HOUSE JUDICIARY STANDING COMMITTEE April 23, 1997 1:00 p.m. MEMBERS PRESENT Representative Joe Green, Chairman Representative Con Bunde, Vice Chairman Representative Brian Porter Representative Norman Rokeberg Representative Jeannette James Representative Eric Croft Representative Ethan Berkowitz MEMBERS ABSENT COMMITTEE CALENDAR SENATE BILL NO. 19 am "An Act relating to enforcement of federal laws relating to fish and game; and repealing the power and duty of the commissioner of fish and game to assist in the enforcement of federal laws relating to fish and game." - MOVED HCS SB 19(RES) OUT OF COMMITTEE HOUSE JOINT RESOLUTION NO. 25 Proposing amendments to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation-proofing, and to require a vote of the people before spending undistributed income from the earnings reserve of the permanent fund; and relating to the permanent fund. - HEARD AND HELD; SCHEDULED EXECUTIVE SESSION HOUSE BILL NO. 199 "An Act relating to the property, transactions, and obligations of spouses; relating to the augmented estate; amending Rule 301, Alaska Rules of Evidence; and providing for an effective date." - HEARD AND HELD * HOUSE BILL NO. 163 "An Act relating to designating gamma-Hydroxybutyrate as a schedule IVA controlled substance; and providing for an effective date." - SCHEDULED BUT NOT HEARD * HOUSE BILL NO. 234 "An Act relating to assistance for abortions under the general relief program; and relating to financial responsibility for the costs of abortions." - SCHEDULED BUT NOT HEARD * HOUSE BILL NO. 196 "An Act relating to wills, intestacy, nonprobate transfers, and trusts; and amending Rule 24, Alaska Rules of Civil Procedure." - BILL CANCELLED (* First public hearing) PREVIOUS ACTION BILL: SB 19 SHORT TITLE: REPEAL FED ENFORCEMENT DUTIES/F&G COMSNR SPONSOR(S): SENATOR(S) SHARP, Taylor, Donley JRN-DATE JRN-PG ACTION 01/03/97 19 (S) PREFILE RELEASED 1/3/97 01/13/97 19 (S) READ THE FIRST TIME - REFERRAL(S) 01/13/97 19 (S) RES, JUD 02/05/97 (S) RES AT 3:30 PM BUTROVICH ROOM 205 02/05/97 (S) MINUTE(RES) 02/06/97 247 (S) RES RPT 6DP 1NR 02/06/97 247 (S) DP: HALFORD, TAYLOR, TORGERSON, 02/06/97 247 (S) LEMAN, GREEN, SHARP; NR: LINCOLN 02/06/97 247 (S) ZERO FISCAL NOTE (DPS) 02/19/97 (S) JUD AT 1:30 PM BELTZ ROOM 211 02/19/97 (S) MINUTE(JUD) 02/20/97 428 (S) JUD RPT 3DP 02/20/97 428 (S) DP: TAYLOR, PARNELL, PEARCE 02/20/97 428 (S) PREVIOUS ZERO FN (DPS) 02/21/97 (S) RLS AT 10:45 AM FAHRENKAMP RM 203 02/21/97 (S) MINUTE(RLS) 02/24/97 469 (S) RULES TO CALENDAR & 1NR 2/24/97 02/24/97 473 (S) READ THE SECOND TIME 02/24/97 473 (S) AM NO 1 OFFERED BY SHARP 02/24/97 473 (S) AM NO 1 ADOPTED Y14 N5 A1 02/24/97 474 (S) ADVANCED TO THIRD READING UNAN CONSENT 02/24/97 474 (S) READ THE THIRD TIME SB 19 AM 02/24/97 474 (S) COSPONSOR(S): DONLEY 02/24/97 475 (S) PASSED Y15 N4 A1 02/24/97 475 (S) ADAMS NOTICE OF RECONSIDERATION 02/25/97 502 (S) RECONSIDERATION NOT TAKEN UP 02/25/97 502 (S) TRANSMITTED TO (H) 02/26/97 478 (H) READ THE FIRST TIME - REFERRAL(S) 02/26/97 478 (H) RESOURCES, JUDICIARY 04/10/97 (H) RES AT 1:00 PM CAPITOL 124 04/10/97 (H) MINUTE(RES) 04/17/97 (H) MINUTE(RES) 04/18/97 1167 (H) RES RPT HCS(RES) 2DP 4NR 04/18/97 1168 (H) DP: DYSON, OGAN 04/18/97 1168 (H) NR: WILLIAMS, GREEN, MASEK, HUDSON 04/18/97 1168 (H) SENATE ZERO FISCAL NOTE (DPS)2/6/97 04/21/97 (H) JUD AT 1:45 PM CAPITOL 120 04/21/97 (H) MINUTE(JUD) 04/23/97 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HJR 25 SHORT TITLE: CONST. AM: PERM. FUND INCOME & DIVIDEND SPONSOR(S): REPRESENTATIVE(S) AUSTERMAN JRN-DATE JRN-PG ACTION 02/26/97 483 (H) READ THE FIRST TIME - REFERRAL(S) 02/26/97 483 (H) STATE AFFAIRS, JUDICIARY, FINANCE 03/11/97 (H) STA AT 8:00 AM CAPITOL 102 03/11/97 (H) MINUTE(STA) 03/13/97 (H) STA AT 8:00 AM CAPITOL 102 03/13/97 (H) MINUTE(STA) 03/15/97 (H) STA AT 11:00 AM CAPITOL 102 03/15/97 (H) MINUTE(STA) 03/17/97 688 (H) STA RPT CS(STA) 3DP 4NR 03/17/97 689 (H) DP: JAMES, HODGINS, DYSON 03/17/97 689 (H) NR: ELTON, BERKOWITZ, VEZEY, IVAN 03/17/97 689 (H) FISCAL NOTE (GOV) 03/17/97 689 (H) ZERO FISCAL NOTE (REV) 03/17/97 689 (H) REFERRED TO JUDICIARY 03/21/97 789 (H) CORRECTED STA CS SUBMITTED 04/21/97 (H) JUD AT 1:45 PM CAPITOL 120 04/21/97 (H) MINUTE(JUD) 04/23/97 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 199 SHORT TITLE: COMMUNITY PROPERTY SPONSOR(S): REPRESENTATIVE(S) RYAN, Therriault JRN-DATE JRN-PG ACTION 03/18/97 736 (H) READ THE FIRST TIME - REFERRAL(S) 03/18/97 737 (H) L&C, JUDICIARY 04/18/97 (H) L&C AT 3:15 PM CAPITOL 17 04/18/97 (H) MINUTE(L&C) 04/21/97 1211 (H) L&C RPT 3DP 1NR 04/21/97 1211 (H) DP: RYAN, HUDSON, COWDERY 04/21/97 1211 (H) NR: BRICE 04/21/97 1212 (H) 2 ZERO FISCAL NOTES (COURT, DCED) 04/23/97 (H) JUD AT 1:00 PM CAPITOL 120 WITNESS REGISTER JOSEPHINE HARDY, Legislative Secretary to Senator Bert Sharp Alaska State Legislature Capitol Building, Room 516 Juneau, Alaska 99801 Telephone: (907) 465-3004 POSITION STATEMENT: Presented sponsor statement for HCS SB 19(RES). DALE BONDURANT HC 1, Box 1197 Soldotna, Alaska 99669 Telephone: (907) 262-0818 POSITION STATEMENT: Testified on HCS SB 19(RES). JOHN