HB 292-PRINCIP.& INC/PROBATE/UTMA/RETIREMT/ETC.  4:05:28 PM CHAIR OLSON announced that the first order of business would be HOUSE BILL NO. 292, "An Act relating to property exemptions for retirement plans; relating to pleadings, orders, liability, and notices under the Uniform Probate Code; relating to the Alaska Principal and Income Act; relating to the Alaska Uniform Transfers to Minors Act; relating to the disposition of human remains; relating to insurable interests for life insurance policies; relating to transfers of individual retirement plans; relating to the community property of married persons; and amending Rule 301(a), Alaska Rules of Evidence." 4:05:58 PM JANE PIERSON, Staff, Representative Steve Thompson, Alaska State Legislature, on behalf of the bill's sponsor, Representative Thompson, stated that HB 292 is a trust bill and she then read the title of the bill. She indicated that Dave Shaftel would walk the committee through the bill. 4:07:28 PM DAVE SHAFTEL, Attorney, Shaftel Law Offices, LLC, stated that he is an attorney in private practice who works in the area of estate and estate and trust administration. He related he is also a member of an informal group of lawyers and trust officers who have worked with the legislature for approximately 14 years on estate law to make recommendations to improve this area of Alaska's law. He highlighted that Alaska is considered a leader in estate law, such that many states have copied Alaska's laws. He characterized this area of law as a dynamic one across the U.S. Estates affect nearly everyone so improving estate laws will help all Alaskans. This is a particularly good and thorough bill that covers a number of "bread and butter" subjects, which are the types of things that affect many families. 4:09:17 PM MR. SHAFTEL provided a section by section analysis of the bill. He stated that Section 1 pertains to asset protection for inherited retirement plans. He explained that retirement plans are protected from an employee's creditors by federal and state law. Under federal law, the bankruptcy courts have extended this protection to the beneficiaries of a retirement plan. He related a scenario in which in which a husband has an individual retirement account (IRA) or retirement interest and passes away and names his wife as beneficiary. Thus the wife's interest in the plan would be protected from her creditors. MR. SHAFTEL stated that this represents the majority rule in bankruptcy courts. There are 12 jurisdictions which have enacted this type of protection under their bankruptcy codes, including Arizona, Florida, and Texas. 4:11:04 PM MR. SHAFTEL turned to proposed Section 2, which is a conforming amendment for Section 28, while Section 3 offers definitional changes relating to the provision just described. The changes in Section 4 pertain to settlement agreements and representation for settlement agreements. He explained that practical problems arise in reaching settlement agreements in non-judicial settlement proceedings or in court. He characterized Alaska's statute as a good statute. This would allow someone with similar interests, such as a parent, to represent his/her minor children in a settlement agreement. The problem was that while it is clear it pertains to judicial proceedings, questions arose as to whether the provision pertained to out of court settlements. 4:12:05 PM REPRESENTATIVE SADDLER referred back to the example for Section 1, which outlines that the surviving spouse's interest in an Individual Retirement Account (IRA) would be protected. He asked for clarification on how this provision would affect children who were partial beneficiaries of an IRA. He pointed out this is the case for his wife and children. MR. SHAFTEL answered that the protection would apply to each beneficiary. 4:13:08 PM MR. SHAFTEL turned again to settlement agreements. He stated that Section 4 and Section 5 will make it clear that this type of representation would apply to settlement agreements made outside a judicial setting. He gave an example in which a trustee renders an accounting, noting in such instances the mother can approve the accounting for herself and her minor children. He explained that this provision is binding on the minor children since the interest of children is same as the mother's interest. He pointed out that this provision is a clarification provision of AS 13.06.120. 4:13:59 PM REPRESENTATIVE SADDLER asked for further clarification on same interest or equivalent monetary interest. MR. SHAFTEL answered that the interest does not need to be the same monetary interest. He referred to the same scenario, but related in this instance, 50 percent of the IRA was designated for the surviving spouse, and 10 percent to the surviving five children, three of whom are minors. If the will was challenged, the spouse could agree to it for herself and for the three minor children. He related that the children would essentially have the same interest as the mother. Thus the mother would protect her share as well as the children's' shares. REPRESENTATIVE SADDLER related his understanding that it would be the same class of interest as a creditor. 