SB 11-COMMUNITY PROPERTY TRUSTS  2:37:02 PM CHAIR HOLLAND announced the consideration of SENATE BILL NO. 11, "An Act relating to community property and to community property trusts; and providing for an effective date." 2:37:27 PM SENATOR TOM BEGICH, Alaska State Legislature, Juneau, Alaska, sponsor of SB 11, stated that the bill reintroduces a bill from a prior legislature. SB 11 would clarify the meaning of what income and appreciation was intended by a bill introduced in 1997 by then-Representative Joe Ryan. He advised members that he had reviewed the transcripts from the legislature's deliberations on Mr. Ryan's bill. When one partner in a relationship died, the basis for the value of the asset was the purchase price and any appreciation of the estate to ensure it had no tax liability. He briefly reviewed what then- Representative Ryan wanted to address, which was to carry forward the value of the trust and any appreciation when a couple voluntarily forms a community property trust. Because it was not specifically clear in the language, a recent court hearing raised ambiguity related to estates. Some of today's invited testifiers brought this matter to his attention. 2:39:26 PM BRIX HAHN, Staff, Senator Tom Begich, Alaska State Legislature, Juneau, Alaska, presented a sponsor statement and sectional analysis on behalf of the sponsor. She read: [Original punctuation provided.] Alaska is a state with favorable trust laws and favorable laws for property ownership between spouses. Alaska allows for "opt in" community property ownership between married spouses. Community property ownership can provide tremendous tax advantages to spouses. In Alaska, residents can enter into community property agreements, and residents and nonresidents can enter into Alaska community property trusts. This benefits the individuals entering these agreements, the trust industry of Alaska, increases deposits in Alaska banks and through the revenue generated by the formation of a new trust, the state. Community property is simply a way to own joint property. A common way to enter a community property agreement is in conjunction with one's spouse. Each party must elect into this agreement and the agreement provides, most commonly, equal ownership and management of specific property. Currently, community property has a significant tax advantage. When a spouse dies, community property is placed into a category that allows tax advantages when that property is sold. To realize these advantages, appreciation and income must be characterized as community property. 2:40:42 PM The default rule has generally been that appreciation and income on community property will be characterized as community property, unless otherwise declared in the community property trust. Trust attorneys have attested to this interpretation, however recent court rulings have created an ambiguous understanding of this general criterion. This legislation, consistent with industry understandings of trusts, seeks to clearly define community property as including appreciation and income on community property. SB 11 establishes a clear definition of appreciation and income as community property, as intended by The Community Property Trust Act. This bill also has a retroactive effective date of May 23, 1998. 2:41:31 PM MS. HAHN provided the sectional analysis for SB 11. She read [Original punctuation provided]: Section 1. Clarifies AS 34.77.030(h), by affirming legal intent to ensure appreciation and income in community property trusts are in fact community property unless expressly otherwise stated in legal trust documents. Section 2. Provides that AS 34.77.030(h) is retroactive to community property trust agreements entered into after May 23, 1998 and defines "community property trust" consistent with statute. Section 3. Adds as a new uncodified law of the State of Alaska, a savings clause and asserts that Sec. 2 of this act does not impact court actions or proceedings that began before the effective date, or a community property rights accrued before the effective date. Section 4. Adds as a new uncodified law of the State of Alaska retroactivity to AS 34.77.030(h). Section 5. Establishes retroactivity through May 23, 1998. 2:42:46 PM SENATOR HUGHES asked why the bill had a specific retroactive date of May 23, 1998. SENATOR BEGICH answered that this is the effective date of the Community Trust Act. It will establish continuity but the savings clause ensures that it does not affect any legal action before the state today. Essentially, it will establish that the understanding and intent extended by then-Representative Ryan's comments during committee hearings was the bill's intent and of the Community Trust Act established at the time. SENATOR HUGHES asked whether any appreciation and income would be considered community property prior to that date. SENATOR BEGICH deferred to Mr. Blattmachr. He stated that the Community Trust Act passed the legislature and prospectively created that relationship. Before 1998, the law did not provide for it. 2:44:12 PM CHAIR HOLLAND asked if any dispute had occurred since 1998, such that the bill would overturn the decision. SENATOR BEGICH responded that the bill included the savings clause to clarify that the intent is not to overturn any legal decisions already made. Instead, the intent is to enforce the will retroactively. He introduced the bill to correct the interpretation but not change any specific court outcome. 