GLASS, Colonel, Director Division of Fish and Wildlife Protection Department of Public Safety 5700 East Tudor Road Anchorage, Alaska 99507-1225 Telephone: (907) 269-5509 POSITION STATEMENT: Provided department's position and answered questions regarding HCS SB 19(RES). CLIFF STONE, Legislative Assistant to Representative Alan Austerman Alaska State Legislature Capitol Building, Room 434 Juneau, Alaska 99801 Telephone: (907) 465-2487 POSITION STATEMENT: Presented sponsor statement for HJR 25. REPRESENTATIVE JOE RYAN Alaska State Legislature Capitol Building, Room 420 Juneau, Alaska 99801 Telephone: (907) 465-3875 POSITION STATEMENT: Sponsor of HB 199. RICHARD S. THWAITES, JR., Attorney at Law Law Offices of Richard S. Thwaites, Jr. 500 L Street, Suite 301 Anchorage, Alaska 99501 Telephone: (907) 277-1595 POSITION STATEMENT: Testified in support of HB 199. JONATHAN BLATTMACHR, Partner Milbank, Tweed, Hadley and McCloy One Chase Manhattan Plaza New York City, New York 10005 Telephone: (212) 530-5066 POSITION STATEMENT: Testified in support of HB 199. RICHARD W. HOMPESCH II, Attorney at Law Hompesch and Associates, PC Denali Financial Center 119 North Cushman Street, Suite 400 Fairbanks, Alaska 99701 Telephone: (907) 452-1700 POSITION STATEMENT: Testified in support of HB 199. LINDA HULBERT, Insurance Agent 110 Cushman Street Fairbanks, Alaska 99701 Telephone: (907) 452-4400 POSITION STATEMENT: Testified in support of HB 199. ACTION NARRATIVE TAPE 97-61, SIDE A Number 0001 CHAIRMAN JOE GREEN called the House Judiciary Standing Committee meeting to order at 1:00 p.m. Members present at the call to order were Representatives Green, Bunde, Porter and Rokeberg. Representatives Croft, Berkowitz and James arrived at 1:05 p.m., 1:06 p.m. and 1:15 p.m., respectively. SB 19 am - REPEAL FED ENFORCEMENT DUTIES/F&G COMSNR CHAIRMAN GREEN announced the first item of business was Senate Bill No. 19 am, "An Act relating to enforcement of federal laws relating to fish and game; and repealing the power and duty of the commissioner of fish and game to assist in the enforcement of federal laws relating to fish and game." A brief sponsor statement had been presented on April 21, 1997. JOSEPHINE HARDY, Legislative Secretary to Senator Bert Sharp, presented the same sponsor statement given April 21. Number 0130 REPRESENTATIVE CON BUNDE asked whether Ms. Hardy was addressing the committee substitute passed out of the House Resources Standing Committee. MS. HARDY said yes. She advised members that back-up materials in committee packets from the Department of Law and the Department of Public Safety should be disregarded. Those addressed concerns about a previous version of the bill. Number 0208 CHAIRMAN GREEN asked: If this action is taken, does Senator Sharp feel this will adversely affect reciprocity with the federal government relating to their looking after the state's interests in other areas? MS. HARDY said the state has usually helped past the three-mile limit, for example; that would not change. In other areas, taking away this mandate will do no harm in working with the federal government. It will simply give the commissioner discretion. Number 0295 CHAIRMAN GREEN said his concern was more than the three-mile limit. The state scratches the federal government's back in certain areas, which the federal government reciprocates elsewhere. He asked whether the sponsor had considered that this could irritate the federal government into refusing to assist the state. Number 0340 MS. HARDY replied that eliminating this statute does not mean there will be no assistance by the state. That is only when state and federal laws are in conflict. Number 0365 REPRESENTATIVE BUNDE asked Representative Porter, "If a sworn officer in fish and game observes a federal violation of fish and game laws, isn't he, by his oath of office, duty-bound to act on that observation?" REPRESENTATIVE BRIAN PORTER replied that the officer would be empowered to do so. However, policy can be set by the commissioner. Noting that both the Department of Law and the Department of Public Safety had expressed problems with the bill, he asked whether representatives from those departments were present. CHAIRMAN GREEN advised members that Colonel Glass had not yet joined the teleconference. REPRESENTATIVE PORTER stated his understanding that the bill, by deletion of this provision to return to common law, would allow a state officer to enforce federal law if policy, time and circumstance required it. Federal fish and game enforcement officers and state Division of Fish and Wildlife Enforcement officers get agreements throughout the state, informal and formal, regarding mutual assistance; they often come to each other's aid in the field. Representative Porter assumed it was not the intent of the sponsor to interfere with those kinds of safety issues. Number 0509 MS. HARDY explained that although both departments had problems with a previous version of the bill, those concerns had been satisfied through HCS SB 19(RES). Repealing the mandate simply gives discretion to the commissioner in allowing the