Legislature(1999 - 2000)
03/22/2000 01:14 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
March 22, 2000
1:14 p.m.
MEMBERS PRESENT
Representative Joe Green
Representative Norman Rokeberg
Representative Jeannette James
Representative Lisa Murkowski
Representative Eric Croft
Representative Beth Kerttula
MEMBERS ABSENT
Representative Pete Kott, Chairman
COMMITTEE CALENDAR
CS FOR SENATE BILL NO. 162(JUD)
"An Act relating to the rule against perpetuities, nonvested
property interests, and powers of appointment; and providing for an
effective date."
- MOVED HCS CSSB 162(JUD) OUT OF COMMITTEE
HOUSE BILL NO. 369
"An Act relating to property exemptions under the Alaska Exemptions
Act; and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 398
"An Act relating to the Alaska Life and Health Insurance Guaranty
Association."
- HEARD AND HELD
PREVIOUS ACTION
BILL: SB 162
SHORT TITLE: RULE AGAINST PERPETUITIES
Jrn-Date Jrn-Page Action
4/22/99 1040 (S) READ THE FIRST TIME - REFERRAL(S)
4/22/99 1040 (S) JUD
4/28/99 (S) JUD AT 1:30 PM BELTZ 211
4/28/99 (S) -- MEETING CANCELLED --
5/03/99 (S) JUD AT 1:30 PM BELTZ 211
5/03/99 (S) MINUTE(JUD)
5/05/99 (S) JUD AT 1:30 PM BELTZ 211
5/05/99 (S) -- MEETING CANCELLED --
5/07/99 (S) JUD AT 1:30 PM BELTZ 211
5/07/99 (S) -- MEETING CANCELLED --
5/10/99 (S) JUD AT 1:30 PM BELTZ 211
5/10/99 (S) SCHEDULED BUT NOT HEARD
5/10/99 (S) MINUTE(JUD)
5/11/99 (S) JUD AT 1:40 PM FAHRENKAMP 203
5/11/99 (S) SCHEDULED BUT NOT HEARD
5/12/99 (S) JUD AT 2:30 PM BELTZ 211
5/12/99 (S) MOVED CS (JUD) OUT OF COMMITTEE
5/13/99 (S) MINUTE(JUD)
5/13/99 1425 (S) JUD RPT CS 1DP 2NR SAME TITLE
5/13/99 1425 (S) DP: TAYLOR; NR: ELLIS, DONLEY
5/13/99 1425 (S) ZERO FISCAL NOTE (LAW)
1/12/00 (S) MINUTE(RLS)
1/13/00 1959 (S) RULES TO CALENDAR AND 2 OR 0
1/13/00 1960 (S) ZERO FISCAL NOTE (LAW)
1/13/00 1964 (S) READ THE SECOND TIME
1/13/00 1964 (S) JUD CS ADOPTED UNAN CONSENT
1/13/00 1964 (S) ADVANCED TO THIRD READING
UNAN CONSENT
1/13/00 1964 (S) READ THE THIRD TIME CSSB 162(JUD)
1/13/00 1965 (S) PASSED Y19 N- A1
1/13/00 1965 (S) EFFECTIVE DATE(S) SAME AS PASSAGE
1/13/00 1967 (S) TRANSMITTED TO (H)
1/14/00 1918 (H) READ THE FIRST TIME - REFERRALS
1/14/00 1918 (H) RLS (HB 219 IS THE COMPANION BILL)
1/18/00 1937 (H) RULES TO CALENDAR 1/18
1/18/00 1937 (H) READ THE SECOND TIME
1/18/00 1938 (H) ADVANCED TO THIRD READING 1/21
CALENDAR
1/21/00 1974 (H) READ THE THIRD TIME CSSB 162(JUD)
1/21/00 1974 (H) REFERRED TO JUD
1/26/00 (H) JUD AT 1:00 PM CAPITOL 120
1/26/00 (H) <Bill Postponed>
3/22/00 (H) JUD AT 1:00 PM CAPITOL 120
BILL: HB 369
SHORT TITLE: PROPERTY EXEMPTIONS
Jrn-Date Jrn-Page Action
2/11/00 2183 (H) READ THE FIRST TIME - REFERRALS
2/11/00 2184 (H) L&C, JUD
3/01/00 (H) L&C AT 3:15 PM CAPITOL 17
3/01/00 (H) Moved Out of Committee
3/01/00 (H) MINUTE(L&C)
3/03/00 2389 (H) L&C RPT 2DP 2NR
3/03/00 2389 (H) DP: HARRIS, ROKEBERG; NR: MURKOWSKI,
3/03/00 2389 (H) HALCRO
3/03/00 2389 (H) ZERO FISCAL NOTE (LAW)
3/03/00 2389 (H) REFERRED TO JUDICIARY
3/22/00 (H) JUD AT 1:00 PM CAPITOL 120
BILL: HB 398
SHORT TITLE: LIFE AND HEALTH INSURANCE GUARANTY ASSN
Jrn-Date Jrn-Page Action
2/16/00 2218 (H) READ THE FIRST TIME - REFERRALS
2/16/00 2218 (H) L&C, JUD
3/03/00 (H) L&C AT 3:15 PM CAPITOL 17
3/03/00 (H) Moved CSHB 398(L&C) Out of Committee
3/03/00 (H) MINUTE(L&C)
3/06/00 2420 (H) L&C RPT CS(L&C) 3DP 2NR
3/06/00 2420 (H) DP: HARRIS, CISSNA, ROKEBERG;
3/06/00 2420 (H) NR: HALCRO, MURKOWSKI
3/06/00 2420 (H) ZERO FISCAL NOTE (DCED)
3/06/00 2420 (H) REFERRED TO JUDICIARY
3/17/00 2598 (H) CORRECTED L&C CS
3/22/00 (H) JUD AT 1:00 PM CAPITOL 120
WITNESS REGISTER
LESIL McGUIRE, Legislative Assistant
to Representative Pete Kott
Alaska State Legislature
Capitol Building, Room 118
Juneau, Alaska 99801
POSITION STATEMENT: As Committee Aide for House Judiciary Standing
Committee, provided overview of SB 162 and Version M.
STEPHEN GREER, Attorney at Law
4041 B Street, Number 205
Anchorage, Alaska 99503
POSITION STATEMENT: Explained changes in Version M of SB 162;
emphasized its importance in trying to create a trust industry in
Alaska and in allowing creation of trusts that can go on for 1,000
years without being subject to federal estate tax. Testified on HB
369.
DAVID SHAFTEL, Attorney at Law
550 West 7th Avenue, Suite 705
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of SB 162 [Version M],
saying it is important to remedy the "Delaware tax trap."
Testified on HB 369.
DOUGLAS BLATTMACHR, President
and Chief Executive Officer
Alaska Trust Company
1029 West 3rd Avenue
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of SB 162 [Version M].
RICHARD THWAITES, JR., Attorney at Law
500 L Street, Suite 301
Anchorage, Alaska 99501
POSITION STATEMENT: Testified in support of SB 162 [Version M].
