEBERG said Alaska has no joint-tenancy-with-
right-of-survivorship statute, as some states do. He asked whether
Mr. Thwaites believed this would be an additional benefit. He
further asked whether those jurisdictions having joint tenancy with
right of survivorship enjoy the step-up in basis.
MR. THWAITES replied that this would only affect husbands and
wives. It would be much the same as tenancy by the entirety, in
that it would only affect marital couples. "And in those
situations, they already have the joint ownership with right of
survivorship," he stated. "So, it wouldn't change that, but it
would add the additional benefit of this double step-up in basis."
Number 1681
REPRESENTATIVE CROFT asked, "Why shouldn't we get rid of tenancy by
the entirety if we've got this?"
MR. THWAITES replied, "Because there are a lot of Alaskans who will
not opt for the community property status and will still want to
retain the joint tenancy with right of survivorship for, perhaps,
the bank account or some other piece of property, especially those
situations where there is a second or a third marriage and the
couple together wants to acquire recreational property or
residential property under the tenancy by the entirety (indisc.)."
Number 1707
REPRESENTATIVE CROFT stated his understanding that for tenancy by
the entirety, there is an automatic right of survivorship, whereas
in community property "you can do it by regular will." He said
they were distinct not just in tax consequence but in legal effect
as well.
MR. THWAITES concurred.
RICHARD W. HOMPESCH II, Attorney at Law, Hompesch and Associates,
PC, testified via teleconference from Fairbanks, saying he had been
in practice for 13 years. He stated, "I feel that the difference
in tax treatment between community property states and states like
Alaska is an injustice. There's no reason that surviving spouses
in Alaska should pay more income taxes than surviving spouses in
community property states." He stated his belief that HB 199 would
correct that situation.
MR. HOMPESCH reported that he had seen up to half a dozen clients
in the past few weeks who were waiting on their estate planning to
see whether HB 199 passed, as they wanted to elect community
property. He urged passage of the bill and concluded by saying he
agreed with the testimony he had heard thus far.
REPRESENTATIVE ROKEBERG asked Mr. Hompesch whether his specialty is
domestic relations or estate planning and taxation.
MR. HOMPESCH said his practice is limited to estate planning,
probate and taxes. He does no domestic relations work.
Number 1798
REPRESENTATIVE ROKEBERG suggested that Mr. Hompesch's view of the
bill, then, was as an estate planning tool, not a domestic
relations tool.
MR. HOMPESCH replied that obviously it has impact in the event of
divorce. He added that most of his clients who do estate planning,
believe it or not, do not get divorced.
Number 1817
LINDA HULBERT, Insurance Agent, testified via teleconference from
Fairbanks. A 28-year resident there, she had been an agent for
eight years. She had helped many people to do their planning, and
she believed many people without a lot of assets would benefit from
this bill. Many worry about providing for their spouses after they
die. Many have recreational property, for example, and there may
be difficult taxation issues on capital gains.
MS. HULBERT stated her belief that it is important in many
different situations, although not so much with real property, to
be able to use that double step-up in basis. She believes it will
help a broad spectrum of Alaskans, not only those who are
necessarily doing estate planning now, but also those who can
realize the impact that this will make on their surviving spouses'
well-being. She encouraged rapid passage of the bill.
Number 1901
REPRESENTATIVE ROKEBERG noted that although HB 199 had been heard
by the House Labor and Commerce Committee, he had been unable to be
there. He had talked with a few members of the Alaska Bar
Association (ABA) about it and had tried unsuccessfully to connect
with the family law section of the ABA. He suggested it would be
remiss to act on this bill without input from the family law
section and perhaps from additional people dealing with estate
planning.
REPRESENTATIVE ROKEBERG said he believed the bill had merit but
could have a significant impact on domestic relations law. He
emphasized that most of the testimony that day related to estate
planning and commercial aspects of the bill, not the domestic
relations aspect with regards to Alaska law.
Number 1953
REPRESENTATIVE CROFT said he would like to echo that; he said that
was part of the reason he had drafted his amendment (not yet
offered). He expressed willingness to conclude that the bill has
a good estate planning purpose and achieves it in the right way.
However, he did worry about its real-world impact, as Mr.
Blattmachr had discussed. Representative Croft indicated the
desire for input from the family law section as well.