department to enter into agreements, memoranda of understanding and enforcement protocols. It removes the "hammer" if the department does not feel comfortable or appropriate in assisting. Number 0555 REPRESENTATIVE BUNDE asked whether this would preclude a state enforcement officer from charging someone under a federal statute. He noted that sometimes federal penalties are greater than the state's, and it is possible to charge someone with violation of the Lacey Act, which he understands to have no statute of limitations. MS. HARDY said the answer would be no. Number 0623 REPRESENTATIVE ERIC CROFT read from AS 16.05.050, which says, "The commissioner has, but not by way of limitation, the following powers and duties". He stated his understanding that they were taking away the duty but not the power. CHAIRMAN GREEN agreed. He indicated that he questioned whether by removing that duty, they were also removing the power; but he noted that apparently the sponsor's representative was saying no. He then asked whether this removed power from the ADF&G and whether if, in their normal, routine duties, ADF&G personnel find a violator, they can still act if they so wish. REPRESENTATIVE PORTER pointed out that the Department of Fish and Game (ADF&G) contains biologists, whereas the Division of Wildlife Protection enforces fish and game laws and regulations. He said fish and game enforcement officers work for the federal government. He acknowledged it is confusing. REPRESENTATIVE BUNDE stated that he needed to have questions answered by Colonel Glass. Number 0760 REPRESENTATIVE ETHAN BERKOWITZ said he saw nothing in his packet regarding what the Department of Law thinks of this. In particular, he wanted to know the district attorneys' opinions. MS. HARDY stated that the Department of Law's concerns have been satisfied with the current version of the bill. REPRESENTATIVE BERKOWITZ said he was concerned about the Criminal Division's response. He asked whether they had addressed this. MS. HARDY said no. CHAIRMAN GREEN asked whether Representative Berkowitz wished to offer the amendment included in the packets. REPRESENTATIVE BERKOWITZ said no; he was withdrawing it. Number 0826 DALE BONDURANT testified via teleconference from Kenai, saying he was deeply involved in the subsistence priority issue. He referred to the McDowell case and said the Alaska Supreme Court had found that the subsistence priority cannot be determined by where Alaskans reside. They had stated that the common use clause imposes upon the state a duty to manage fish, wildlife and waters for the benefit of all the people. The minimum requirement of that duty is a prohibition against special privileges. MR. BONDURANT said for the "Alaska fish and wildlife to continue to manage and enforce these public resources, contradictive to this ruling, is a violation of the supreme court findings and the constitution of the state." He said one year ago, the Alaska Federation of Natives (AFN) took a written position that they would no longer even discuss the subsistence issue with the state of Alaska but would deal only with the federal authorities. MR. BONDURANT said continuing to support management enforced contrary to the state constitution violates Article VIII and, possibly more importantly, Article I, Section 1, which says in part, "all persons are equal and entitled to equal rights, opportunities, and protection under the law; and that all persons have corresponding obligations to the people and to the State." MR. BONDURANT concluded that it is time to abide by the Alaska Supreme Court and the state constitution and stick to enforcing those requirements. Number 1030 REPRESENTATIVE BUNDE asked Colonel Glass, now on teleconference, to comment on the bill. JOHN GLASS, Colonel, Director, Division of Fish and Wildlife Protection, Department of Public Safety, verified that they were addressing the committee substitute, then stated, "The bill, in its entirety, as it presently stands, we have no objections to whatsoever. It will not affect our abilities to continue doing the work that we have been doing, and we'll be able to continue to do so under the present wording of this bill." REPRESENTATIVE CROFT asked what objection there was previously and how that was cured. COLONEL GLASS responded, "The other amendments that were on this bill originally is where our objections were. We were afraid it was going to impose upon us a situation where we would not be able to continue working with the federal agencies as we do currently, use of the Lacey Act, et cetera, enforcing some of the rules and regulations that we handle." CHAIRMAN GREEN noted that an earlier version contained a prohibition, as opposed to not having a duty. Number 1096 REPRESENTATIVE CROFT asked whether Colonel Glass's interpretation was that elimination of subparagraph (1) left his division the ability, but not the duty, to assist the U.S. Fish and Wildlife Service. COLONEL GLASS said as currently written, the bill affects only the ADF&G. The Division of Fish and Wildlife Protection obtains enforcement authority under Title 18, not through