HB 219 - RULE AGAINST PERPETUITIES CHAIRMAN KOTT announced the next order of business is HOUSE BILL NO. 219, "An Act relating to the rule against perpetuities, nonvested property interests, and powers of appointment; and providing for an effective date." Number 0079 CORY WINCHELL, Administrative Assistant to Representative Pete Kott, Alaska State Legislature, came before the committee and presented the following sponsor statement: This legislation corrects a technical problem created by the Alaska Trust Act. The Alaska Trust Act effectively repealed the rule against perpetuities. As a practical matter, this old common rule prevented the continuation of trusts for longer than 90 to 110 years. The Alaska Trust Act changed the common law rule to allow a trust to continue in perpetuity if the income of principle of the trust could be distributed in the discretion of the trustee to a person who was living when the trust was created. The problem with the Alaska Trust Act is that it does not allow a person to create a perpetual charitable lead trust. A typical perpetual charitable lead would pay all income to a charity for a term of 20 years (not to a person who was living when the trust was created) and then would continue in perpetuity for the benefit of the descendants of the person creating the trust. Since the passage of the Alaska Trust Act, many persons have contacted trust companies and attorneys in Alaska and have expressed a desire to create perpetual charitable lead trusts. This new legislation would completely repeal the rule against perpetuities and would permit the creating of perpetual charitable lead trusts. Number 0241 REPRESENTATIVE CROFT referred to Section 2 of the bill and noted that it doesn't eliminate perpetuities, but that it gives a 90-year optional savings clause. MR. WINCHELL stated under the language in the bill a person would not be able to create a trust so that a person's descendants would receive money from it. However, a trust could be created as a charitable lead so that a person's descendants could take advantage of it. Number 0360 REPRESENTATIVE MURKOWSKI asked Mr. Winchell what the reason is for the April 2, 1997 date in the bill [Section 7]. REPRESENTATIVE JAMES noted that is the date of the Alaska Trust Act. Number 0400 ERIC KNEFFNER, Attorney, Faulkner Banfield P C, testified in Juneau. The real reason for the bill is to allow charitable lead trusts for a state to take a charitable deduction thereby "getting money to charities that might not otherwise get there." In contrast, a charitable remainder trust is one in which the benefits go to human beings first and the remainder goes to charities. Number 0483 REPRESENTATIVE CROFT said in either case a trust has to satisfy the old rule against perpetuities, or vest or terminate within 90 years. MR. KNEFFNER said that's right. That's his understanding. The existing rule required "life" for the first period rather than a charity or institution. Number 0580 REPRESENTATIVE MURKOWSKI asked Mr. Kneffner whether there was a point - prior to enacting the Alaska Trust Act - when the state did not have a rule against perpetuities. MR. KNEFFNER replied a modification was made at the same time of the Alaska Trust Act. REPRESENTATIVE MURKOWSKI said then, prior to April 2, 1997 the state has always had a rule against perpetuities. MR. KNEFFNER replied that's his recollection. Number 0623 REPRESENTATIVE KERTTULA referred to the language - "A nonvested property interest is invalid unless the interest is created on or after January 1, 1996, and before the effective date of this Act and" [Section 2] - and asked Mr. Kneffner why there is a window. MR. KNEFFNER replied that's when the rule against perpetuities was modified. The period between January 1, 1996 and April [2], 1997 is the section that needs to be applied. REPRESENTATIVE KERTTULA said: "Don't you want to change it so that they can always be done? Why would you want it only for that window of time?" MR. KNEFFNER replied prior to that time the rule against perpetuities was in effect... REPRESENTATIVE KERTTULA interjected and said: "Right. During this time only the other Act is in effect and then there's some interim Act in effect and then the final Act comes into effect." MR. KNEFFNER said what is being done with the bill would be in effect since April [2], 1997. It can't go back beyond January [1], 1996 because that's when the rule was modified the first time around. Number 0718 REPRESENTATIVE MURKOWSKI asked Mr. Kneffner what the modification was in 1996. MR. KNEFFNER replied, according to his recollection, it was modified to vest or terminate in 90 years. Number 0771 REPRESENTATIVE KERTTULA asked Mr. Kneffner why the bill is being limited to before the effective date of the Act in Sections 2, 4 and 