JOHN MANLY, Staff
to Representative John Harris
Alaska State Legislature
Capitol Building, Room 110
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 369 and HB 398 on behalf of the
bill sponsors.
JOHN GEORGE, Lobbyist
American Council of Life Insurance
3328 Fritz Cove Road
Juneau, Alaska 99801
POSITION STATEMENT: Discussed HB 398, CSHB 398(L&C) and the Ford
I.2 amendment.
DON THOMAS, Executive Director
Alaska Life and Health Insurance Guaranty Association
(Address not provided)
Anchorage, Alaska
POSITION STATEMENT: Urged the committee's support of CSHB 398(L&C)
and the Ford I.2 amendment.
MARY BETH STEVENS, Alaska Legislative Director and Counsel
American Council of Life Insurers
(Address not provided)
POSITION STATEMENT: Reviewed changes encompassed in CSHB 398(L&C).
ACTION NARRATIVE
TAPE 00-35, SIDE A
Number 0001
REPRESENTATIVE JOE GREEN called the House Judiciary Standing
Committee meeting to order at 1:14 p.m. Members present at the
call to order were Representatives Green, Rokeberg, James,
Murkowski and Croft. Representative Kerttula arrived as the
meeting was in progress.
SB 162 - RULE AGAINST PERPETUITIES
[HB 219 was the companion bill heard previously in the House
Judiciary Standing Committee.]
REPRESENTATIVE GREEN announced that the first order of business
would be CS FOR SENATE BILL NO. 162(JUD), "An Act relating to the
rule against perpetuities, nonvested property interests, and powers
of appointment; and providing for an effective date." [SB 162 was
sponsored by the Senate Judiciary Committee by request. The
companion bill, HB 219, had been heard and moved out of the House
Judiciary Standing Committee on 5/12/99. In committee packets was
proposed House CS for CSSB 162, Version M (1-LS0485\M, Chenoweth,
3/6/00).] Representative Green asked Lesil McGuire, Committee
Aide, to make opening remarks.
Number 0070
LESIL McGUIRE, Legislative Assistant to Representative Pete Kott,
Alaska State Legislature, speaking as the Committee Aide to the
House Judiciary Standing Committee, explained that the companion
bill [HB 219] had already passed through this committee. There was
a little bit of confusion in the process, however, and the bill
version [that passed out of the Senate] had a glitch.
MS. McGUIRE advised members that in April 1997, the legislature
amended AS 34.27.050(a) of Alaska's trust law to include a
[paragraph] (3), which made the rule against perpetuities
inapplicable to those trusts where a trustee has the ability to
make a distribution to a person living when the trust is created.
In adding this language, the legislature in effect abolished the
rule against perpetuities, making it possible to create a trust
that can continue forever. The abolition was significant for
Alaska's trust business, booming since 1997. With careful
drafting, perpetual trusts can avoid all federal estate tax and
continue to grow for the use of successive generations; that is the
goal in creating those trusts. The tax advantage has caused at
least ten states to abolish the rule against perpetuities, and five
others have pending legislature that would do so.
MS. McGUIRE told members that the legislation before the committee
seeks to fix a problem discovered by a group of Anchorage trust and
estate attorneys. Affectionately called the "Delaware tax trap" -
because when Delaware enacted something similar to this
legislation, the Internal Revenue Service (IRS) found a way to
collect tax on that - this problem is fatal to numerous trusts
created in Alaska since passage of the 1997 Act.
MS. McGUIRE explained the problem: Any person who creates a
perpetual trust usually wants to give the trust beneficiaries the
power to direct the disposition of their assets at death, as a
means of making the trust more flexible; that is the power of
appointment. Under present law, however, if a beneficiary
exercises a special power of appointment by directing that the
trust assets continue in trust for the benefit of an individual who
is the beneficiary, and if that beneficiary also is given a special
power of appointment in the trust, then the trust assets eventually
will be subjected to either an estate or a gift tax liability.
MS. McGUIRE told members the problem is fixed in this bill by
stating that the trust will vest in 1,000 years. Practically
speaking, that makes it perpetual but provides an end-point; for
tax purposes, that seems to cure the "Delaware tax trap" problem.
Ms. McGuire deferred to Steve Greer, who she said had provided
effective explanations to herself and Chairman Kott in Anchorage a
month before.
Number 0420
STEPHEN GREER, Attorney at Law, came forward, noting that he is a
sole practitioner in Anchorage who focuses on estate and gift tax
planning. He told the committee this is a technical bill, remedial
in nature. He agreed that the rule against perpetuities was
rendered ineffective in April 1997 so that trusts could go on
forever, and that there is a tax reason for wanting to do this;
however, it created the little-known problem known as the "Delaware
tax trap." He said he wouldn't be surprised if all 50 states have
similar legislation within five years.
Number 0482
REPRESENTATIVE CROFT asked what tax consequences there are to
abolishing the rule against perpetuities.
MR. GREER posed an example where he wants to create a trust, using
his own money, for Ms. McGuire. He can give Ms. McGuire rights to
this trust that are really almost tantamount to outright ownership,
and as long as he falls short of that threshold, the properties in
the trust won't be subject to estate tax at her death; they can
pass on to her children, and to their children. The rule against
perpetuities says that cannot be. It says all interest must vest
"within the lives in being" at the time the trust is created - Ms.
McGuire's life, in this instance - plus 21 years, at which point
the trust must terminate and the assets must be distributed to
those beneficiaries.
MR. GREER continued. If it were possible to have a trust continue
forever - because the rule against perpetuities has been done away
with - he could give Ms. McGuire the following: the right to be
trustee of her own trust; the right to all of the income that the
trust generates; and the right to as much of the principal as she
determines, in her position as trustee, is necessary for
maintenance and support. Furthermore, he could give her a special
testamentary power to appoint those assets to other beneficiaries
at her death, either outright or in trust for the benefit of those
beneficiaries.
MR. GREER emphasized that giving Ms. McGuire that testamentary
special power of appointment is incredibly important for these
kinds of trusts, because if they can run on in perpetuity, one
wants the beneficiaries - whose properties these really are - to be
able to change the disposition of that trust to meet changing
conditions. In this instance, his own trust would probably say
that if Ms. McGuire doesn't exercise this testamentary special
power of appointment at her death, [the trust assets] will go to
her children in equal shares, per stirpes.
MR. GREER continued. If one of Ms. McGuire's children has a
disability, for example, Ms. McGuire could exercise her
testamentary special power of appointment and leave that property
in trust for the benefit of that child. Or if she had two
children, a doctor and a drug addict, she could diminish the amount
that the drug addict would receive, or at least leave it in trust
for that child, and give the other share to the child who has done
well in life and has worked hard.
MR. GREER again emphasized the importance of including the special
power of appointment. He said this is why all of these states are
getting in line to abolish the rule against perpetuities. When he
creates this trust, he has to allocate an amount of generation-
skipping tax exemption equal to the value of the trust when he
funds it, but from that point forward, this trust can grow to
whatever value. As long as he doesn't give those beneficiaries
rights that exceed the threshold which he had just described, these
properties can pass on and on and on, in further trust. This
legislation allows people to essentially create a fund that can go
on forever without being subject to a federal estate tax.