the commissioner of the ADF&G under Title 16. REPRESENTATIVE CROFT asked whether an ADF&G representative would testify. CHAIRMAN GREEN indicated none was scheduled to appear. REPRESENTATIVE CROFT inquired whether Colonel Glass believed this meant the ADF&G no longer would have the duty to act, but would have the power. COLONEL GLASS estimated that up to 99 percent of the enforcement is done by the Division of Fish and Wildlife Protection, rather than by the ADF&G. He commented, "And I asked Director Regelin to respond to that during our last hearing in the House Resources Committee, and I never did hear exactly how much they do." Number 1170 REPRESENTATIVE BUNDE reported, based on his personal experience fishing, that a fisheries biologist may come by who also checks licenses and who could write a ticket if there was a violation. He asked whether that person would be precluded from bringing a charge under the Lacey Act, for example. COLONEL GLASS replied, "No, I don't believe they would, as long as it is -- it would not be against what the federal mandate would be, no." Although he could not speak directly for the ADF&G, he had never known them to bring charges under the Lacey Act. He explained, "That has always been ours, because most of those are on guided hunts, which we have the ability to police." Number 1224 REPRESENTATIVE BERKOWITZ stated, "Colonel, I don't want to put you in an awkward spot, but it seems to me that this bill doesn't do anything." COLONEL GLASS responded, "Representative Berkowitz, it does not do anything to us directly; no, it does not, sir. It is directly aimed at Fish and Game." REPRESENTATIVE BERKOWITZ said it seemed to be just another way of telling the federal government that the state is unhappy with federal management of fish and game. COLONEL GLASS replied, "In my opinion, that's exactly what it is, sir." Number 1260 REPRESENTATIVE PORTER made a motion to move the bill from committee with individual recommendations. There being no objection, HCS SB 19(RES) moved from the House Judiciary Standing Committee. HJR 25 - CONST. AM: PERM. FUND INCOME & DIVIDEND Number 1273 CHAIRMAN GREEN announced the next item of business was House Joint Resolution No. 25, proposing amendments to the Constitution of the State of Alaska to guarantee the permanent fund dividend, to provide for inflation-proofing, and to require a vote of the people before spending undistributed income from the earnings reserve of the permanent fund; and relating to the permanent fund. The committee had heard testimony from Representative Austerman, sponsor, on April 21, 1997. Number 1302 CLIFF STONE, Legislative Assistant to Representative Alan Austerman, read the sponsor statement into the record: "Within the Constitution of the State of Alaska, all income from the Alaska permanent fund is deposited into the general fund and available for appropriation. The legislature, by statute, has created an earnings reserve account, from which dividends and inflation-proofing are paid. Funds then remaining in the earnings reserve account are called undistributed income or leftover earnings. "Historically, this undistributed income has been deposited back into the principal of the permanent fund by the legislature. Last year, the legislature deposited $1.8 billion of undistributed interest earnings back into the corpus of the permanent fund, leaving a balance of about $100 million in the earnings reserve account. "Under current law, the permanent fund dividend and inflation- proofing could be eliminated by a simple majority vote of the legislature and subsequent approval by the Governor. "A constitutional amendment is the only way to guarantee the permanent fund dividend program continues and provide for inflation-proofing of the Alaska permanent fund itself and to require a vote of the people before any spending of the undistributed income can take place. "With both the permanent fund dividend and inflation-proofing permanently protected by the constitution, Alaskans might feel more comfortable about considering other uses for undistributed income in the earnings reserve account." MR. STONE stated the sponsor's intention is to create a dialogue to inform Alaskans of the difference between the permanent fund dividend and the permanent fund itself. He indicated when "permanent fund" is mentioned, people only think about the dividend. With this resolution, the sponsor hopes that during this interim and the next session, people can become educated statewide about how the permanent fund is set up, what constitutionally must be put back into the corpus, how it is inflation-proofed and how it is that Alaskans have a permanent fund dividend. Then people may feel comfortable with the legislature's looking at that earnings reserve account and making decisions for its use in state government other than depositing it back into the corpus of the fund. Number 1470 REPRESENTATIVE BERKOWITZ asked whether Mr. Stone was saying that current constraints prohibit the best investment possible for the fund. MR. STONE replied that the permanent fund itself is being managed by