CHAIRMAN GREEN stated, "One of the questions I would like to have
put on the record is that we had been led to believe that this
would actually be of great consequence to the state because there
would be people bringing large sums of money for the estate
planning. And could you tell us how that will benefit the state?"
MR. THWAITES replied, "I believe that the outside funds coming to
the state will have to come in through some sort of trust
relationship. So, you're probably looking at the banks, trust
companies and so forth (indisc.--background noise) there,
additionally, the accountants, (indisc.) and attorneys that are
involved in doing that planning, because they're going to want
local contacts to do that."
MR. THWAITES continued, "I did talk with, just as a matter of fact,
with one of the (indisc.) court judges regarding the divorce
aspects, and I met with the family law section of the bar, as well,
and didn't receive any adverse inquiries there about what the bill
would do and what impact it would have. They suspected, as the
superior court judge pointed out, it might be the first time in
their career as a family law lawyer that they might have not only
one but maybe even two people walking away from the relationship
and were happy with it."
MR. THWAITES continued, "There is a lot to planning these community
property agreements, and the debtor and other relationships of the
real-world aspects are probably best left to those practicing in
the area of family law. So, I suspect it will open up an area of
their practice they haven't experienced before."
Number 2070
REPRESENTATIVE JAMES noted that the bill was brought to them and
"sort of sold on" an expansion of the trust bill passed previously.
However, they had discussed it in a totally different light, as a
benefit separate from the trust issue. She asked for confirmation
that this would become an advantage for those people who might
otherwise be planning to put their money in a trust, as another way
they could avoid some tax.
MR. THWAITES said coupled with the step-up in basis, it would be
highly attractive to many people with low-basis property coming to
the state of Alaska to establish these trusts.
Number 2140
REPRESENTATIVE BUNDE asked whether the economic impact would relate
to people already in the state who would expand their businesses.
He further asked whether they were talking about people moving
their property to the state rather than actually moving to Alaska,
as well as whether there was a sufficient cadre of Alaskans who
would handle the anticipated business.
MR. THWAITES said he did not know. He stated, "I do think we do
have the sufficient cadre now to do it. I believe that if the
demand picks up, if it picks up as -- perhaps to meet that
trillion-dollar industry that's out there, then definitely we don't
have, and you're going to end up with more people here. Mr.
Manley, the other day, indicated to me that an East Coast trust
department was looking at coming to the state and perhaps trying to
open up a business here as well, because of the articles in the
national journals that have appeared already ... for the trust
bill."
MR. THWAITES continued, "Likewise, I think that you will find the
experience of other jurisdictions is that those people who have the
assets aren't going to give the assets to somebody they aren't
going to come and visit. And, principally, if you're looking at
one of Mr. Blattmachr's clients with $20 million, I suspect they're
not going to fly up here in coach; I suspect they're going to fly
up first-class and visit the institution that will be handling
their account." He said he suspected that a fair amount of tourism
would result from it, if it takes off.
REPRESENTATIVE ROKEBERG asked Mr. Thwaites whether there is any
other method, under existing Alaska trust law, to accomplish
similar benefits for existing residents. He provided an example:
If one set up a irrevocable life estate, with proceeds going to the
surviving spouse and "for further disposition at the surviving
spouse's death," was there not a step-up in basis at that time?
MR. THWAITES replied, "Yes, Representative Rokeberg, there is. It
would be the gamble of who's going to die first. And estate
planning would be a lot easier if you could get commitments from
the spouse as to which one predeceased the other."
MR. THWAITES continued, "... to get the step-up in basis using the
device you're talking about, you need to make a commitment to
allocate that asset either to one side or the other. Likewise, if
one of the spouses had a terminal illness and you attempted to do
that, it would still require a year to pass before the service
would recognize it for the step-up in basis purposes. And it's not
nearly as open and free as this bill would be."
REPRESENTATIVE ROKEBERG responded, "I understand that. But there
is a mechanism for existing residents to be able to estate-plan
potentially; is that your testimony?"
MR. THWAITES said it would be a 50-percent gamble. He stated, "You
have to gamble that one spouse is going to predecease the other
spouse to make it work."
(HB 199 was held over.)
ADJOURNMENT
Number 2309
CHAIRMAN GREEN adjourned the House Judiciary Standing Committee
meeting at 3:20 p.m.
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