Number 0766
REPRESENTATIVE CROFT said the object, then, is to give Ms. McGuire
the money; if it were given straight out, then at the end of her
life she would have to pay estate tax. This gives it to her, in
effect, with almost all of the rights of it but in a way that
avoids estate tax forever.
MR. GREER affirmed that, saying that is the law now. He reiterated
that within ten to fifteen years all fifty states will have similar
legislation; he pointed out that most of the ten states onboard now
came onboard within the last three years, and five others have
pending legislation. "We all wonder at what point the federal
government's going to get tired of this," he commented, saying the
federal government is in a state of flux with the whole estate and
gift tax regime. "But all we can do is form trusts on the basis of
the law as it now stands, and that's the way it is right now," he
concluded.
Number 0835
REPRESENTATIVE GREEN asked: If Ms. McGuire has the authority to
modify the trust and pass that right on to her doctor child [in the
hypothetical situation], how does that differ from having full
authority?
MR. GREER responded that this is a tax definition; that is all it
is. If he said that [Ms. McGuire] has the power to appoint these
assets at her death to her estate or to creditors of her estate,
then she has a general power of appointment, and all that property
would be subject to estate tax at her death. "As long as you
exclude those two individuals, you can include everybody else," Mr.
Greer said, "and yet, under ... the federal estate and gift
taxation of what defines a general power of appointment and a
special power of appointment, ... it will not be included in her
estate because it's considered to be a special power of
appointment."
Number 0905
REPRESENTATIVE GREEN said without the rule against perpetuities,
then, his own [trust] could go on for another 1,000 years.
However, he thought that was the whole purpose of the rule against
perpetuities.
MR. GREER agreed the trust could go on and on. He said this is a
"technical thing" and isn't meant to get into the argument of
whether to abolish the rule against perpetuities, which has already
been done. This tries to fix a problem, to give beneficiaries of
a perpetual trust a special power of appointment so that the trust
can retain flexibility. There is even a public policy reason for
that, he suggested. However, a provision in the Internal Revenue
Code passed in 1951, found under Sections 2041(a)(3) and 2512(d),
says that if Ms. McGuire, in this case, takes her special power of
appointment and creates a trust for the benefit of her child, in
turn giving that child a special power of appointment regarding
those assets in trust at his or her death, that sets off the
"Delaware tax trap." She would be considered to have created a
general power of appointment, and all that trust property would be
thrown into her estate.
MR. GREER acknowledged how technical this area is. Offering some
history, he said at first the desire was to abolish the rule
against perpetuities and make that clear, instead of doing this
sleight of hand that essentially rendered it ineffective.
Therefore, they had proposed SB 162. However, Mr. Greer had
started wondering whether that created a "Delaware tax trap"
problem; he knows national experts and had posed this question to
others. He had wanted to actually initiate the "Delaware tax trap"
to get out of the generation-skipping tax problem. He had talked
to a University of Tennessee law professor, Amy Hess (ph) and then
to Jonathan Blattmachr, who was instrumental in the legislation and
who at first dismissed the idea.
MR. GREER provided further history, noting that he had continued
his correspondence. He mentioned the University of Miami estate
planning program, from which he had graduated, then said Bruce
Stone (ph), who heads the legislative drafting committee in
Florida, had put out legislation for that state; that legislative
history included a concern that many states which had abolished the
rule against perpetuities had stumbled into the "Delaware tax
trap." With Mr. Stone's corroborative report, Mr. Greer had
returned to Mr. Blattmachr and his own attorney group, who saw the
need to fix this problem. His solution, then, was to abolish the
rule against perpetuities, but with respect to this limited
circumstance where one takes a special power of appointment and
exercises it to create a further special power of appointment, the
property subject to that special power of appointment must vest
within 1,000 years.
Number 1151
REPRESENTATIVE CROFT asked whether there wasn't some logic,
however, to the decision interpreting the [1951] tax code. If one
exercises a special power to grant that special power again, isn't
that coming so close to a general power that it is general? And
shouldn't taxes be paid at that point? "Or no one should ever pay
estate tax," he added.
MR. GREER said that is a philosophical question.
REPRESENTATIVE CROFT suggested that it is a public policy
discussion which legislators should be concerned with.
MR. GREER responded that the legislature took the position in 1997
that abolishing the rule was a good thing, and other states
apparently feel the same way. This is probably the most important
piece of legislation that exists as far as trying to create a trust
industry here in Alaska, he said. Many states have recently
enacted these statutes and fallen into the "Delaware tax trap"; he
cited Rhode Island as an example. Mr. Greer said he has even
declined to write an article in the country's most prestigious
estate planning magazine on this unless [Alaska] fixes its
legislation to cure this; he doesn't want to highlight any other
states' problems, which would, in turn, highlight Alaska's
problems. If this isn't fixed, he believes millions or possibly
hundreds of millions of dollars are at stake. As far as the estate
and gift tax question, he asked whether that isn't a congressional
debate, in the federal government's hands.
Number 1353
REPRESENTATIVE GREEN said this sounds like a really fine line. He
asked whether it is certain that the IRS would agree that this
change [to 1,000 years] still would not be quite full ownership.
MR. GREER said it would fix the problem, for a number of reasons.
He had submitted the draft [legislation] to Jonathan [Blattmachr]'s
law firm, which he believes is composed entirely of Harvard Law
School graduates and which has represented Jackie Onassis and the
Rockefellers, for example; he had received revisions back as
recently as last month. Mr. Greer stated:
Yes, we think it will work ... To be honest with you, we
know it'll work with respect to all future trusts because
this legislation [hinges itself] on a Wisconsin statute;
in fact, we just mimicked the Wisconsin statute. And the
[United States] Tax Court, in the Estate of Murphy
[Murphy, Mary Margaret, Estate of v. Comm.], says, "Yes,
indeed, it does work if the statute reads this way." But
we had to go further. We had to fix all those existing
trusts that were created since April of '97. And so this
legislation does two things. We've actually got two
lines of defense here. We've got the Estate of Murphy,
and we go further and we set up a perpetuity period of a
thousand years in that limited circumstance where a
special power is exercised to create a further special
power.
REPRESENTATIVE GREEN surmised that when the thousandth year is
reached, some taxes would have to be paid if the trust still
exists.
MR. GREER clarified, "Well, someone's got to get the money."
Number 1371
REPRESENTATIVE MURKOWSKI referred to the retroactivity to April 1,
1997. She asked how many trusts are in this "Delaware tax trap."
She further asked whether this remedies the situation not only for
trusts created after the date of passage of SB 162 but also for
other trusts caught in the trap, without having to go into those
individually to fix them somehow.