some of the best people available. Number 1500 REPRESENTATIVE BERKOWITZ said that was not his question; in fact, he was praising the management. He suggested the impact of this would be to "unleash them" somewhat, which would enhance the return to the state from the permanent fund. MR. STONE responded that he believed all the resolution attempts to do is place in the constitution the dividend and inflation- proofing. Currently, those are in statute. Theoretically, someday the legislature may decide to take the dividend and inflation- proofing, wiping them out. If those were in the constitution, they would be safeguarded a little better. CHAIRMAN GREEN said as the resolution is worded, it has no effect on activity and investment restrictions now placed on it. He stated, "And, I think, dealing with perhaps better rates of return on some types of investment - some certain stocks are a little higher-risk/higher rewards, if you're right - those restrictions that have recently been changed would still be changed ... by the majority." MR. STONE said that was his understanding. Number 1580 REPRESENTATIVE BUNDE said as long as he had been in the legislature, there had never been a move to spend the earnings of the permanent fund. Many people had been frightened of doing that, even though he understands that as the permanent fund was initially proposed, the earnings in excess of the dividend were to pay for state services. He asked whether Mr. Stone knew of any movement afoot to spend the earnings. MR. STONE said no. REPRESENTATIVE BUNDE commented, "And so, this may be putting suspenders on the belt." MR. STONE replied that he believed Representative Austerman's thought was that future legislatures may be more free-wheeling and, to make up for a fiscal gap, may be willing to restrict the dividend program itself, unless it is in the constitution. REPRESENTATIVE BUNDE suggested this is an attempt to bind future legislatures. Acknowledging the intent to guarantee continuation of a dividend and to require inflation-proofing, he asked whether a further intent is to disallow spending of the earnings. MR. STONE said no, the earnings reserve would still be at the discretion of the legislature. The idea is that if Alaskans understand that their permanent fund dividend is constitutionally protected, they might feel more at ease in allowing a future legislature to spend that earnings reserve account to set up an endowment, for example. Number 1685 REPRESENTATIVE BUNDE asked whether under HJR 25, excess earnings could be spent without a vote of the people. MR. STONE replied, "The original resolution did read that way, but this new, revised resolution takes that restriction away. After meeting with the permanent fund folks and through the House State Affairs, some consideration was made. And so, a CS came forward to not have that restriction in there." REPRESENTATIVE BUNDE referred to subsection (b) of Section 3, which says in part, "Income from the permanent fund shall be deposited into a separate account". He asked whether they were setting up a "permanent fund within the permanent fund." MR. STONE said no; the earnings reserve account is the separate account to which they are referring. Number 1760 REPRESENTATIVE JEANNETTE JAMES noted that she had worked extensively on this issue in the House State Affairs Standing Committee. She said as far as a deposit into a separate account, subsection (b) puts into the constitution what is already in statute. REPRESENTATIVE JAMES said the one change they made was where it indicates the reserve account can be spent for the permanent fund dividend program and inflation-proofing, both as provided by law. This does not preclude the legislature from changing the way the dividend is calculated; it just protects its existence. Depending on future interest rates and the cost of inflation-proofing, there could be insufficient money for both in the earnings reserve account. There could not be something set up in the constitution that the legislature would be unable to do. Therefore, they were not defining the dividend program or the inflation-proofing. REPRESENTATIVE JAMES continued, "The other part that was in this bill - which was, then, also, that the rest of the leftover could not be spent by the legislature without a vote of the public because of its being in the constitution - seemed to be unwieldy, because that wouldn't even let us put it back in the fund. It wouldn't let us do anything without putting it out to the people for a vote. And then, of course, we would get a vote based on not whether we could spend it or not, but whether we could spend it for that, and that that would have to be part of that issue." REPRESENTATIVE JAMES said it is an educational tool as much as anything else. People don't want any of the permanent fund spent because they believe it will affect their dividends. Conversations over this constitutional amendment will allow the legislature to let people know exactly how this works. She agreed that funds remaining after dividends and inflation-proofing will have a higher likelihood of being spent by