HB 199 - COMMUNITY PROPERTY Number 0767 CHAIRMAN GREEN announced the next item on the agenda was HB 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." At the previous hearing, some testimony had been taken. GEORGE GORRIG, Attorney at Law, testified via teleconference from Anchorage. He favors HB 199 not only for the income tax advantage, which would put Alaska on equal footing with community property states, but also as an important vehicle to help plan Alaskans' estates. Even though there are no more federal and state taxes between husbands and wives, oftentimes the major wage earner is listed and liquidation of the assets is necessary. A half-interest in a piece of property cannot be sold. People incur an income tax liability because of the death of a family member, which he believes is patently unfair compared to the advantage enjoyed in community property states. MR. GORRIG explained that there are problems equalizing estates when there is a joint death. The ability to enter into a community property agreement precludes having to equalize estates on an annual basis. A person could choose to have community property status for certain property, which would continue to have that status as an undivided interest, without having to worry about one property having a much greater value than another. MR. GORRIG said on the down-side are problems with potential creditors. As it currently stands, the creditor of one spouse cannot reach the assets of the other spouse unless a professional is involved. This provision is to prevent doctors, dentists and attorneys, for example, from transferring assets to their spouses in case they are sued for malpractice. He believes this is a poor offset against the advantages. MR. GORRIG referred to AS 13.26.332, relating to statutory powers of attorney. He said whoever receives the power of attorney has tremendous powers. He stated, "And we know that this could be a problem, but there are sufficient warnings in the statute which put these people on alert that they could have problems with property ownership and the ability to dispose or sell if you execute these general powers of attorney." He said similar warnings could easily be put into HB 199, saying, as a caveat, that this could affect the creditors' rights to certain mineral property and that the person should be advised to seek competent advice regarding liability. MR. GORRIG concluded that overall, HB 199 is invaluable. He said instead of Alaska being one of the last states to enact what he believes is a "very advanced law," it should be one of the first. Number 1022 CHAIRMAN GREEN said a concern is whether HB 199 would pass muster with the Internal Revenue Service (IRS). MR. GORRIG responded, "No question." He said when he worked for the IRS, community property estates had a much greater advantage than separate property estates in regards to federal taxes. Enactment of the unlimited marital deduction in 1982 took away the fear of being forced to sell property. When a tax between a husband and a wife is generated due to a death where the property is being sold, a double taxation occurs in separate property estates; the living spouse is forced, by a tax consequence, to incur a capital gains tax. MR. GORRIG said he believes in 50 percent of the cases that he is handling on probate, some liquidation is necessary because of other issues such as loss of the major wage earner. He commented that when persons are forced to sell something, they never get the full market value and are forced to incur a tax. MR. GORRIG said the IRS looks to state law to determine who gets what. It is not the states but the federal government that gives the community property status or "step-up in basis" for both halves. This bill says that this tax advantage, available by the federal government, should be made available to Alaskans. If the state allows a community property status when a person dies, the entire community is going to be stepped up. REPRESENTATIVE ROKEBERG asked what Mr. Gorrig's background is. MR. GORRIG said he was a federal/state gift tax attorney for three years beginning in 1971 for the Seattle district and moved to Alaska to perform the same job for two years. His background is both in community property estates and separate property estates. He has been doing estate planning throughout Alaska since 1977. Number 1180 SHARON GLEASON, Attorney at Law, testified next via teleconference from Anchorage, saying she is a domestic relations and family lawyer. She has practiced in Alaska for 14 years. She is not an estate planning lawyer but has done several wills. Her practice is primarily divorce law, with increasing focus in recent years on large-asset property division cases rather than custody work. MS. GLEASON expressed concern about HB 199 from her perspective as a divorce lawyer. This bill, as presently drafted, would be a departure from many of the protections afforded by Alaska to spouses when they go through a divorce. MS. GLEASON said from a general standpoint, divorce in Alaska is an expensive process. Many dissolutions require more than 20 pages of paperwork; that would magnify to include these community property issues. She recalled seeing a chart where estate lawyers show a tax savings of $14,000 in a hypothetical situation of a spouse deciding to sell property upon the death of the other spouse. In her view, 