MR. GREER said the answer is yes to all. He cannot imagine a
competent attorney setting up a perpetual trust without giving
beneficiaries special powers of appointment, which provide
flexibility to meet changing conditions over time. He noted that
[Internal Revenue Code] Section 2041(a)(3) is complicated but
essentially states that to determine whether the "Delaware tax
trap" will be set off, one must look at local law. If, by looking
at local law, the time in which a property subject to that special
power of appointment vests cannot be ascertained without looking
back to the date of the creation of the instrument creating the
first special power of appointment, then the "Delaware tax trap"
exists. He likened it to rocket science.
MR. GREER explained that by changing the law to read that this
property has to vest within 1,000 years of that date of creation of
the original trust instrument, it now falls outside of the literal
reading of 2041(a)(3), and "we're home free." He referred to
retroactivity. Noting that the ability to create a perpetual trust
has only existed since April of 1997, he said they are looking at
perpetual trusts created between then and the date of enactment for
this current bill. The solution is already found in our law,
adopted from the uniform statutory rule against perpetuities passed
by the national commissioners. In that law, [AS] 34.27.07(a), the
second sentence says that if one exercises a special power of
appointment, the law in effect at the time that occurs will be the
law that controls. If Alaska were to pass a law that is different
from what the law was back then, someone who exercises a special
power of appointment with respect to one of these old trusts would
look to the laws that now exist. Mr. Greer explained:
And the reason they did that was ... because previous to
enacting this law, we only had the common law rule
against perpetuities, which says all property interests
must vest within the lives in being plus 21 years. And
the uniform statutory rule said, "You know, this is a
pretty difficult thing to understand." I think in law
school, if you can remember, ... that was the one area of
law we [were] told you could never malpractice in; it's
just too complicated for anyone to understand. ...
What they did with the uniform statutory rule against
perpetuities, they put in a wait-and-see provision of 90
years: ... "We'll wait and see whether or not ... these
property interests vest within this 90-year period, okay?
And this will affect all those old trusts that you may
have created, where you haven't exercised the special
power of appointment .... We'll wait and see if it vests
within the 90-year period from the date that you exercise
that special power of appointment." So, ... the body of
law is already there to make it retroactive back to April
of '97.
MR. GREER remarked that the complexity of the rule against
perpetuities is one reason why a lot of states have decided to
abolish it. He asked what good a law is that no one understands.
Number 1706
REPRESENTATIVE MURKOWSKI referred to Mr. Greer's mention of
comments from Florida. She asked whether Alaska is the first state
to figure out how to get around this "Delaware tax trap" with
legislation like that before the committee.
MR. GREER answered yes, except that if Alaska essentially had
abolished the rule against perpetuities back in April of 1997 and
had put in its place another statute, a rule against the suspension
of the power of alienation, "we would have been home free." He
added, "We wouldn't even have to address this problem because under
the Estate of Murphy, we ... wouldn't have to reckon with this
'Delaware tax trap.' But we did not." Mr. Greer told members,
"What's novel about our statute is this: ... it provides ... a
vesting regime with respect to property interests that are subject
to the exercise of this special power of appointment; and we're
saying that it has to vest within the 1,000-year period." He
indicated the 1,000-year period was an idea offered by a Florida
professor.
Number 1780
REPRESENTATIVE GREEN asked what happens if ten years from now the
legislature modifies this law. Could that negate this? Would [Ms.
McGuire's] hoped-for estate be "tax due" at the end of her
lifetime? Once established, could her estate falter?
MR. GREER said no, it is fixed; this is just a fixing statute.
However, there is no guarantee that what they do will be good ten
years from now. "And we're all wondering what the federal
government is going to do," he added. In response to a further
question about what happens if the federal government passes
superseding legislation, Mr. Greer suggested the need to keep
current no matter what the area of law or life.
Number 1906
REPRESENTATIVE ROKEBERG referred to Section 7 of the bill and said
he was trying to understand the thrust of that. Mentioning the
hypothetical situation discussed earlier by Mr. Greer, he asked how
one manages the corpus of the trust regarding selling [assets], for
example, if one is "restricted from your power of alienation."
MR. GREER suggested that the public policy reason behind the rule
against perpetuities is to ensure free marketability of the
property in trust. He added, "Well, in a sense we're doing that
now." He said previously [Alaska] never had a rule against the
suspension of power of alienation; that rule says one must always
be able to give someone the ability to sell property, which makes
it transferable. The gist of Section 7 is that one cannot suspend
that power for more than 30 years; in other words, even though this
trust can continue on forever, one has to be able to give the
trustee the ability to sell the property while it is in trust.
That is one good reason for including Section 7.
MR. GREER pointed out that the principal reason for including
Section 7, however, is this is what the Estate of Murphy hinged on.
He commented that the [United States] Tax Court and the IRS - the
[Department of the] Treasury - have both misinterpreted the rule
against perpetuities, and he really wonders what they were reading.
He noted that the seminal article on this, "Perpetuities in a
Nutshell," was written by Profession Leach (ph) in 1934 in the
Harvard Law Journal.
MR. GREER told members that, in short, the tax court says that some
states have characterized their rule against perpetuities as a rule
against the remote vesting of property, whereas other states have
characterized theirs as a rule against the suspension of the power
of alienation. In the latter instance, as long as the special
power of appointment relates back to the date of the original trust
instrument, the "Delaware tax trap" will not be violated. The
irony is that one can give a trustee the power to sell property -
which every trust would do - and never violate the rule against the
suspension of the power of alienation; nonetheless, the property
can still stay in trust forever and still be excluded from estate
taxes that pass from one generation to the next. He said that
really makes one wonder if the [Department of the] Treasury knew
what they were doing.
MR. GREER noted that the tax court, in fact, pointed that out,
saying, "But you wrote the regulations, and now you're stuck with
it." Furthermore, the IRS acquiesced and now agrees they will be
stuck with this decision. However, the big point is what will
happen down the road and whether Congress will put forth a rule
that says these trusts cannot go on forever without being subject
to some sort of estate and generation-skipping tax. "But that
isn't the case now," Mr. Greer added.
Number 2106
REPRESENTATIVE ROKEBERG requested confirmation that the State of
Alaska has no inheritance taxes.
MR. GREER responded that it does, but it works like this: "If you
pay the federal government a dollar, ... the state may get 20 cents
out of that dollar - it's not even really that high - ... but the
federal government will get the remaining 80 cents. ... You don't
end up paying $1.20; ... it's a type of revenue sharing."
REPRESENTATIVE ROKEBERG posed a scenario where one uses a special
power [of appointment] to change the nature of the asset mix. He
asked whether one must keep a trail of the corpus of the principal
at all times. He stated his understanding that Mr. Greer had said
one even could use up a substantial portion of the principal of the
trust. He said presumably there would be some remainder to be
passed on to the next generation.
MR. GREER agreed but said that with the special power of
appointment one could actually say that the trust is coming to an
end and distribute the assets. It only continues if that is
desired. One wants the special power of appointment so that one
can terminate the trust down the line.
Number 2204
REPRESENTATIVE MURKOWSKI recalled that when [HB 219] was heard in
committee previously, it was addressing that the charitable lead
trust aspect had been overlooked. She said she assumes that with
the newly revised and updated SB 162, they are rolling all the good
things from the former versions into this one.
