SB 11-COMMUNITY PROPERTY TRUSTS  2:10:31 PM CHAIR COSTELLO reconvened the meeting and 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." 2:11:01 PM SENATOR TOM BEGICH, Alaska State Legislature, Juneau, Alaska, Sponsor of SB 11, (via Teams), stated that SB 11 is similar to Senate Bill 91 that former Senator John Coghill introduced in the last legislature. He agreed to reintroduce the legislation when he realized that it clarifies the meaning of "increment appreciation" as intended by legislation passed in 1997. That was House Bill 199 and the sponsor was Representative Joe Ryan. He quoted testimony from 1997 that described the basis of the value of an asset when a partner dies. Any appreciation of that on behalf of the estate of the person who died has no tax liability. He emphasized that the original legislation recognized appreciation in the valuation of assets in an estate and SB 11 clarifies that and corrects the ambiguous interpretation of the original law. 2:14:38 PM At ease 2:15:16 PM CHAIR COSTELLO reconvened the meeting and asked Ms. Hahn to continue her testimony. 2:15:22 PM BRIX HAHN, Staff, Senator Tom Begich, sponsor of SB 11, Alaska State Legislature, Juneau, Alaska, read the following sponsor statement for SB 11 into the record: [Original punctuation provided.] Alaska is a state with favorable trust laws, and beneficial laws for community property ownership between spouses. The state allows for "opt in" community property ownership between married couples. Community property ownership can provide tremendous tax advantages to these couples. In Alaska, residents and nonresidents alike can enter into Alaska community property trust agreements. These agreements benefit the individuals entering them, the trust industry of Alaska, banks that hold associated deposits, and through revenues 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 into a community property agreement is with your 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 your spouse dies, community property is placed into a tax category that allows for tax advantages when the property in question is sold. To realize these advantages, appreciation and income in a trust must be characterized as community property. The default rule has been that appreciation and income on community property will be characterized as community property, unless specifically declared in a community property trust. Trust attorneys have attested to this interpretation, but recent court rulings have created an ambiguous understanding of this general norm. This legislation is consistent with industry understandings of trusts and seeks to clearly define community property to include appreciation and income on community property. Senate Bill 11 establishes a clear definition of appreciation and income on community property, as intended by original drafters and The Community Property Trust Act. This bill also has a retroactive effective date of May 23, 1998. 2:17:45 PM MS. HAHN presented the sectional analysis for SB 11. 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. 2:18:43 PM At ease 2:19:15 PM CHAIR COSTELLO reconvened the meeting and moved to invited testimony 2:19:33 PM DAVE SHAFTEL, representing self, Anchorage, Alaska, stated that SB 11 corrects a long-standing problem in the statutes that has become a trap for the unwary when drafting community property trusts. He reminded the members that the tax purpose is that when one spouse dies, both halves of the community property basis step up to the fair market value. He said this unusual rule applies only to community property states and it keys on appreciation of the property being the default rule. 2:23:17 PM MR. SHAFTEL said unfortunately the 1998 act was drafted to create the opposite default rule and appreciation is not included as part of the community property. Over the last 20 years, many attorneys have said in the trust document that appreciation is part of the community property, but some have been unaware and appreciation is not included as part of the community property. He characterized SB 11 as a correction of a drafting error to make appreciation part of Alaska's Community Property Act. 2:25:40 PM SENATOR STEVENS asked if this includes investments held as community property. MR. SHAFTEL answered yes; it includes any type of property held as community property. SENATOR STEVENS commented that it appears that the bill would be advantageous to all people, not just the wealthy. MR. SHAFTEL replied it is important to anyone who wants to own property jointly and take advantage of reducing income tax for the surviving spouse. CHAIR COSTELLO asked if the bill would increase the estate tax liability. MR. SHAFTEL answered no. 2:28:08 PM MATHEW BLATTMACHR, Peak Trust Company, Anchorage, Alaska, stated agreement with the previous testimony. He said this is a widely used financial planning technique for Alaskans. The original intent of the Community Property Act was to include appreciation and income and SB 11 clarifies that original intent. He encouraged the committee to support the bill. CHAIR COSTELLO noted who was available to answer questions. Finding no questions, she thanked the sponsor. 2:29:39 PM CHAIR COSTELLO held SB 11 for future consideration.