50 percent of couples in Alaska are going to divorce. For those couples, this community property law would greatly increase the costs associated with getting that divorce. MS. GLEASON referred to a discussion with a lawyer who is head of the family law section in Wisconsin, which adopted a similar bill about ten years ago; they call their bill "the divorce lawyers' and tax accountants' relief and pension fund act" because the law is so complex that it has mushroomed into making divorces far more difficult for the parties involved. Ms. Gleason offered to discuss additional concerns. Number 1438 CHAIRMAN GREEN asked for examples of problems that HB 199 might create. MS. GLEASON referred to page 11, lines 1 through 26; this specifies when a community property agreement can be set aside. Under current Alaska law, if the parties venture into a premarital agreement and then later divorce, a spouse can argue that the agreement should not be enforced because it is unconscionable at the time of the divorce. And she reads it, HB 199 would eliminate that argument. MS. GLEASON said HB 199 basically allows an agreement to be set aside if there was no disclosure at the time it was made or if it was not voluntarily executed. Under present Alaska law, an agreement, whether premarital or following marriage, can be set aside at the time of the divorce if enforcing it would be grossly unfair to one spouse. As reflected in the court system, a husband and wife entering into an agreement should be accorded a different level of review than two people entering into a business transaction. Number 1598 CHAIRMAN GREEN asked: If property or something of value was voluntarily put into this kind of a trust, how would that be held unconscionable at a later date? MS. GLEASON explained that the problem is that a party can take action after entering into the agreement. She cited an example where a woman has premarital stock in her family business. When they marry, she and her husband decide that the husband will run the business. They put the stock into a community property agreement, as well as including a no-alimony provision. Unknown to her, the husband transfers the entire community property interest to a third party, which under a different provision of this bill is allowable. At the time of the divorce, the woman cannot set that transaction aside. The result would be that the husband had, during the marriage, defrauded the wife of this property, and the wife could not argue that it was unfair in light of the husband's actions after the date of the agreement. MS. GLEASON said another example might be when one spouse develops a serious illness or problems that would warrant something other than an equal division of assets, given the disparity of the parties' circumstances. Those types of "after arising" circumstances are what the court deems appropriate considerations when determining whether an agreement between the parties should be enforced at the time of divorce. Number 1706 CHAIRMAN GREEN referred to prior testimony and said they had heard this sort of thing could be "opted out." He asked, in the situation where a husband is seriously ill, whether opting out would be possible. He also asked whether Ms. Gleason sees other sections of Alaska law allowing something entrusted voluntarily by both parties as being subject to withdrawal by one party. MS. GLEASON replied that as she reads HB 199, no provision allows one spouse to opt out. Once property is put into the community property characterization, it would require both parties' consent to opt out. This is in contrast to the provision that would allow one party, on his or her own, to sell, transfer or encumber the community property without the consent or knowledge of the other spouse. One spouse cannot opt out of the agreement unless they both agree. CHAIRMAN GREEN said, "It could be encumbered by one by not opted out by one." MS. GLEASON concurred. She said a form of opting out would be to transfer the asset, unbeknownst to the other spouse. Typically, the desire to opt out would arise in the spouse who had not managed the assets at the time of divorce. Number 1787 REPRESENTATIVE BUNDE proposed a situation where the community property is a building. He asked whether it is possible to encumber one-half of the interest in that building, unbeknownst to other spouse. He doubted that he could get a second mortgage on his home without his wife's consent and involvement, as they had both signed the mortgage. He asked whether one could get a second mortgage on a building without the spouse's knowledge. MS. GLEASON responded, "The issue would be if the building was only titled in the name of one spouse, so that on the deed it indicated `husband is the owner,' but separate and apart from the deed, there was a community property agreement, which would not be recorded, that ... identified that asset as community property, that what this bill does, as I understand it, is say that husband can go out and he can get a loan, without the consent or knowledge of the other spouse, regarding that property." MS. GLEASON continued, "Now, as a practical matter, the banks typically require the other spouse to sign a waiver of a homestead exemption if it's residential property. But with regard to commercial property, there would be nothing to preclude one spouse from getting loans or transferring