MR. GREER affirmed that and said he feels comfortable with it.
Number 2304
DAVID SHAFTEL, Attorney at Law, testified via teleconference from
Anchorage. He agreed that a number of states have abolished the
rule against perpetuities for tax and non-tax reasons. A number
have avoided the glitch by prohibiting suspension of the power of
alienation; when they combine that with the use of the power of
sale, they don't have the problem that Alaska and a few other
states have stumbled into, the "Delaware tax trap," which is
obsolete but nonetheless exists in the law. All this bill does is
provide a way to avoid that glitch. The unfortunate alternative
would be to not use special powers of appointment in these
perpetual trusts, which are very popular right now, because those
special powers of appointment provide flexibility so that
generation after generation can make adjustments. This amendment
places Alaska on the same footing as other states that have already
done this in a little different way. Mr. Shaftel concluded:
I think it's a very good bill. There are a number of us
up here who have discussed this and looked at it. And,
as I've mentioned to you before, we're an informal group
of estate planning attorneys who have a lot of experience
in this area. There have been a lot of these trusts
created by Alaskans. They have created them with the
expectations that they will get the same ... advantageous
treatment that the residents of other states are getting
in their estate planning. ... And so, it really is very
important, in my view and the view of our informal group,
that this glitch be remedied. So I'd urge your support
of ... this bill.
Number 2430
REPRESENTATIVE GREEN asked Mr. Shaftel whether he concurs with Mr.
Greer that until the law is changed, either at the federal or state
level, people who set up these trusts would be protected with the
passage of this legislation.
MR. SHAFTEL affirmed that.
Number 2449
DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska
Trust Company, testified via teleconference from Anchorage,
agreeing that the bill [Version M] corrects a glitch. He
concluded, "Probably 99 percent of the trusts that we have, have
that provision in there, so we would strongly recommend that the
committee approve this legislation."
Number 2465
RICHARD THWAITES, JR., Attorney at Law, testified briefly via
teleconference from Anchorage that he supports the legislation
[Version M], a worthwhile change to the statute that would assist
in "the planning that we do" and would keep Alaska in the
forefront.
TAPE 00-35, SIDE B
Number 0001
MR. SHAFTEL, in response to a question by Representative Rokeberg,
emphasized the importance of retroactivity and the immense
popularity of perpetual trusts, which have been set up by Alaskans
and nonresidents of Alaska who desire that perpetual characteristic
for their trusts. The bill is designed to provide that type of
benefit. "I don't see any downsides, nor have I heard any
downsides discussed of the retroactivity," he concluded. "It's a
pure positive."
REPRESENTATIVE ROKEBERG stated:
Just for the record, Mr. Chairman, I would assume that
the public policy that this legislature decided on in '97
when we introduced the first legislation to establish the
trust, this is merely a ratification thereof, making sure
that those particular instruments that were created by
that policy are retained in place and not changed. And
this is a vote of confidence, if you will, for that.
Number 0060
REPRESENTATIVE GREEN asked whether most attorneys are aware of this
in Alaska or it is only shared by a few.
MR. GREER reiterated that estate tax planning is very complicated;
typically, it requires him to spend two months every year, at no
pay, on continuing legal education, and Mr. Shaftel does the same.
The people who engage in this must dedicate their lives to it. He
said he had attempted to share this problem with the entire estate
planning section of the bar association on countless occasions;
however, perhaps only five or six people really understand it.
REPRESENTATIVE GREEN thanked Mr. Greer, saying he believes it is an
extremely important issue. Noting that there were no further
testifiers signed up, he closed public testimony. He asked whether
there was any discussion; none was offered.
Number 0132
REPRESENTATIVE ROKEBERG made a motion to adopt the proposed HCS for
CSSB 162, Version M [1-LS0485\M, Chenoweth, 3/6/00], as a work
draft. There being no objection, it was so ordered.
REPRESENTATIVE ROKEBERG made a motion to move HCS CSSB 162, Version
M, from committee with individual recommendations and the attached
zero fiscal note. There being no objection, it was so ordered and
HCS CSSB 162(JUD) was moved from the House Judiciary Standing
Committee.
HB 369 - PROPERTY EXEMPTIONS
REPRESENTATIVE GREEN announced that the next order of business
would be HOUSE BILL NO. 369, "An Act relating to property
exemptions under the Alaska Exemptions Act; and providing for an
effective date."
Number 0210
JOHN MANLY, Staff to Representative John Harris, Alaska State
Legislature, testified on behalf of the sponsor of HB 369. He
explained that HB 369 changes the "exemption statute," which is
Title 9, Chapter 38. Basically, HB 369 would increase the dollar
amounts of specified assets that would be protected under this
exemption statute. Furthermore, it provides new protection to
assets that are not covered under the current law. He pointed out
that "AS 09.38, exemption statute, delineates what assets are
protected from creditors when a person is sued and loses and has a
judgment entered against him; it can also apply in some cases of
bankruptcy if the person opts to take state exemptions as opposed
to federal exemptions."
MR. MANLY specified that HB 369 will increase the homestead
exemption to $250,000 per individual. Currently, the homestead
exemption is set in statute at $54,000, although it has been
increased to $63,000 per the formula in statute. The legislation
would also increase the exemption for the cash value of life
insurance policies and/or annuity contracts owned by the individual
to $250,000. Furthermore, HB 369 provides an unlimited exemption
on the proceeds of a life insurance contract or an annuity paid to
a beneficiary that is not the person seeking protection under the
exemption act.
MR. MANLY pointed out that HB 369 increases the ability to trace
assets that an individual could have claimed as an exemption from
six months to two years. He noted that the new exemptions proposed
in HB 369 are located in Section 4. Those exemptions address the
reserves held by a condominium association. These reserves are
usually held for maintenance and such and would be protected
against some lawsuit against the association. Section 5 provides
an exemption for a government employee's deferred compensation plan
in order that a deferred compensation plan would have the same
protection as a 401K plan, for example. He noted that Section 6
has a limited cash and liquid asset exemption of up to $8,075.
Number 0335
REPRESENTATIVE GREEN inquired as to what that is based on.
MR. MANLY said he believes that [limited cash and liquid asset
exemption amount] is related to the Internal Revenue Services'
(IRS) allowance. However, he deferred to Mr. Greer.
MR. MANLY moved on to Section 13, which addresses how certain
revocable trusts are treated. When HB 369 was heard in the House
Labor & Commerce Committee, the Department of Labor & Workforce
Development (DOLWD) discovered a problem with the reference to
indexing in Sections 11 and 12 of the bill. He explained that on
page 4, line 24, the bill references the index for January of 1998,
but there is no index for January because the indexing is performed
for the first half of the year and the second half of the year.
