SB 258 TRUSTS & PROPERTY TRANSFERS IN TRUST  JOE RYAN, Legislative Aide to Representative Al Vesey, Sponsor of SB 258, said this Trust law is simple and would allow trusts to be administered in Alaska and this has the potential of bringing in a lot of outside money to Alaska. RICHARD THWAITES, an estate planning attorney, testified that SB 258 would create an opportunity for investors to place property in trust, with an Alaska trustee, and thereby establish its situs as Alaska. If a current New York resident, with property in New York, put property in a trust anywhere else, it would still be taxed in New York. If the situs of the trust is in Alaska, with an Alaskan trustee, and is an irrevocable transfer as set forth in SB 258, it removes the property out of the jurisdiction and places it in the jurisdiction of Alaska. That would mean a $50 million trust in New York would no longer be subject to New York State taxes. Most members of the American College believe that if and when Alaska passes a state income tax, it will be less than the combined taxes of New York City and New York State. SB 258 does not create any shelter for estate taxes or income taxes. This measure makes Alaska similar to the jurisdictions of the Cook Islands, the Cayman Islands, and the Bahamas. The difference is that the trust would be subject to federal income tax in Alaska. Alaska is an attractive jurisdiction because the U.S. military and the Alaska National Guard provide legal stability. The Joint Committee on Taxation for the U.S. House of Representatives did a study two years ago and estimated that $460 billion dollars per year was going offshore. MR. THWAITES believed Alaska could pick up a substantial portion of that business in a relatively short period of time. Most of the dollars would come in the form of commissions to banks, trust companies and brokers managing the funds. Using a three-eighths percent average return on a $200 billion corpus, commissions would total approximately $750 million dollars per year. On a $1 million trust the commission is one percent. As the volume of the trust increases, the commission decreases, however if the asset requires unusual management, the commission increases. Number 414 SENATOR KELLY asked if the bill would attract more trust attorneys to Alaska. MR. THWAITES replied there are currently 12 to 15, and he does not know if the number will increase. SENATOR KELLY asked if trust attorneys work independently, or whether they are employed through banks. MR. THWAITES stated one-quarter of the membership of the American College are law professors, mostly in private practice. The American College is an organization devoted to education, therefore members must be published, and give presentations to the college to become elected nationally. SENATOR KELLY asked if all members must be attorneys. MR. THWAITES replied affirmatively. SENATOR KELLY inquired whether any other accreditation is necessary. MR. THWAITES replied negatively and explained the function of the College is to recognize those with expertise in the field. MR. THWAITES said the money in trust must be "clean" money; no fraudulent transfers can occur, no liens or claims against it can exist. Once the money is placed in trust, it is irrevocable. Only the very wealthy will take advantage of this type of trust. SENATOR KELLY asked if any other states besides Missouri have a similar set up. MR. THWAITES responded that Missouri passed a similar statute, however the statute was too ambiguous therefore trust holders have not established trusts in that state. Alaska is not encumbered by any statutes in particular regarding which types of trusts are permissible, and has no case law on trusts, therefore as a state, Alaska has a relatively clean slate to begin with. He suspected Nevada may try to pass a similar statute. SENATOR KELLY asked if a sales tax would have much affect on these types of trusts. MR. THWAITES replied it would depend on the nature of the sales tax, and whether it applied to brokerage items. Alaska is unique on that basis because it does not have a past record. If SB 258 passes, a private letter ruling will have to be obtained from the Internal Revenue Service, which a New York firm is planning to pay for. The IRS categorizes trusts in three ways to determine taxability: grantor trusts; complex trusts; and simple trusts. SB 258 would establish grantor trusts which are taxed at the rate of the grantor or the beneficiaries of the trust. SB 258 does not change existing statute substantively, it merely adds some provisions within the trust section. The definition of an Alaska resident is that used to define recipients of permanent fund dividends. Number 481 SENATOR TORGERSON questioned why that definition is used, since it has nothing to do with the qualifications of the person managing the trust. MR. THWAITES explained by statute, there is a difference between domicile and residence. The definition of resident was used to be consistent with existing statutory language at the recommendation of the legislative drafter, Terry Bannister. MR. THWAITES noted in the House version, the trust company is organized under AS 06.25 with its principal place of business in the state, and adds that a bank, organized under AS 06.05, or a national banking association organized under 12 USC 12.21-216(d) that has trust powers, must have its principal place of business in this state. SENATOR KELLY asked for an example of a banking association. MR. THWAITES specified National Bank of Alaska or First National Bank would be designated as national banking associations. State banks and national banking associations differ depending upon which section they were incorporated under. SENATOR KELLY inquired whether credit unions would fall under this definition. MR. THWAITES replied it would not matter, since credit unions have never been granted fiduciary powers to function in that capacity. Number 516 SENATOR KELLY asked how much money would move to Alaska if SB 258 passed. MR. THWAITES projected, under a best case scenario, the amount could range from $200 to $500 billion. SENATOR KELLY asked how much of that would be sitting in Alaska banks, as opposed to being in the form of property elsewhere. MR. THWAITES felt it would be a large percentage, since these types of trusts are not usually funded with active assets that are normally used to develop and run a business. This transfer is irrevocable and is meant to benefit one's succeeding generations. Number 526 SENATOR SALO requested more elaboration on "clean" money. MR. THWAITES pointed out the question arose, in earlier discussions, whether someone could set up a trust fund knowing he/she planned to file bankruptcy to discharge debts later on. There is a fraudulent transfer statute to prevent that from happening. He also explained a person cannot put their money in a trust knowing he/she is about to be sued for malpractice, because money cannot be sheltered in the trust. Likewise, if an airplane is part of a trust, and a beneficiary uses the airplane and causes damage, the trust is open to suit. If assets in a trust are used as collateral, those assets can be taken. It is only those assets with no lien or claim that are protected from creditors. SB 258 would extend the same status that protects shareholders from the liability of a corporation to family trusts. In the Cayman Islands and the Cook Islands, there are no treaties with the U.S. Even though there is a legal obligation for a U.S. resident to pay tax on those dollars, the resident does not, because records are not available from the administrator on the Cook Islands. That would not be the case in Alaska since trusts in Alaska would be subject to IRS review and claims. SENATOR SALO commented SB 258 would attract wealthy investors who are not trying to avoid paying U.S. taxes. MR. THWAITES believed the bill would hurt jurisdictions such as New York and California. WES COYNER, representing the Alaska Bankers Association, stated the banking community in Alaska is still reviewing this issue, and has no position on SB 258. SENATOR KELLY asked when a position might be forthcoming. MR. COYNER believed a position might be determined in one week. MR. THWAITES commented he has not received a response from Key Bank, but he has received a response from the National Bank of Alaska, which indicated they were interested in the legislation and wanted to know how it would be promoted. They are hesitant to accept placing real property in a trust, because of the problem of environmental regulations. SENATOR KELLY asked if they were hesitant to accept real property anywhere. MR. THWAITES clarified real property anywhere. In other states real property is accepted, but the commission is higher. SENATOR KELLY announced the bill would be held over until Thursday to give the banking industry time to determine a position. He adjourned the meeting at 2:20 p.m.