SB 63-TRANSFER RESTRICTIONS ON TRUSTS  9:45:46 AM CHAIR MENARD announced the next matter to come before the committee would be SB 63. SENATOR MEYER moved to adopt the proposed committee substitute CS for SB 63, labeled 26-LS0317\R, as the working document of the committee. There being no objection, version R was before the committee. ESTHER CHA, staff to Senator McGuire, sponsor of SB 63, read the following statement: The climate for trust and estate planning is highly competitive, and the trust business is a multi-billion dollar sector that often crosses state lines in order to take advantage of more attractive state trust laws. In 1997, Alaska became the first state to establish a law that allows a person to form an irrevocable trust, be a discretionary beneficiary of the trust and, if the trust has a spendthrift clause, protect the trust assets from the settlor's creditors. 9:47:21 AM To give a little background, I'll summarize the aspect of trusts to which this bill refers. In trusts, there are three parties: a settlor also known as a trust- maker, grantor, or testator; the trustee, which can be an individual or an institution; and beneficiaries. The settlor designates whether or not a beneficiary is discretionary, which means that payment of distributions is determined based on the discretion of the trustee instead of the settlor stating how much and how often payments will be distributed. With discretionary beneficiaries, trustees may be given standards by which to exercise discretion e.g. the HEMS or Health, Education, Management, and Support standard. If the trust has a spendthrift provision, a creditor cannot force the trustee to pay money directly to the creditor. Instead, the creditor must wait until the trustee pays out the distribution to a beneficiary, at which time the creditor can seize the assets. Alaska established in 1997 that assets in a trust would be protected from a settlor's creditors if he designates himself as a discretionary beneficiary, provided that he has no current claims pending. Since Alaska enacted this statute, numerous other states have enacted similar statutes. At present, twelve states allow this type of trust. SB 63 upgrades Alaska's trust statute by adopting provisions that have been adopted by other states. Therefore, without changes in legislation, Alaska would not be able to maintain its position at the forefront. This bill provides the following amendments: · It clarifies the burden of proof which a creditor must meet to establish that a transfer in trust was done with the intent to defraud a creditor · Clarifies that a spendthrift provision will apply to a trust if distributions are made under the exercise of discretion by a trustee who is not the settler, whether or not the exercise of the discretion is governed by the standard · Provides that the spendthrift provision in a trust will apply even though the trustee may distribute income or principal to the settlor to pay income taxes · Clarifies that a beneficiary's interest in a trust, whether or not vested, is not considered a factor or economic circumstance in the division of property subject to divorce These changes in SB 63 were brought to our office's attention by experts in the probate and trust field. SB 63 is part of an ongoing effort to modernize our trust laws and by doing so (1) to create jobs and revenue, (2) to diversify our economy, and (3) to continue making Alaska attractive to trust business and investment. 9:50:35 AM DOUGLAS BLATTMACHR, President, Alaska Trust Company, spoke in support of SB 63. He said Alaska Trust Company is constantly trying to update trust laws to keep them the best in the country, bringing substantial assets and employment opportunities to Alaskans. 9:52:04 AM SENATOR PASKVAN said he wanted to make sure he understood the difference between the original bill and committee substitute: (3)(F) was removed from Section 1 of the original bill [Version A] so that in the committee substitute [Version E] what was section (3)(G) is now section (3)(F). He asked for the reason for the removal of 3(F) from [Version A]. CHAIR MENARD pointed out that section (3) is on page 3. MS. CHA pointed out that a house companion bill moved out of judiciary yesterday. She explained that some of the committee substitute is a reflection of changes made in the house. DAVID SHAFTEL, Shaftel Law Offices, said he is a private attorney and a member of an informal group of attorneys and trust officers that has been working with the Legislature since the late 1990's on state and trust legislation. He said the Alaska Legislature has passed a number of bills that have improved this area of law for Alaska residents and that the statutes are often used by non-residents who want to take advantage of Alaska's improved law in this area. 9:55:26 AM MR. SHAFTEL said he does not have a copy of the committee substitute [Version E]. SENATOR PASKVAN said the provision labeled as [Section (3)(F), subparagraph (i) in Version A] addressed the "reasonable definite standard as described in 26 CFR1.674(b)-1(b)(5)" and [Section (3)(F), subparagraph (ii) in Version A] read "an ascertainable standard relating to health, education, support, or maintenance as described in 26 U.S.C. 2041(b)." He said he is wondering why this section [Section 1(3)(F)(i)and (ii) in Version A] is no longer in committee substitute [Version E]. MR. SHAFTEL said the house bill combines [Section 1(3)(E) and (F) from Version A] into a simpler statement. He said people who have worked on SB 63, including himself, must have decided it would be simpler to use this language rather than the references to the federal regulations and code. 9:57:45 AM SENATOR PASKVAN said [Section 1(3)(E) of Version A] reads "the exercise of discretion by a trustee who is not a settlor and that are not governed by a standard". The committee substitute removes the conjunctive term "and" and says, "whether or not the exercise of discretion is governed by a standard". He asked why "and" was changed to "whether or not it is governed by a standard." MR. SHAFTEL asked for clarification. SENATOR PASKVAN said that on page 3, line 2 of the original bill [Version A], it says, "and that are