5; they create a window. She is concerned about creating a window upon which it drops out again. MR. KNEFFNER replied that's not the intention. The sections talk about three different kinds of powers or trusts, which is why the language has to be repeated for each section. He further noted that after the date of the Act the common law is superseded. Therefore, in going forward it is not needed anymore. Number 0914 REPRESENTATIVE CROFT stated that he thinks there was a pure rule against perpetuities until January 1, 1996 and then there were modifications made to the Alaska Trust Act - the 90 years. The statute refers to SLA 1994, which went into effect on January 1, 1996. Number 0990 REPRESENTATIVE KERTTULA said, given this particular topic, she is concerned about inadvertently dropping the whole thing, especially since Section 6 talks about the extent provided under AS 34.27.050 - 34.27.090. MR. KNEFFNER noted that Section 6 is key because it supersedes the rule of the common law. The other four sections deal with the interim period. After that interim period, it is completely repealed, which is why there are Sections 3, 4 and 5 - to deal with the period from January 1, 1996 to April 2, 1997. REPRESENTATIVE KERTTULA noted the language appears to be circular. Number 1067 DICK THWAITES testified via teleconference from Anchorage. He explained that the pure version of the Act was amended in 1994 to provide clarification in limiting the rule against perpetuities to 90 years. When the Alaska Trust Act was adopted in 1997, the concept of charitable lead trusts were overwhelming; therefore, they were left out. The bill attempts to bring forward that period because there are charitable lead trusts that have been created in other jurisdictions that have mobility language: language that allows them to be transferred to one of the Alaska trust institutions, if they can get around the rule of a 1996 effective date of the state's 90-year rule against perpetuities. Number 1213 REPRESENTATIVE MURKOWSKI asked Mr. Thwaites to explain - in real terms - what the adoption of HB 219 would mean for the state. In other words, would it increase business for the state? MR. THWAITES replied he believes that it would bring increased business to the state. A charitable lead trust is a device used in the estate planning world that allows for someone with a fair amount of wealth to give money to a charity, to receive an income tax deduction (the difference in value between what goes to charity and what goes to the rest of the family), and to set up a perpetual benefit to the family and successive generations - the intent of the Alaska Trust Act. He further noted that many of the practitioners around the country have indicated that the Alaska Trust Act is flawed in that regard. He reiterated the intent of the bill is to bring charitable lead trusts into Alaska in order to be administered by one of the Alaska trust institutions. Number 1310 REPRESENTATIVE CROFT asked Mr. Thwaites what the flaw was. The biggest change in the bill is to AS 34.27.050, which is only the deletion of an "or" provision. MR. THWAITES deferred the question to the bill drafter [Terry Bannister, Legislative Affairs Agency]. REPRESENTATIVE CROFT asked Ms. Bannister to explain the effective dates - January 1, 1996 and April 2, 1997. Number 1354 TERRY BANNISTER, Attorney, Legislative Legal Counsel, Legislative Legal and Research Services, Legislative Affairs Agency, replied January 1, 1996 is the date that the current modification of the rule against perpetuities went into effect - the 90 years. REPRESENTATIVE CROFT asked Ms. Bannister why there needs to be a window for that modification. MS. BANNISTER replied the abolition in the bill starts prospectively, except for a few things in AS 34.27.042. The other property interests that have been created before the effective date are to be covered as they are currently being covered. REPRESENTATIVE CROFT asked Ms. Bannister what happens after the effective date of the Act. MS. BANNISTER replied the bill creates a window for both interests. She doesn't know the reason for it, however. REPRESENTATIVE CROFT said that Section 2 would invalidate the interest created by the window. He asked Ms. Bannister what would be the state of the law after the effective date of the Act in regards to Section 2. MS. BANNISTER replied the property interests created and subjected to the current statute would still be covered under AS 34.27 - Sections 2-6 in the bill. The property interests created afterwards in AS 34.27.042 would be handled by the new prospective law. REPRESENTATIVE CROFT asked Ms. Bannister where the new prospective law is referred to in the bill. MS. BANNISTER replied in Section 1. There are two sections within Section 1 - AS 34.27.040 and 