4:15:57 PM MR. SHAFTEL stated that proposed Sections 6-8 pertains to a type of trust modification referred to as decanting, which has developed nationwide in order modify an irrevocable trust to correct errors and to adjust for changed circumstances and new laws. In 1998, Alaska enacted its decanting statute under AS 13.36.157. At that time, Alaska was the third state to enact that type of law, which was modeled after New York's statute. Since that time, then 13 other states have enacted decanting statutes and three others have pending changes. This has become a popular way to handle irrevocable trusts. In 2011, New York substantially revised its law. The proposed changes in HB 292 amendment closely tracks the New York provisions with certain procedural changes to accommodate references to our law. 4:17:46 PM MR. SHAFTEL referred to the proposed Sections 9-25, which pertain to the Uniform Alaska Principal and Interest Act (UAPIA). He provided a brief history, noting that in 2003, Alaska updated their UAPIA act. One of the main changes made was to create a unitrust approach for determining the income of the trust. Often, many trusts provide for income to be paid to the spouse and after his/her death, will pay the remainder of the estate to surviving children in equal shares. This approach has created a tension between the surviving spouse and the children since the surviving spouse often is interested in investing the estate's assets to produce income, while the children prefer to have assets invested to produce equity growth. Therefore, while the spouse would often want to invest in bonds, the children would prefer to invest in stocks. The unitrust concept was developed to alleviate that tension. Under a unitrust, instead of paying income the trust would require payment of a percentage of assets, such as four percent of the assets that exists at the beginning of the year. Thus if stocks provided the best investment, the family could invest in equities and sell four percent of them each year. After the unitrust concept was enacted, over time the IRS has enacted regulations related to the unitrust. The unitrust concept is one that has been used nationwide. He said a Philadelphia attorney who is a specialist in this area of estate law, has recommended changes to update Alaska's unitrust laws. The changes would allow a trustee to choose a unitrust rate without going to court. The unitrust rate does not have to be set at four percent, but is flexible and could range from three to five percent. These changes provide a better definition of income and an ordering of income among the types of income and principal, such as capital gains, ordinary income, and return of principal. Additionally, this also provides a smoothing period of up to five years for determining the amount of assets. This helps avoid fluctuations by using a five-year average of the value of the assets in the trust and applies that percentage to the average. This provision would also clarify the unitrust method can apply to retirement benefits, as well. He offered his belief that these changes will facilitate the use of the unitrust concept for Alaska's residents. 4:21:34 PM REPRESENTATIVE HOLMES asked whether it is fair to say that this would make the trust law a little more like how foundations are run, which is a percent of market value calculation to be used. MR. SHAFTEL answered yes. 4:22:01 PM REPRESENTATIVE SADDLER questioned whether this would resolve the growth versus income issue just raised. He pointed out that the children may still want long-term growth investments and the spouse may want bonds for short-term return on investment. MR. SHAFTEL offered to clarify this aspect more fully. He explained that in 2003, Alaska's law was changed to address the growth versus income aspects. He agreed the changes he just described did not focus on this issue. He offered to illustrate the basic changes by relating a scenario in which an existing trust would distribute income to his wife. After she dies, the trust would pay the remainder of the assets to his three children. He highlighted that this trust could be converted to a unitrust. Thus, instead of having the tension between investing for income or equity growth, the trustee would be given direction, for example, to pay five percent each year of the value of assets to his spouse. Thus, the changes would allow the trustee to invest to maximize the best total return, which is also called a total return unitrust. He offered his belief his spouse will be satisfied so long as she receives the five percent annually. Of course, she would hope the trust funds will be invested to maximize the best total return. 4:24:17 PM REPRESENTATIVE SADDLER clarified the three to five percent election is based on the corpus and not the proceeds. MR. SHAFTEL agreed. 4:24:31 PM MR. SHAFTEL turned to proposed Sections 26-28, which he said was initially suggested by a legislator and relates to the Uniform Transfer to Minors Act (UTMA). He pointed out that every state has an UTMA. He described a UTMA as an informal method of creating a trust. A person could go to bank or brokerage firm to create an account and make gifts to the account. Over time, the UTMA can build up and become substantial assets. The law dictated that if the deposits were gifts, when the child reaches age 21, he/she is entitled to the fund, but up until then a custodian is named to the account. The custodian may be the person who contributed to the UTMA or it may be someone else. The custodian can also spend the money on behalf of the child. He pointed out that problems have developed since some of these accounts represent very substantial assets. When a child reaches the age of 21, he/she may not be ready for the assets due to maturity problems or the child may not have the experience to handle substantial funds since it may derail him/her from attending college or developing a career. Additionally, a drug or alcohol problem may exist that would only be exacerbated if he/she receives substantial funds. 