the property, provided that on the deed, he was - or she was - the sole owner of the property. You'd have a separate agreement that would not be recorded." Number 1875 REPRESENTATIVE BUNDE observed that if there is an encumbrance on a piece of property, and if the attorney involved in creating the loan, for example, does not discover it, that is a whole other story. He referred to the "unconscionable portion," page 11, lines 25 and 26, and asked whether that addresses Ms. Gleason's concern. MS. GLEASON said she wondered about that herself. To her, that section could be interpreted two ways. She stated, "When you determine what's unconscionable, as that term is used above in sections (f) and (g), then this section (h) is saying that's up for the courts to decide. The other way would be the interpretation that I understand you would be proposing, which is to say that this is, in essence, a catch-all that would allow the court to determine that the agreement is unconscionable at the time enforcement is sought. To me, at least, it's unclear, and in the context of the bill, it would be likely that a court might well conclude that the term there is intended to define its use above and not to accord additional rights to a party seeking to set aside the agreement." REPRESENTATIVE BUNDE said his interpretation is that this subsection affords additional rights, which is the second interpretation presented by Ms. Gleason. He suggested strengthening this language. Number 1960 REPRESENTATIVE BERKOWITZ asked, "The question of unconscionability is a question of law for the courts to determine regardless, isn't it?" MS. GLEASON said yes. REPRESENTATIVE BERKOWITZ asked whether her concern with the bill was from the divorce aspect, not relating to estate planning. MS. GLEASON replied that she had no concern, nor ability to testify, regarding estate planning. Number 1983 REPRESENTATIVE JEANNETTE JAMES presented a situation where a party has property in their own name and then enters into a community property agreement in Alaska, providing this became law. The scenario presented by Ms. Gleason was that the person who had the property in their name could dispose of it. Representative James said she would be surprised if people did not understand that if there is a community property agreement, it must be recorded. Number 2033 MS. GLEASON responded that in her practice, she would disagree. The vast majority of business interests she sees are held in the name of one spouse. Although there might be a premarital agreement addressing the rights of parties in respect to business interests, she does not recall ever seeing a premarital agreement recorded. It is quite common for a court to divide property in a divorce that is titled in only one spouse's name. To her, it is a cause for concern. She said she had several other concerns as well. Number 2078 REPRESENTATIVE JAMES asked whether it would be wise to include something in this legislation that indicates that these need to be recorded. MS. GLEASON answered that her sense is that most parties would prefer to keep these agreements between themselves. As with a will, this is a private document regarding assets, debts and agreements with each other. Although recording does have a benefit in giving protections, she believes most Alaskans would prefer privacy. Number 2132 CHAIRMAN GREEN asked where the recording for more liquid properties such as stocks or a business would take place. MS. GLEASON answered that interest in real property is recorded at the Recorder's Office, which is the only place where a third party is expected to know of transactions between spouses regarding real property. For security interests in stock, theoretically, one could do a Uniform Commercial Code (UCC) filing, but the process does not achieve any purpose because it is accounted in so many different ways. For example, if a building is owned by a corporation, the title at the Recorder's Office will show that `ABC Corporation' owns it. However, the corporation might be owned 100 percent by one of the spouses. That will not be at all apparent when one goes to the Recorder's Office. Number 2203 MR. GORRIG suggested this problem occurs when one person has their name on the property and then enters into a community property agreement. Because it is not recorded, the person whose name is on the property could dispose of it or do anything with it. He asked, "Well, why can't they do that anyway? I mean, it seems to me that the community property agreement at least would give the other spouse some claim against that property." He asked what the damage would be if there was no community property agreement. MS. GLEASON responded that it ties in with another provision of HB 199. Referring to the top of page 10, she said under AS 34.75.090(e), there is a provision that says a community property agreement may not adversely affect the right of a child to support. By implication, to her that would mean a community property agreement could adversely affect the right of a spouse to support. A situation could occur where someone sells an asset with a community property agreement in place. If the community property agreement says that neither spouse is entitled to spousal support, someone could walk away with virtually nothing out of a divorce under this language. MS. GLEASON said if the same scenario happened under existing