not governed by a standard." He said he assumed the phrase is addressing the exercise of a trustee who is not a settlor "and that are not governed by a standard" as to the exercise of discretion. MR. SHAFTEL replied, "Correct." SENATOR PASKVAN said the committee substitute [Version E] eliminates the conjunctive ["and"] and says "whether or not the exercise of discretion is governed by a standard." MR. SHAFTEL said [Section 1(3)(F) of Version A], which referenced two statutory and regulatory standards was eliminated. He explained that the two concepts are being combined into one simple subsection that says the distributions, that are made under the exercise of discretion by a trustee who is not the settlor, can be governed by a standard but don't have to be governed by a standard - either way, [distributions] are acceptable. This type of trust allows the assets in the trust to be protected from the creditors of the settlor. SB 63 has been simplified and the two concepts have been incorporated into [Section 1(3)(E) of Version E]. 10:00:59 AM MR. SHAFTEL reiterated that the meaning has not been changed. The original bill [Version A] said the trust still protects assets from the creditor even though the trustee is not governed by a standard. It then says that assets are still protected from the creditors of the settler even though the trustee is subject to a standard. [Section 1(3) (E) and (3)(F)] were combined to say this trust is protected from the creditors of the settler "whether or not" the trustee is governed by a standard. It is a simplification of language. 10:02:09 AM SENATOR PASKVAN asked if it was correct he was establishing a method by which a creditor can't have access to monies of a settlor in a trust that has a trustee who is another person. MR. SHAFTEL replied that was correct and explained that this type of trust was initially approved by the Legislature in 1997. He said the Legislature has enacted various additional provisions to strengthen and increase the workability of this type of trust about six different times. With SB 63, the Legislature is considering another slight improvement. This kind of trust was always set up to have an independent trustee who had absolute discretion as to whether or not to make distributions. Several states have enacted laws that allow the trustee of this type of trust to be subject to a standard, meaning directions or guidelines. These other states have said this trust will work even though the trustee is subject to a standard. SB63 would make Alaska's trusts subject to a standard as well and still protect the assets from the settlor's creditors. 10:06:06 AM MR. SHAFTEL said the language being discussed is a couple of different ways of stating the concept that the trustee can be subject to a standard. 10:07:54 AM CHAIR MENARD said the committee can continue to become better informed but she felt it would be better if Senator McGuire could help clean up SB 63 for better understanding. SENATOR PASKVAN agreed and asked Mr. Shaftel what [Section 1 (3)(E)] does beyond [Section 1 (b)(1)] which addresses the clear and convincing standard with the settlor regarding an intent to defraud. MR. SHAFTEL replied that whenever one is required to prove fraud, the standard burden of proof is by clear and convincing evidence. Alaska's statute failed to address that subject; other states' statutes point it out expressly in their statutes. [Section 1 (b)(1)] is making it clear in the statue. 10:10:23 AM SENATOR PASKVAN referred again to [Section 1(3)(E) and (F), Version E] and asked what is being advanced, who is being protected and who is at risk. MR. SHAFTEL replied that this type of trust is designed to provide two benefits to Alaska residents and non-residents that want to use it. One, it allows a person who is solvent and has adequate assets to put assets into irrevocable trust for the benefit of that person and his or her family, assuming there is no intent to defraud creditors. He noted that a person could always do this for family, however, as of 1997, the creator of the trust could also be a beneficiary of the trust. He explained that the trustee, who is not the creator of the trust, can have discretion to make distributions to the creator as well as the creator's family. MR. SHAFTEL said the second benefit is that the creator of the trust can use the trust to minimize the amount of federal estate taxes that will have to be paid upon his or her death. If a person creates the same type of trust, but is not a beneficiary of the trust, and makes gifts to that trust, then those assets, plus the growth of those assets, are not taxed upon the creator's death. Because this type of trust is subject to the discretion of a trustee, who is not the person who created the trust, experts said it should not be included in the creator's gross estate tax, under the federal estate tax, when he or she dies. Mr. Shaftel said the IRS just issued a private letter ruling approving that. 10:14:43 AM MR. SHAFTEL summarized the second benefit of this kind of trust: it allows people to make gifts for their family into an irrevocable trust, which will not be taxed when they die. However, if they need the funds themselves, the trustee can distribute the funds back to them. He said it is a very helpful estate planning approach for Alaska families and is very popular. SENATOR PASKVAN thanked Mr. Shaftel and said he understands more clearly now. He said some clean up between the original bill and the committee substitute is needed. CHAIR MENARD said she will hear SB 63 again after flushing it out with Senator McGuire and the involved attorneys. 10:16:26 AM SENATOR MEYER asked if a person's estate has to be a certain value before a trust makes sense. MR. SHAFTEL said not necessarily; it depends upon the purpose of the trust and the needs of the person creating it. He said trusts are often created with $25,000 or $50,000 to help children or grandchildren go through college. He mentioned that a temporary repeal of the federal estate tax is in place but if Congress does not act, any person who dies who has more than 1 million assets will be subject to federal estate tax in 2011. [SB 63 was held in committee.]