4:26:51 PM MR. SHAFTEL explained that this issue has arisen nationwide. Under the IRS code, the child must be given the right to compel for distribution at age 21; however, if the child agrees, and often that is the case, under existing law the age can be extended to age 25. He pointed out there isn't any reason the age cannot be extended beyond 21 or 25. This statute allows the custodian to give notice to the child to extend the trust up until the age of 30. The child has the right at age 21 to compel a distribution, but if the child agrees it will be extended to age 30. He offered his belief that often a child will recognizes he/she is not quite ready to manage the funds. He reiterated that the custodian has a fiduciary duty to manage the funds for the benefit of the child. 4:28:22 PM REPRESENTATIVE SADDLER asked whether there is an outside age limit. MR. SHAFTEL answered no, but the longer the extension the more likely the child will not agree to an extension. He stated that there could be a series of these extensions. In practice the wisest proposal would be to propose a reasonable extension, then when the child reaches that age, to propose another extension. He reminded members that the beneficiary is considered an adult at 18 and the assets are his/her property. 4:29:38 PM REPRESENTATIVE CHENAULT asked whether the child would have the ability to receive the funds at any time. He also understood that the agreement would allow the custodian to extend the timeframe. MR. SHAFTEL answered that once assets are deposited to the account the custodian would manage the funds for the minor that the child has right to demand the assets until the child reaches age 18, or if the UTMA represents a gift at age 21. However, if the custodian approaches the child at age 21 and proposes an extension to age 25, which is agreed to by the child, the child would not have access to the assets until he/she reached age 25. He cautioned that the custodian has a fiduciary responsibility to the child, so if the child needed funds for college and the custodian refused, the custodian would be in violation of his/her fiduciary duties. In that instance the child could petition the court for remedy; however, the child cannot just demand assets at will. He reiterated that the custodian cannot act unreasonably. 4:32:10 PM REPRESENTATIVE CHENAULT related his understanding that the child would have access to the funds unless he/she agrees to extend the UTMA to ages 25 or 30. MR. SHAFTEL agreed. 4:32:37 PM MR. SHAFTEL referred to Section 29 to the decedent remains. Alaska does not presently have statutory authority with respect to who may control the disposition of a decedent's remains, which is an issue that was identified during the estate planning sessions. Significant disputes have arisen, which not only affect the decedent, his/her family, but also the funeral businesses. He explained that his group would like to make it clear who has the power to make these decisions and to protect funeral businesses from any liability. Thus Section 29 provides authority for a person to sign a form to clarify who has the authority to make final decisions. If a person has not signed a form, this provision contains a priority list identifying who can make any decisions on behalf of a decedent. 4:34:45 PM REPRESENTATIVE CHENAULT asked for clarification of who is first and last on the priority list just mentioned. MR. SHAFTEL referred to page 24, to the proposed AS 13.75.020 of HB 275, which outlines the order of those who may control disposition of a decedent's remains, beginning with the designee, followed by the person serving as personal representative, the spouse, and sole adult child. He related that the proposed statute lists a total of eight priorities. 4:35:42 PM REPRESENTATIVE SADDLER asked whether a personal representative is different class than executor of the estate. MR. SHAFTEL answered that most wills will identify the personal representative, who is the person to handle the probate as the manager of the will. In further response to Representative Saddler, he agreed that this person is also the executor of the estate. 4:36:39 PM MR. SHAFTEL referred to Section 30 to insurable interests. He explained that in order to buy a life insurance policy on someone's life, the person must have an insurable interest. A person cannot randomly buy life insurance policies for others. In 2005, a federal court case in Virginia, Chawla, ex rel Giesinger V. Transamerica Occidental Life Ins. Co., 2005 WL 405405 (E.D. Va. 2005) raised questions as to whether a trustee of a life insurance trust had an insurable interest and could buy insurance on the settlor's life. Additionally, it raised questions about partnerships and limited liability corporations (LLCs). The Uniform Law Commission studied the matter and made amendments to the Uniform Trust Code. This section, Section 30, would incorporate these amendments to make it clear that a trustee or general partner or manager may buy an insurance policy on a family member if the beneficiaries are people who would have insurable interest. 