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