the legislature without public outcry than the way it currently is. Representative James asked whether she had correctly evaluated the intent. MR. STONE said yes. REPRESENTATIVE JAMES noted that investment of money in the earnings reserve differs from investment of money in the fund itself; the former is invested for short-term, rather than long-term, gains. Number 1902 CHAIRMAN GREEN said as he reads it, there would be inflation- proofing, determined by inflation rates. Although the dividend would have to be maintained, it could be any amount, even one dollar, as determined under current law. MR. STONE concurred. He said in talking with Jim Kelly of the Alaska Permanent Fund Corporation, there had been very good returns these last few years. He stated, "And it's based on five-year segments, to kind of allow for those roller-coaster rides." In the future, there may be a less "bullish" market and the dividend itself may actually decline. CHAIRMAN GREEN recalled that the original purpose for the permanent fund was to take care of the cost of government during the lean years of oil revenue. MR. STONE said that seems to have been lost. CHAIRMAN GREEN asked for confirmation of that being the original intent. MR. STONE said he would have to look at that. However, he had heard that the original intent was to provide money to help support government as oil money dries up. REPRESENTATIVE PORTER said he remembered that precisely. He noted that he had further questions. Number 1981 REPRESENTATIVE CROFT stated his understanding that HJR 25 has no say about the rate of dividend, the particular investment strategy or the calculation of what adequate inflation-proofing is. It requires inflation-proofing and continuation of the dividend program, as provided by law, as the legislature sees fit. MR. STONE said that is correct. This in no way would change the way the fund is managed. It would simply protect, constitutionally, the dividend program and inflation-proofing. It was also intended to create the educational atmosphere mentioned by Representative James. Number 2025 REPRESENTATIVE BUNDE asked whether inflation-proofing would take priority over the dividend. He further asked whether anyone was present from the Alaska Permanent Fund Corporation. MR. STONE replied that he believed the way it is set up currently, the dividend program comes first. He noted that it is spelled out in statute. CHAIRMAN GREEN said if there is a downturn significant enough so they could essentially only cover inflation-proofing, since that is specified, then dividends would have to go down. MR. STONE said that is correct. CHAIRMAN GREEN stated, "So, they would take precedent." Number 2062 REPRESENTATIVE BERKOWITZ asked whether financial analysts had looked into this and, if so, what they had to say. MR. STONE said that was a good point. He had been talking with Mr. Kelly from the Alaska Permanent Fund Corporation. Some Internal Revenue Service (IRS) questions had been raised regarding how this would affect the distribution and the permanent fund itself if this is constitutionally protected, rather than statutorily protected. He stated, "The IRS is not letting us know how they would rule on such a case. But they're very concerned over at the Permanent Fund Corporation about ... such a ruling." REPRESENTATIVE BERKOWITZ referred to correspondence from Ron Lorensen (included in packets) discussing the IRS questions. He asked whether those questions had been pursued further in relation to this resolution. MR. STONE said not that he was aware of. But even before this resolution came to light, there were questions about the IRS tax implications with the permanent fund itself, because it was never intended to be just a dividend program. The fund itself was supposed to be utilized in some way to help support government. So, the IRS has been looking at this for some time. He said Mr. Kelly would be the person to address that question. Number 2141 REPRESENTATIVE BERKOWITZ commented that he was leery of rushing to making a change if it would jeopardize the tax status of the permanent fund. He suggested it would be prudent to have a firm grip on the consequences. CHAIRMAN GREEN asked whether there was an estimate of when that response may come. He noted that dealing with the federal government can be a lengthy process. MR. STONE replied, "Apparently they're not talking. They're letting the state make that decision." CHAIRMAN GREEN asked whether the concern with the IRS would be greater if this was protected statutorily rather than constitutionally. MR. STONE said apparently it was vice versa. He suggested that the Alaska Permanent Fund Corporation and its counsel could provide a better answer. REPRESENTATIVE PORTER requested consideration of an executive session and commented, "I can't think of anything that could have a greater impact on the state than this question." Number 2207 CHAIRMAN GREEN noted that if they went into executive session, their questions would require a response by someone from the Alaska Permanent Fund Corporation. REPRESENTATIVE CROFT indicated he had attempted to