4:38:52 PM REPRESENTATIVE JOHNSON moved to adopt the proposed committee substitute (CS) for HB 292, labeled 27-LS1232\B, Bannister, 2/22/12, as the working document. CHAIR OLSON objected for purpose of discussion. There being no objection, Version B was before the committee. 4:39:56 PM MR. SHAFTEL referred to Section 31, which pertains to transfers of individual retirement account (IRA) interests. He explained that lifetime estate planning often involves making gifts, sales, or other transfers of property to family members or trusts for their benefit. He offered his belief that this has become more popular as the estate and gift tax laws have changed. This provision would allow the transfer of IRA interest to a grantor trust for the benefit of the employee participant's family members. He related that no adverse tax consequences would occur and would allow the participant of an IRA to voluntarily transfer his or her IRA, and any growth of the IRA, out of transferors' gross estate for federal estate tax purposes. 4:41:29 PM REPRESENTATIVE SADDLER asked whether this would allow people to transfer their IRA during their lifetime. MR. SHAFTEL answered yes. He expanded on this, noting adverse tax consequences would occur if it was done to other than a gran tour trust. He highlighted that this provision will likely be used on irrevocable trusts, with respect to transfers or contributions by the settlor of the trust, without any income tax consequences. 4:42:24 PM REPRESENTATIVE SADDLER asked if other states allow transfers of IRA interests. MR. SHAFTEL answered no. He stated that this is probably the first time this provision would be enacted nationwide. REPRESENTATIVE SADDLER questioned the IRS implications. MR. SHAFTEL answered prior to estates using this provision that the parties would likely apply to IRS for a private letter ruling. 4:43:00 PM MR. SHAFTEL turned to proposed Section 32-36, which pertains to community property law. In 1998, Alaska was the tenth state to enact an optional community property system, which consists of primarily western states, including Washington, California, Nevada, Arizona, New Mexico, Texas, Louisiana, as well as Wisconsin. He explained that the community property concept is a sharing concept between spouses, with each spouse owning 50 percent of the property, with very attractive income tax implications. When the first spouse dies, both halves of the community property receive an adjustment, which allows the surviving spouse to sell property without paying capital gains tax. He explained that implementation and clarification provisions are needed. He explained that community property is unique in every state. This bill clarifies that property which spouses agree is owned as community property is community property regardless of the form of title to the property. Thus the property will be community property even if the title is only in one spouse's name, so long as the husband and wife have agreed that property is community property. This bill clarifies this and the clarification is important for title companies and banks. Another clarification and one he believes has been needed pertains to the right of survivorship. In instances in which title to community property is in a form that provides for survivorship ownership between the spouses then it is presumed to have been made with the consent of both spouses. He said that another situation commonly encountered is property with beneficiary designations. If one spouse executes a beneficiary designation it is only effective for that spouse's half interest unless the other spouse consents in writing. He pointed out that various family designations are presumed to have been made although these can be overcome by surviving spouse's testimony. 4:46:27 PM MR. SHAFTEL said it was necessary to clarify the statute of limitations when transfers were made improperly by one spouse of community property without the consent of the other and to provide remedies for those improper transfers. He characterized this as a "clean up" bill that helps implement elective community property. 4:46:52 PM REPRESENTATIVE SADDLER referred to Section 40. He remarked he had not seen the standard for two-thirds majority often included in a bill. He then referred to the legal memo from Terry Bannister, Legislative Legal Services attorney, with respect to the single subject rule for bills. He asked for clarification with respect to the violation of the single subject rule. MR. SHAFTEL acknowledged that he was aware of the letter. He concluded that the legislative attorney's job is to point out possible issues. He said he has discussed the letter with the attorney. He offered his belief that all of these proposed changes are under Title 13 and while a possible issue may occur that it would probably arise by someone who wanted to challenge a part of the bill. He observed that it is unclear how the Alaska Supreme Court would rule in such a case. He offered there is a practical reason to keep these changes in one bill and to not have numerous bills before the legislature that pertain to estate law. CHAIR OLSON remarked that he planned to hold the bill over for that reason and is working with Ms. Bannister on this issue. 4:49:19 PM DOUG BLATTMACHR, President; Chief Executive Officer, Alaska Trust Company, stated that Alaska Trust Company supports the bill. 4:50:04 PM CHAIR OLSON, after first determining no one else wished to testify, closed public testimony on HB 292. [HB 292 was held over.] The committee took an at-ease from 4:50 p.m. to 4:52 p.m.