Alaskan law, at the very least, the court would have the ability to order spousal support in an effort to address the needs of both parties. The community property agreement, in addition to giving one spouse complete control over assets, could eliminate the right of a spouse to support. She said this is also a way to address equities when a property is encumbered or difficult to access, such as in a professional practice. Number 2326 CHAIRMAN GREEN asked whether there is some way, not already afforded, that a community property agreement would preclude court intervention or invasion. He referred to a building being deeded to one spouses and asked, under a divorce proceeding, whether the court could invade that or whether it was precluded under community property. MS. GLEASON said that was an interesting question and stated, "You're correct that you can invade under existing law quite readily. As I read the intent of this bill, the intent would be to preclude invasion because there is a provision of the bill that would require a 50-50 split of community property, unless at the outset - at the time of entry into the agreement - the parties had agreed on a different split between them." REPRESENTATIVE BERKOWITZ asked whether Ms. Gleason had a copy of her comments or a sectional analysis. MS. GLEASON offered to prepare comments and forward them to the committee. CHAIRMAN GREEN asked about Ms. Gleason's concerns. MS. GLEASON said there are two other concerns. She referred to page 7, line 4, relating to gifts of community property to third persons. This is substantially a variance with existing Alaskan law as it would apply in equitable distribution. Currently, if one spouse makes a gift of marital property, the other spouse has two years after learning of the gift to have it set aside. Referring to subsection (d), beginning on line 18, she said under HB 199, the spouse that learns of the gift has a much more limited time period, the earlier of one year after notice of the gift or three years after the gift. Three years could pass without the spouse learning of the gift, precluding them from setting it aside. TAPE 97-63, SIDE B Number 0001 MS. GLEASON continued, saying this could harm the spouse that has less knowledge or involvement in an asset put into a community property agreement. CHAIRMAN GREEN referred to line 7 and said there is a limit of $1,000 in a calendar year. He asked if this is under existing law. MS. GLEASON said no. There are no current limits on "gifting." REPRESENTATIVE BUNDE said he understands the problem of having an open-ended window; a person could give a gift and then 20 years later, the recipient might receive notice that they must give it back. He asked: If three years is not an adequate amount of time, and since it is not acceptable to him to have no time limit, what would be an acceptable time limit? Number 0043 MS. GLEASON replied that she does not have an idea on the time limit as much as on the appropriate remedy. She agreed one could not go back and recover the gift necessarily, but the open-ended time limit, if it allowed a remedy between the spouses, is a workable solution; that is what exists in current law. Rather than setting aside a gift learned about 20 years later, the other spouse can be held accountable for the gift transaction in the divorce. She said she had not thought about it but would consider the idea of a time limit that would apply irrespective of notice to the spouse. MS. GLEASON referred to page 5, lines 2 through 5, which says in part, "income earned or accrued by a spouse or attributable to property of a spouse during marriage and after the determination date is community property." She said this is problematic in two respects. First, it sets up the problem of tracing, which is already an expensive process in divorce litigation on occasion; this would double the cost. She presented a situation where people put apartment buildings into community property, leaving everything else as noncommunity property, with the intent of lumping the rents into a joint account used for their various needs. Money also accumulates in this account. She questioned what should be done with the income attributable to the building, which is supposedly community property, while other income going into that same account would be marital property subject to equitable distribution. This is an accounting problem. MS. GLEASON said the other problem with this provision is that existing Alaskan law clearly establishes that the date when parties physically separate from one another is a cut-off date for allocation of marital and nonmarital property. For example, when the husband leaves the home, his post-separation earnings are his own and not part of the marital property, even if it takes a year for the divorce. That year's earnings are his, subject to child and spousal support obligations that might be imposed. To Ms. Gleason, this would run counter to that provision because it would make all of the income during that post-separation process community property. It would complicate an already-complex accounting problem that arises in divorce cases. CHAIRMAN GREEN noted that there was a response and asked that Ms. Gleason send further testimony to the committee. Number 0201 REPRESENTATIVE JOE RYAN, sponsor of HB 199, read the first portion of subsection (d), which says, "If the