34.27.042. The limited coverage of current interests are covered in 34.27.042. REPRESENTATIVE CROFT said: "So, there's no 90-day [year] limit either. I mean, we've gotten rid of the 90-day [year]. So, getting through all that Mr. Chairman, why is it a good idea to get through the 90-day [year] and just abolish ... We've in effect created a complicated rule or 90-day [year] and then we're just saying forget the whole thing and just do what you want. Why wouldn't it be appropriate to keep some sort of outer clear limit like the 90-day [year] we have?" MR. KNEFFNER replied that's a policy question for the legislature to decide. The reason for the bill is to create a fair amount of flexibility for charitable lead trusts. The existence of the Alaska Trust Act contemplates perpetual trusts; and, under that scheme, it's already assumed that the legislature has decided - in some circumstances - that perpetual trusts are a good idea. Number 1585 MS. BANNISTER said that the application-back erases contract impairment issues. However, it's not a great idea to change contracts that have already been entered into before putting in a new bill. Number 1629 REPRESENTATIVE CROFT said, as he recalls, the rule against perpetuities was put on because there were tax consequences to vesting back in the time of Henry VIII. He asked Mr. Thwaites how true is that now; have the tax consequences changed so that's not as significant? MR. THWAITES replied yes there is the generation skipping transfer tax now. The purpose of the rule then was because of an inexhaustible supply of land, and the idea of commerce was to keep the land revolving in "the commerce." Now, with conservation easements, for example, land is perpetually protected from development. It's a change of policy from the 1600s to now. He further noted that the actual provision, under the rule against perpetuities, is found in AS 34.27.050 (3), which states that the interest is in a trust and all or part of the income or principle of the trust may be distributed, at the discretion of the trustee, to a person who is living when the trust is created. He noted, of course, a charity is not a person; therefore, repealing the Act in this sense would allow Alaska to have perpetual trusts for charitable lead trusts. Number 1764 REPRESENTATIVE CROFT said: "Why would you want to get rid of subsection (3) then? Do we get ourselves in any bind by--I mean why wouldn't you want to just say what we say in Sections 1 and 2. Create this window for the current law and then know that you could write these--these ones that start with the designation of a charity only after the effective date." MR. THWAITES said the discussion following the passage of the Alaska Trust Act was to create a more aggressive environment in the estate planning area, which is what the bill does. He noted that the state of Delaware, within 16 weeks after the Alaska Trust Act was effectuated, included the language - "this is an act to keep Delaware the preeminent trust jurisdiction like the Alaska statute." The state of Delaware also repealed the rule against perpetuities entirely because there doesn't seem to be a lot of reason for continuing exceptions because of the way society has developed. Number 1853 RICH HOMPESCH testified via teleconference from Fairbanks. Section 1 - AS 34.27.040 - abolishes the rule as to nonvested property interest, a general power of appointment not presently exercisable. He noted, because the existing law took effect January 1, 1996, Sections 2, 3 and 5 have to be carried in the bill. But from then on, the rule against perpetuities would be abolished. Number 1899 MR. KNEFFNER stated, at the time the rule against perpetuities was created, there weren't things like charitable trusts or foundations. Those kinds of charitable enterprises are already allowed to be perpetual under Alaska law. He said, "If your looking for a reason to evolve into allowing to have perpetual trusts, that's perhaps one reason. I'm not saying that's the defining one, but it's certainly something to consider." Number 1941 SHARALYN SUE WRIGHT testified in Juneau as the beneficiary of a trust. She is concerned that the bill would benefit a few attorneys, when it isn't necessarily true that the money would stay in the state. She mentioned that the committee hasn't heard from any bankers yet that would benefit from this. Furthermore, if this bill perpetuates trusts, it would also perpetuate trust violations and the bad things that go on with trustees. However, she is mostly concerned that the bill is being rushed, given its magnitude and given that very educated and concerned people don't fully understand it. Number 2031 CHAIRMAN KOTT indicated that the bill would be held over for further consideration; there wasn't a quorum to conduct business.