call Ron Lorensen and had left a message. He had also called Eric Wohlforth, an attorney who is a trustee on the board; Mr. Wohlforth had preferred that Representative Croft talk through counsel. Representative Croft agreed that an executive session would be best when the appropriate people could be present. Number 2323 CHAIRMAN GREEN announced the committee would hold HJR 25 over and hear it in executive session, probably on Monday, April 28. HB 199 - COMMUNITY PROPERTY CHAIRMAN GREEN introduced the next item of business, House Bill No. 199, "An Act relating to the property, transactions, and obligations of spouses; relating to the augmented estate; amending Rule 301, Alaska Rules of Evidence; and providing for an effective date." Number 2415 REPRESENTATIVE JOE RYAN, sponsor, explained, "There is an income tax advantage if a person has assets with unrealized gains in community property. This bill was designed, among other things, to allow married Alaskans to obtain the income tax advantages available to residents of community property states and to produce business in Alaska." He specified that the bill does not mandate community property in Alaska. TAPE 97-61, SIDE B Number 0006 REPRESENTATIVE RYAN noted that packets included a facsimile from Robert L. Manley relating to federal statutes and the community property step-up in basis for a surviving spouse's one-half share of community property. He read from the second page of that fax, which says, "Both the decedent's and the surviving spouse's half interests in community property receive a new basis, if at least half of the community property was includible in the decedent's gross estate." REPRESENTATIVE RYAN provided an example. A person buys stock at $10 per share; the basis for that would be the $10 at which it was purchased. The stock appreciates over the years as a large, unrealized gain. If the person sells the stock, he or she would be subject to a capital gains tax on the realized gain at the time of sale. However, if that person was prudent enough to leave it in an estate and lived in a state that allows a community property option or that had community property, the federal government says that when one partner dies, the new basis is current market value, with no tax liability on that half of the estate or on the surviving spouse's half of the estate. Representative Ryan commented, "So, in effect, what you get is Uncle Sam takes a beating on the taxes and you get the realized gain without a tax liability." REPRESENTATIVE RYAN explained that nine states currently have community property. Wisconsin structured theirs so that although everything is community property, the parties may opt out. CHAIRMAN GREEN asked whether that was for both parties. REPRESENTATIVE RYAN replied, "Yes. Alaska, we plan on having individual property as the basis. And you have to opt in, and you can opt out at a later time. It's very flexible. This is just like a Chinese menu: one from Column A, one from Column B, so that nobody's required to do anything. You have to ask. You have to set up this good-faith agreement. There's many conditions which ... you are required to follow to set up this agreement. And you can place any or all of your assets, nominate them as community property." REPRESENTATIVE RYAN pointed out that gifts, inheritances and so forth are excluded and remain individual property. The bill only applies to property for which both spouses decide to take advantage. REPRESENTATIVE RYAN referred to the new trust law signed by the Governor on October 1. He said this allows people from the other 41 states that have no community property option, who put assets in a trust in Alaska, to nominate the assets as community property. They could take advantage of the step-up in basis and yet live in another state. He suggested that would bring a lot of investment money to Alaska because it would have to be held here, administered here and, he hopes, invested here or managed here for investment. REPRESENTATIVE RYAN explained, "And that's the purpose basically behind this bill, is to try to offer some advantages similar to what some of the offshore things have, where they have zero tax liabilities and so forth, so in America we can offer you a zero tax liability that you can't get anywhere else unless you happen to live in one of the other nine states that have a community property law. But those states, community property is mandatory; Wisconsin allows you to opt out. In Alaska, it's a choice. If you want to participate, you're allowed to. If you don't want to participate, no one forces you to do anything." REPRESENTATIVE RYAN said he is promoting the bill because it appears to be a good opportunity to get needed capital for Alaska. He added that there are many undeveloped resources in the state. Number 0173 CHAIRMAN GREEN noted that his grandfather used to say if something seems too good to be true, it probably is. It seemed beyond comprehension that the IRS would allow putting stock under community property in Alaska, for example, and if one spouse preceded the other in death, both halves would be