2:45:16 PM SENATOR HUGHES disclosed that she had community property with her husband prior to 1998. She asked whether there was any legal way to apply SB 11 to community property acquired before May 1998. CHAIR HOLLAND turned to invited testifiers. 2:46:35 PM MATTHEW BLATTMACHR, Attorney; President & Chief Executive Officer, Peak Trust Company, Anchorage, Alaska, spoke in support for SB 11. He stated that many Alaskan residents had taken advantage of this law since it passed in 1998. He related a scenario in which a couple bought an asset together to fund their grandchildren's education through Alaska's community property and options. The surviving spouse sold the asset and funded their grandkids' college education. He characterized this as a powerful law. In response to the question, if it would overturn any disputes, he referred to a case in Alaska court. He explained that the case in question used semantics but did not consider the law's intent, which was to follow the rules of the federal property law. The savings clause was specifically added to protect those parties and ensure that this bill will not overturn their case. MR. BLATTMACHR, in response to Senator Hughes' earlier question, clarified that prior to the passage of the 1998 law, Alaska did not have the option of community property. It was solely separate property, and it became optional with the passage of the Community Property Act. 2:48:52 Pm SENATOR KIEHL asked what right might have accrued before May 23, 1998, that the bill protects since it only affects community property. MR. BLATTMACHR answered that he was not sure any right could have accrued prior to the passage of the Community Property Act and any property being converted to community property. The only protection would be any right that has accrued since 1998 that was converted during that time. 2:49:56 PM WILLIAM PEARSON, Attorney, Foley and Pearson, Anchorage, Alaska, said he is a shareholder with Foley and Pearson. He stated that the firm believes that SB 11 is a simple but effective statutory fix. It would create the presumption that the income and appreciation of an asset transferred to a community property trust is community property. As Mr. Blattmachr testified, the bill would clarify that the income and appreciation is community property. It will provide the double benefit of the step-up in basis under the federal tax regime, which is the purpose of this legislation. 2:50:54 PM ABIGAIL O'CONNOR, Attorney, O'Connor Law Office, LLC, Anchorage, Alaska, stated that she is an estate planning attorney. She stated her support for SB 11. She opined that multiple trusts would be adversely affected without this bill because the income and appreciation would not be treated as community property. She said she was aware of at least one trust that would be affected by this issue. This bill will provide an automatic fix. 2:52:05 PM DAVE SHAFTEL, Attorney, Shaftel Delman & Associates, Anchorage, Alaska, stated that he practices in the trust and estate area of law. He said he is one of a group of attorneys that have worked with the legislature since the enactment of the enabling legislation to improve the trust and estate laws. This bill will correct a trap for the unwary, he said. He stated a false rule exists. The person drafting a trust must affirmatively state in the trust that community property includes appreciation and income to receive federal tax benefits. Absent that affirmative statement in the trust, the default rule will apply, such that the appreciation and income will not be considered community property. Then the estate would lose the entire tax benefit of community property. SB 11 would reverse the default rule. It provides that the default rule will be that appreciation in income will automatically become community property unless otherwise stated. He acknowledged that a few people might wish to state otherwise. However, almost all of his clients are Alaskan residents or nonresidents who will want to opt-in and use this tax advantage for community property. He explained that if a married couple owns property in tenants in common or tenants by the entirety, not by community property when the first spouse dies, only that spouse's one-half of the community property will receive an adjustment of basis up to a fair market value. When that deceased spouse's half is sold, there would not be any capital gains tax, but when the surviving spouse's half is sold, there will be a capital gains tax equal to that appreciation and income. Community property law takes advantage of a tax rule that dates back to the 1940s. Alaska is one of 13 states with community property laws. Under those provisions, when the first spouse dies both halves get an adjustment of basis up to fair market value. The adjustment of basis is the appreciation and income under discussion. In community property states, if one spouse dies, both halves will receive an adjustment of basis up to fair market value. The surviving spouse can sell the property and not be subject to a capital gains tax. Thus, community property has a significant advantage, so Alaska adopted it in 1998. He stated support for the bill. 2:57:46 PM CHAIR HOLLAND opened public testimony and, after first determining no one wished to testify, closed public testimony on SB 11. [SB 11 was held in committee.]