community property agreement provides that all property acquired ...." He emphasized that this is an agreement; he assumed people planning to do this would hire someone like Ms. Gleason or an estate planning attorney, who would inform them that if they sign this agreement and put these provisions in, there are consequences if they separate. It is a voluntary agreement, and people must hire someone to inform them of the consequences. REPRESENTATIVE RYAN read from page 8, subsection (b), beginning at line 5: "After the determination date, a spouse's obligation to satisfy a duty of support owed to the other spouse or a child of the marriage may be satisfied only from community property and other property of the obligated spouse that is not community property." He said you take the portion that is designated as community property; the other assets are individual property and apply under the laws applicable to that. He questioned how all the "what-if scenarios" could be addressed in legislation. "This is why we have courts to make these decisions," he added. Number 0282 MS. GLEASON responded that this is why the Wisconsin lawyer called this type of legislation "the divorce lawyers' and tax accountants' relief and pension fund act," because of the complexities associated with it. She hopes most Alaskans who choose to enter into these agreements would obtain legal advice. She cautioned that there are people who will write their own community property agreements after reading what a wonderful tax savings they could obtain. Some people do not like to seek legal advice; she believes it is those people who may be severely impacted by this type of legislation. Number 0321 REPRESENTATIVE ROKEBERG said he did not expect an answer; however, at the previous hearing, he had posited a scenario where the prenuptial agreement has a provision that the parties would elect to have a community property agreement. He asked: Under Alaska law and case law, could a prenuptial agreement stipulate that if there was a divorce, the parties would automatically opt out of the community property agreement and settle into existing state law? He further asked: In the alternative, could the legislature, in this bill, allow for that instance if it would not be allowable under existing case law? MS. GLEASON answered that there is a provision that allows parties to set a termination date for their community property agreement. She advised that she would give thought to that in her written comments. Number 0377 JOAN CLOVER, Attorney at Law, Gruenberg and Clover, testified next via teleconference from Anchorage. She has practiced domestic relations law for 15 years. Like Ms. Gleason, she is currently a member of the executive committee of the state family law section of the Alaska bar; she and Ms. Gleason had been co-chairs of that section a few years ago. MS. CLOVER specified she was speaking with a "voice of caution." She said the family law section had received a mailing from, she believes, the probate section; she received it March 1. That was the first they knew of HB 199. She has received several phone calls regarding the bill. She believes it is important enough to Alaskans that it should be held over the interim so that family law attorneys can study it and provide input. MS. CLOVER said she is personally a proponent of individuals' ability to contract and believes people can be held responsible for their own voluntary actions. However, the purpose of our laws, to a certain degree, is to protect citizens. The legislature should proceed with great care when embarking on something that puts Alaska at the forefront of the nation. She said Alaskans will be the guinea pigs. She noted that only eight states have community property; she said one must wonder why. In addition, only Wisconsin has adopted the uniform marital property act. Alaska has a well-established body of case law dealing with equitable divisions and the way that we hold property in a separate property estate. MS. CLOVER advised that she went to law school in California. She recalled discussions of community property and said it is substantially different from equitable division. The rights of the parties during an intact marriage, where each owns a separate half of property, are significantly different. Similarly, the rights in divorce are different. She believes HB 199 can be improved and that it deserves the study that can be given to it by allowing domestic relations attorneys an opportunity for greater input and time to study this over the interim. Number 0538 CHAIRMAN GREEN noted that there has been an expressed desire to move this rapidly because of "a competitive edge that the state of Alaska may have." He said holding it over the interim may impact that significantly. He asked Ms. Clover to comment. MS. CLOVER answered that this advantage involves attracting money from outside of the state for the benefit of the lawyers who will draft these agreements and some trust officers who want to administer. She believes that legislators' obligations are to their constituents, to Alaskans, most of whom are married and many of whom will find themselves embroiled in a divorce. Along with Ms. Gleason, she fears that not only people who have carefully considered the consequences and have obtained competent advice will enter into these agreements. Unlike many estate planning