There is also an average annual index. The amendment would propose
that [the reference to January be changed] to the average annual
index as would also be the case for the other two occurrences on
page 4. On page 5, DOLWD had a problem with how the additional
portion of the percentage increases. He indicated that the
department recommended the deletion of the following language in
Section 12(b)(1), "portion of the percentage change in the index in
excess of a multiple of 10 percent is disregarded". It was felt
that this phrase would cause the adjusted dollar amounts to
understate inflation to a greater amount over time. The suggestion
was to replace the deleted language in Section 12(b)(1) with the
following language, "the dollar amounts only change in multiples of
$100" and thus one would be rounding to $100 each time.
REPRESENTATIVE ROKEBERG noted that the Anchorage [index], the proxy
for the Alaska Index, "seems to have been raising it to a lesser
degree, historically over the last two decades, than the All U.S.
Average, All Urban Index. So, there seems to be a preference to
use that because it shows somewhat less inflation." Representative
Rokeberg said that this [HB 369] does clean it up.
Number 552
REPRESENTATIVE ROKEBERG moved that the committee adopt [Amendment
1], labeled 1-LS1266\G.1, Bannister, 3/22/00, which reads as
follows:
Page 4, line 24:
Delete "index for January of"
Insert "annual average of the index for [JANUARY
OF]"
Page 4, line 26:
Delete "index for January of"
Insert "annual average of the index for"
Page 4, line 31:
Delete "index for January of that"
Insert "annual average of the index for the year
preceding [JANUARY OF] that even-numbered"
Page 5, lines 2 through 6:
Delete
"(1) the portion of the percentage change in
the index in excess of a multiple of 10 percent is disregarded
and the dollar amounts change only in multiples of 10 percent
of the amounts appearing in this chapter on the effective date
of this Act for the dollar amounts in AS 09.38.010,
09.38.020(f), and 09.38.025(a) and (d) and on August 26, 1982,
for the other dollar amounts in this chapter; and"
Insert
"(1) the [PORTION OF THE PERCENTAGE CHANGE IN
THE INDEX IN EXCESS OF A MULTIPLE OF 10 PERCENT IS
DISREGARDED AND THE] dollar amounts change only in multiples
of $100 [10 PERCENT OF THE AMOUNTS APPEARING IN THIS CHAPTER
ON AUGUST 26, 1982]; and"
There being no objection, [Amendment 1] was adopted.
Number 0577
STEVE GREER, Attorney, informed the committee that what prompted HB
369 is essentially a provision found in Section 4 of the bill. He
related the following disaster, which could have left hundreds of
people disposed from their homes. Mr. Greer noted that he lived in
a condominium complex known as Foxwood Condominiums. A couple of
years ago the [Foxwood Condominium] association hired a painter,
who covered a lighting fixture without letting the paint fully dry,
which led to a fire. The entire building, eight units, went up in
flames. One unit was occupied by a tenant who did not have
renter's insurance and thus, in an attempt to cover his/her losses,
the renter sued the painter. The painter was bonded and the
lawsuit went on to include the condominium association as well as
the individual board members on the association, who happen to be
retired folks.
MR. GREER continued. This lawsuit went to a jury trial and
fortunately, the resulting judgment was less than the amount of the
insurance which the condominium association had. If that had not
been the case [and the judgment had been more than the amount of
the insurance held by the condominium association], all of the
reserves would have been up for grabs. Mr. Greer pointed out that
each month, people pay a certain amount into the condominium
association. That money is analogous to a trust account. This
could have been a disaster. Therefore, this situation prompted
this legislation in order to protect these reserves. Upon review
of the remaining exemption amounts, it was felt that the exemptions
should be updated as that had not occurred since 1982.
MR. GREER turned attention to the dollar amount for the homestead
exemption. As was indicated earlier, 13 states provide more
protection than Alaska does for its citizens even though it is more
expensive to live in Alaska versus other states. Of these 13
states, five provide unlimited exemptions. Although an unlimited
exemption for a homestead was discussed, it was determined that
would probably not ever happen. Therefore, a dollar amount of
$250,000 was proposed. He explained that in 1997 Congress said
that if one sells a principal residence, $250,000 per person can be
excluded of capital gains. The thought was if that is the level
the federal government set for a principal residence, then the same
limit should be used for the purposes of the homestead exemption in
Alaska. However, now there is a U.S. Senate and a U.S. House of
Representatives bankruptcy bill pending before Congress. The bills
have been referred to a joint committee for resolution. The U.S.
Senate bill sets a limit of $100,000 person while the U.S. House of
Representatives bill sets a limit of $250,000.
MR. GREER pointed out that HB 369 would also raise the amount of
the cash value of an insurance policy from $12,000 per person to
$250,000 per person. This increase is very important because as
people age, they become uninsurable. If one cannot keep an
insurance policy, there will be no insurance to pay to
beneficiaries in the case of an untimely death. This change would
also apply to annuities as annuities and insurance products are
practically treated the same under the IRS code. He pointed out
that typically, annuities are meant for retirement and the money
cannot be withdrawn before the age of 59.5 without a 10 percent
penalty. The current law provides protection for retirement
benefits, except with respect to government employees. He noted
that presently, deferred compensation plans [of government
employees] under Section 457 are not protected. Therefore, HB 369
includes that as well.
Number 0967
REPRESENTATIVE GREEN referred to page 1, line 7, and asked if the
$250,000 homestead exemption was to apply to each individual or for
the homestead in total.
MR. GREER answered that it [the $250,000] is meant for each
individual.
REPRESENTATIVE GREEN said the language in Section 1(a) seems to say
that the maximum for the homestead is $250,000.
MR. GREER said he could see that, although he knew the intent.
REPRESENTATIVE JAMES interjected that [the language] is existing
law.
MR. MANLY pointed out that the key language in Section 1(a) is "the
individual's interest in property", which would key the amount to
the individual.
MR. GREER asked if this problem could be resolved by the following:
on page 1, line 7, following "exemption", insert "for the
individual's interest".
REPRESENTATIVE JAMES said that she read this language to mean that
the maximum homestead exemption is $250,000. She did not think
that two joint owners of a homestead would receive $250,000 each.
MR. GREER clarified that the intent was to have each individual
receive $250,000; a marriage penalty was not intended.
REPRESENTATIVE JAMES related her understanding, then, that a
property with a $500,000 value can be exempted by two parties.
MR. GREER replied yes. However, if one person is liable, then only
that individual can protect his/her interest to the amount of
$250,000.
REPRESENTATIVE GREEN said that would be a fairly sizable
protection; is that what the committee desires?
Number 1180
REPRESENTATIVE GREEN pointed out that there was a recommended
amendment, Amendment 2, which read as follows:
Page 1, line 7, following "exemption"
Insert "for the individual's interest"
There being no objection, the adoption of Amendment 2 was ordered.
REPRESENTATIVE ROKEBERG noted that the bill packet should contain
letters from some Anchorage accountants, who believe that a
$500,000 exemption for a married couple's house is too high. This
is a public policy issue. He said, "The combination of the
$250,000 in cash value of insurance and a $500,000 in real estate
value and a few other little things, you could -- I would ask Mr.
Greer, how much can you stash in a year and go bankrupt?"
MR. GREER clarified that Representative Rokeberg's example [of a
$500,000 exemption] suggests that both couples are liable for the
damage. He specified, "It is really $250,000 per person for the
household exemption." Therefore, one could have $500,000 cash
value in insurance plus $250,000 worth of equity in a home, which
could be protected.
REPRESENTATIVE CROFT interjected that there could be $8,000 in
miscellaneous and all one's retirement accounts.
MR. GREER noted that the $8,000 comes from the bankruptcy code and
the [money from one's] retirement accounts is currently the law.
Mr. Greer remarked that this is, no doubt, a public policy issue in
which one would be saying that one is in support of someone being
able to keep their home.
REPRESENTATIVE GREEN commented that when a painter comes to his
home and the house burns down, the painter is fairly well
protected.
MR. GREER said, "That's the other aspect of this thing."
REPRESENTATIVE ROKEBERG reiterated that this is a public policy
issue in regard to what degree would the aggregate of exemptions be
allowed as use for shelter purposes for potential bankruptcies.
Number 1334
DAVE SHAFTEL, Attorney, testified via teleconference from
Anchorage. He pointed out that HB 369 and the particular
provisions in it have been discussed at length over the past couple
of years both among the informal group of attorneys as well as the
Estate Planning Section of the Alaska Bar Association. This has
also been discussed before the Anchorage Estate Planning Council,
which is a mixed membership of attorneys, CPAs, trust officers,
insurance brokers, securities brokers and financial planners. Mr.
Shaftel said that he has heard very few negative comments as most
comments surrounded the need to update and adjust these provisions.
He noted that there is quite a bit of information in regard to what
other states have done, which he believes Mr. Greer has. He also
noted that there are a handful of states that have unlimited
exemptions in regard to both the personal residence and life
insurance. There are other states that have specific dollar
limitations that vary. Currently, Alaska is at the low end of
these exemptions.
REPRESENTATIVE CROFT acknowledged that the $8,075 was chosen
because it matched federal law, and the $250,000 exemption is
suggested because it would match federal law as well. However, it
is indexed to the Anchorage consumer price index (CPI), in effect.
He surmised, "These are going to go off-line from the federal,
gradually, right?" He asked if any of the federal numbers are
indexed and if so, on what index?
MR. GREER replied no.
REPRESENTATIVE CROFT suggested that a solution could be to set the
[homestead] exemption at $250,000, but not index [that amount].
Therefore, the amount would be tied to the federal law and it does
not continue to grow unless "we" decide it should.
Number 1537
MR. MANLY interjected that Chris Miller, DOLWD, has recommended
that indexing be eliminated altogether as it is burdensome and
confusing in the statutes. Mr. Manly commented that he did not
believe Representative Harris would mind if indexing was
eliminated.
REPRESENTATIVE ROKEBERG said that the indexing is already in place
and the amounts are a moving target annually. Therefore, he
surmised that there could be a delay in the disposition of a case
pending verification of the numbers.
MR. MANLY noted that he believes with the bill as written, the
numbers would change in October of even-numbered years.
REPRESENTATIVE CROFT pointed out that what [is in statute] is a
$54,000 statute that really was $63,000; one just had to know that
or find someone who did because of the lack of clarity in this
statute. Therefore, he preferred to have a statute that specified
the amount and if the amount increases at the federal level, there
can be discussion at that time in regard to whether to increase the
state's amount.
REPRESENTATIVE GREEN indicated that such a scenario made sense to
him.
MR. GREER noted that he did not have it [indexing] in the bill to
begin with, but Teresa Bannister, Attorney, Legal and Research
Services Division, added the indexing provisions. If it takes
deletion of the indexing to make HB 369 more palatable to the
legislature, then he suggested its deletion.
Number 1719
REPRESENTATIVE ROKEBERG moved that the committee adopt a conceptual
amendment to delete Sections 11 and 12 and the attendant statutory
conforming draft that would be necessary with the removal of the
CPI provisions. There being no objection, it was so ordered and
Amendment 3 was adopted.
REPRESENTATIVE GREEN pointed out that Amendment 3 in effect deletes
Amendment 1.
REPRESENTATIVE ROKEBERG agreed.
REPRESENTATIVE KERTTULA related her understanding that the
underlying statute, which maintains the index, is not being
removed. She said, "We're not putting in Sections 11 and 12 of the
bill."
REPRESENTATIVE ROKEBERG specified, "That's right, just as related
to the bill."
REPRESENTATIVE KERTTULA pointed out, then, that the index would
still remain in the underlying statute. The CPI is still in
statute. She commented that there could be deep drafting impacts.
REPRESENTATIVE CROFT suggested that a committee substitute (CS) be
brought back before the committee.
REPRESENTATIVE GREEN interjected that the CS would need to be
[based] on the intent of removing indexing.
REPRESENTATIVE KERTTULA indicated it would be helpful to have
someone speak to how this works with indexing in the statute.
REPRESENTATIVE GREEN announced that the committee would take a
brief at-ease at 2:40 p.m. and he called the committee back to
order at 2:42 p.m.
Number 2030
REPRESENTATIVE ROKEBERG moved that the committee rescind its action
in the adoption of Amendment 3 for the purposes of reading
Amendment 3. There being no objection, it was so ordered and the
committee rescinded its action in the adoption of Amendment 3.
REPRESENTATIVE ROKEBERG moved that the committee delete the CPI
clause as set forth in Sections 11 and 12 "so as not to directly
effect or change those provisions within the bill before us and not
other sections of the chapter."
REPRESENTATIVE KERTTULA asked if the desire is to leave the CPI as
it is and let it continue to impact everything or is the desire to
remove the homestead [CPI]?
REPRESENTATIVE ROKEBERG specified, "It was the insurance and the
issues that are covered in the bill that are capped."
REPRESENTATIVE KERTTULA turned to the medical savings in regard to
the deferred compensation. If that is extended to the entire bill,
then those sections are impacted.
REPRESENTATIVE ROKEBERG commented that those are unlimited.
MR. MANLY informed the committee that Mr. Miller, DOLWD, said the
following: "The frequency of statutory intervention calls into
question the necessity/efficacy of subsection 115 of the Act; it's
deletion is recommended." Mr. Manly said that Mr. Miller is
recommending the deletion of [AS] 09.38.115(a) and (b).
REPRESENTATIVE KERTTULA pointed out that would take it out for
everything and she was unsure as to what that would impact.
REPRESENTATIVE CROFT suggested that be done in a CS.
REPRESENTATIVE GREEN said he understood Representative Rokeberg's
amendment to [apply] only to the references in HB 369 and not all
of [AS] 09.38.115(a) and (b).
REPRESENTATIVE ROKEBERG agreed that would be the motion before the
committee. He suggested that there could be a CS that would take
it [the index] out entirely and that could be reviewed by the
sponsor.
Number 2273
REPRESENTATIVE ROKEBERG restated his motion to delete the CPI
provisions in Sections 11 and 12 of HB 369 to impact only those
sections in the bill. There being no objection, it was so ordered
and Amendment 3 was adopted.