attorneys who write prenuptial agreements, she said she tears them apart. She is involved in litigation either attempting to sustain them, under attack, or attacking them. Number 0602 MARYANN FOLEY, Attorney at Law, testified next via teleconference from an offnet site. She has been a practicing divorce attorney for more than 16 years. She agreed with many of the comments made by Ms. Gleason and Ms. Clover. She believes the bill is not in the best interests of most Alaskans, mainly because of the discrimination that occurs within the bill to Alaskans themselves. MS. FOLEY cited an example. One couple decides not to go with a community property agreement; they will divorce under the "fair and equitable" division of property, with the court looking at all the factors contained within AS 25.24.160(a) in making a fair allocation of their property. MS. FOLEY said under HB 199, however, if a second couple has entered into a community property agreement, the court cannot vary from that agreement. Therefore, it cannot consider factors such as the income-earning capacity or health of both parties, the length of marriage or the fact that the marital home should probably go to the spouse who may be getting primary custody of the children. The court is not allowed to balance the equities under HB 199. MS. FOLEY referred to a section where parties who chose a community property agreement may opt for a dissolution instead of divorce in Alaska. Under this proposal, the court could still check into those factors to ensure that the dissolution is fair and equitable. Therefore, there are three different possibilities of treatment from the courts for three different couples. She believes this is discriminatory and may not stand up to muster with the Alaska Supreme Court should someone challenge it. CHAIRMAN GREEN asked whether Ms. Foley had prepared comments. MS. FOLEY replied that she could send them by Monday. CHAIRMAN GREEN commented that the last three testifiers had brought concerns that the committee had not yet heard. He asked Mr. Thwaites whether he could offer a summation to help them through this dilemma. Number 0730 RICHARD THWAITES, Attorney at Law, testified via teleconference from Anchorage. He said it is true that HB 199 adds complexity to the law of the state of Alaska. It provides an optional provision regarding treatment of marital property, which will help spouses in the area of income taxes related to their estate planning. However, it complicates some of the marital issues. MR. THWAITES said he had talked with Representative Ryan and Representative Croft about the possibility of placing a fairly strong warning in the bill. He advised that he had just been handed a proposed amendment that contains some of that language, saying it is essentially the same type of caveat that is placed on the durable power of attorney section. Number 0817 REPRESENTATIVE BERKOWITZ said it seems that HB 199 creates a collision between estate planning and family law. He said as it was explained to him, the focus of the bill was on the estate planning end of it. He expressed support for that. However, he suggested finding a way to work out the family law concerns expeditiously so that no harm is visited on those who must use family lawyers. CHAIRMAN GREEN asked Mr. Hompesch to address the concerns expressed or send comments to the committee. Number 0900 RICHARD HOMPESCH II, Attorney at Law, Hompesch and Associates, PC, testified via teleconference from Fairbanks, agreeing to send comments. He cited a personal example, then stated that very few people do estate planning and few will enter into these community property agreements. He said he finds that most people who do estate planning do not divorce. He does not believe Alaskans will be guinea pigs because he believes more people from outside of Alaska will do this than from inside the state. MR. HOMPESCH referred to Mr. Thwaites' testimony and said he believes this is a freedom of contract issue. Yes, there are many risks and complexities in the case of divorce, and those will need to be considered. He asked, "But can't we rely on the judgment of Alaskans who have acquired one or two or three or four or five million dollars to plan their affairs in the best way they think they should do so?" He said these are sophisticated agreements, with sophisticated planning. He believes his clients can make these choices. Number 0991 REPRESENTATIVE BERKOWITZ commented that this legislature has determined that it wants predictability to be one of the focuses in the courts, with more predictable outcomes. In that respect, the concerns of the family lawyers are of some interest to him; he would like to address them before proceeding; however, he would like to get this bill through as soon as possible. REPRESENTATIVE BUNDE requested testimony from a tax attorney and someone from the IRS the next time the bill is heard. Regarding the last point, he said he had seen a lot of very wealthy people make fools of themselves in public. CHAIRMAN GREEN commented that in effect, they had heard some testimony regarding taxes, as George Gorrig had worked for the IRS. He announced HB 199 would be held over for further discussion. REPRESENTATIVE RYAN said he did not mind addressing these concerns. However, he hoped to see positive ways to improve the bill, not "what-if scenarios." (HB 199 was held over.)