REPRESENTATIVE GREEN announced that two CSs will be prepared for
the committee. One CS will include [Amendment 3], which only
affects HB 369, and the other CS will include the deletion of the
CPI [altogether]. Representative Green further announced that HB
369 would be held.
HB 398 - LIFE AND HEALTH INSURANCE GUARANTY ASSN
REPRESENTATIVE GREEN announced that the final order business would
be, HOUSE BILL NO. 398, "An Act relating to the Alaska Life and
Health Insurance Guaranty Association." [Before the committee is
CSHB 398(L&C).]
Number 2437
JOHN MANLY, Staff to Representative John Harris, Alaska State
Legislature, explained that HB 398 would update the statutes
relating to the insurance guaranty association in order to conform
with the most recent model statute.
TAPE 00-36, SIDE A
MR. MANLY turned the discussion over to John George.
REPRESENTATIVE ROKEBERG clarified that [HB 398] refers to life and
health insurance. There is another bill, HB 310, that addresses an
association related to property and casualty. He noted that there
are two different guaranty associations in Alaska.
Number 0229
JOHN GEORGE, Lobbyist, American Council of Life Insurance (ACLI),
agreed with Representative Rokeberg that the life and health
insurance guaranty association is very different from the property
and casualty guaranty association as the two have very different
operations. He explained that when a property/casualty insurance
company becomes insolvent, there are claims that are outstanding
which would need to be settled in order to collect and distribute
the money. When a life insurance company becomes insolvent, there
are ongoing policies for which people continue to make payments.
The primary goal for a life insurance guaranty association is to
find a home for policies that are in effect and transfer those to
a new company which would take over that obligation. Therefore,
years from now when a person makes a claim against the policy, that
person would have the protection.
MR. GEORGE stated that HB 398 is essentially the National
Association of Insurance Commissioners (NAIC) model bill. The NAIC
writes in a totally different language than the legislative bill
drafters, and therefore there have been problems in converting NAIC
language to bill drafter language. Those language problems have
resulted in some committee substitutes. He noted that he has
another amendment, labeled 1-LS1376\I.2, Ford, 3/22/00 [Ford I.2],
to propose. Mr. George informed the committee that his clients
met, via teleconference, with the Division of Insurance and there
were about 20 differences, which were worked out [save one item].
The bill that was before the House Labor & Commerce Committee only
required a two word change on page 13, lines 20 and 27, the words
"to intervene" were added and thus there was a committee substitute
(CS). With regard to the aforementioned amendment, Ford I.2, Mr.
George believes that CSHB 398(L&C) with the Ford I.2 amendment is
something that he and the division would agree upon, except for the
two words inserted in the House Labor & Commerce Committee. Mr.
George noted that he represents ACLI which supports the bill.
Number 0615
DON THOMAS, Executive Director, Alaska Life and Health Insurance
Guaranty Association, testified via teleconference from Anchorage.
He stated that he is present to convey the association's support
for CSHB 398 [CSHB 398(L&C)] as well as the amendment mentioned by
Mr. George. The association supports the bill and the amendment
for the reasons stated by Mr. Manly and Mr. George. The bill
represents lessons learned over the previous ten years of the
association's existence and these changes are based on the NAIC
model act. He noted that HB 398 is, as noted earlier, similar in
its intent as HB 310, which updates the guaranty association law
regarding property and casualty policies. He pointed out that this
committee moved HB 310 out of committee a few weeks ago and thus
for consistency this committee should do the same with HB 398.
REPRESENTATIVE CROFT inquired as to what this legislation does. He
asked, "What are the major policy shifts that it accomplishes?"
MR. GEORGE pointed out that financial products have changed.
Furthermore, some insolvencies were found in other states due to
the lack of appropriate tools. Therefore, this legislation
essentially updates [the tools]. For further information, Mr.
George deferred to Mr. Thomas.
MR. THOMAS noted that he also serves as the association's
attorney. He said that he could highlight those areas that make
things simpler for the association. For example, there is a
clarification of the definition of "policy ownership," which
clearly excludes beneficial ownership. The law as presently
written is not exactly clear on that matter. There is also a
change which allows the domiciliary insurance director/commissioner
receivership core to approve alternative plans and rates. Mr.
Thomas noted that he has a summary of [changes] that was prepared
by Mr. George's clients.
REPRESENTATIVE KERTTULA referred to pages 2-4, which seem to list
the ways in which people will not be covered. There seem to be a
lot of new exceptions. She asked if that would be a correct
assessment.
Number 0971
MARY BETH STEVENS, Alaska Legislative Director and Counsel,
American Council of Life Insurers (ACLI), testified via
teleconference. She informed the committee that ACLI is a national
trade association representing approximately 475 life insurance
companies, the majority of which write business in Alaska.
Although she said that she is not a detailed expert on this rule,
she believes that the changes to the Alaska Act fall into one of
four categories. She specified, "The first category of amendments
includes proposals to change the situs of guaranty association
coverage for unallocated annuities from the state of residence as
the contract owner to the state of the principal place of business
of the plan sponsor." She believes that much of what is included
on pages 3 and 4 references coverage of unallocated annuities. She
clarified that the purpose of this change is to eliminate "form"
shopping by plan sponsors. Furthermore, the situs of coverage for
structured settlement annuities was changed from the state contract
holder to the state of residence of the payee or injured party.
MS. STEVENS turned to the second category of amendments which
clarifies that assessments can be authorized and called at
different times. Furthermore, it eliminates coverage economically
in material policy guarantees. She noted that the guaranty
association's authority to act is broadened in the event of an
impairment. The guaranty association's authority is also expanded
to provide substitute coverage of annuities and the authority of
receivership court to approve alternative policies.
MS. STEVENS moved on to the third category of amendments which
attempt to clarify rather than change anything. She explained that
several sections of the [NAIC] model act have been the subject of
constant litigation. The [fourth category of] amendments also
include proposals to specifically eliminate synthetic guaranteed
investment contracts (GICs) from coverage and from the $5 million
cap on coverage for coverage of "Coly and Boly" (ph) policies held
by one owner. There is also a one percent assessment rule on
subaccounts. Furthermore, the amendments would allow guaranty
associations to propose their own early access plan with no
distributions received within 120 days of an insolvency. The
amendments would also reduce the authority and the responsibility
of guaranty associations with regard to insolvency prevention and
reporting. Ms. Stevens commented that although she does not
purport to know all the details of this legislation, she pointed
out that all of these issues have been [discussed] over a number of
years at the NAIC level with input from a variety of sources.
REPRESENTATIVE ROKEBERG remarked that it is unfortunate that the
current bill packet does not include all the supporting materials
that were included in the House Labor & Commerce bill packet.
REPRESENTATIVE GREEN suggested that the supporting information is
necessary in order to understand this legislation. Therefore,
Representative Green held HB 398 in order to obtain this additional
material.
ADJOURNMENT
There being no further business before the committee, the House
Judiciary Standing Committee meeting was adjourned at 3:10 p.m.
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