tax-free. He stated, "And the other thing that I'm concerned about is, if that is held in another state that does have state taxes associated with earnings, that they could bring that up here, in a taxless state, that the state would even allow that." Number 0221 REPRESENTATIVE RYAN again read from the second page of the fax from Mr. Manley, indicating it was from Section 1014 of the Internal Revenue Code: "Both the decedent's and the surviving spouse's half interests in community property receive a new basis, if at least half of the community property was includible in the decedent's gross estate." REPRESENTATIVE PORTER said in reading the information provided, he understood it to mean that the survivor would reap the benefit of the tax savings on the inherited half, but for the half retained as a survivor, the basis remained what it originally was. REPRESENTATIVE RYAN replied, "Both halves, Representative Porter. Both halves. That's the thing that's so nice about this." He referred to item (6) on the final page of the fax and said this has been in existence since December 31, 1947. It is a federal statute that applies to "the property that represents the surviving spouse's one-half share, et cetera, et cetera, under the community property laws of any state or possession of the United States or a foreign country." He could imagine that IRS employees may not be too pleased with this. Number 0316 CHAIRMAN GREEN asked: If it has been that way since 1947, why has it not been enacted in community property states? REPRESENTATIVE RYAN replied that indeed it has been the case in community property states. Referring to Chairman Green's earlier question about how another state could allow this, he explained that when a person sets up a trust, that person pays gift tax on what is put into the corpus of the trust and it no longer belongs to that person. He stated, "The beneficial interest could be assigned in the indenture and/or with the body of the trust, and the trustee can be instructed as to how those distributions would like to be had but not necessarily, because these are discretionary. The trustee has discretionary powers." REPRESENTATIVE RYAN continued, "But if you name the surviving spouse the sole beneficiary of the trust, the property is in there. The first person dies, ... and both have a beneficial interest. The step-up in basis takes place. There's no tax liability. And then the distributions go to the surviving spouse." REPRESENTATIVE RYAN continued, "So, under those circumstances, another state cannot come and say that you have messed with the estate or you've taken property or anything else, because the property didn't belong in that estate. The property belongs in the trust, in Alaska, under our laws. And the gift tax was paid when it was settled up, and it no longer belongs to these people as such; they just hold a beneficial interest." CHAIRMAN GREEN asked whether some of the wording between the IRS statutes in the fax was Mr. Manley's. REPRESENTATIVE RYAN said he understood it was actual wording from the federal law and the IRS code. He noted that two people signed up to testify were estate planning attorneys. Number 0435 REPRESENTATIVE PORTER asked whether this provision is law in other states. REPRESENTATIVE RYAN said it is, in nine states, usually those states that "came under not the English common law but from the Napoleonic code." REPRESENTATIVE PORTER asked whether those were not community property states but states with the community property option. REPRESENTATIVE RYAN replied, "No, these are community property states. Wisconsin has a community property option, inasmuch as you're required to accept community property, and then, if both parties agree, they can opt out." REPRESENTATIVE PORTER asked whether Alaska would be the only state with this particular provision. REPRESENTATIVE RYAN responded, "That allows you to opt in. No requirement to do it, but you can take advantage of it if you choose." CHAIRMAN GREEN asked whether this would allow opting in and then opting back out. REPRESENTATIVE RYAN replied that if both partners agree, they can opt back out. CHAIRMAN GREEN posed an example of people opting in and out, "with varying sacks full" of money and suggested that would be extremely complicated to administer. He asked: And we're sure that that's okay with both the IRS and the states in which these people may reside? REPRESENTATIVE RYAN suggested the two estate planning attorneys could answer that question. He stated, "And one final thing: In case there is a divorce, the assets are split 50/50 because each partner owns half of whatever is designated as community property." CHAIRMAN GREEN asked: If it were put in trust, would that mean there were two trusts created? Or could one partner opt out, take his or her share, pay the tax and go? REPRESENTATIVE RYAN replied, "Once you create this trust, you've given it away. It belongs to the trustee. It no longer belongs to you; it's not your property." CHAIRMAN GREEN asked whether if that was split, there would be two trusts. REPRESENTATIVE RYAN replied that a person named as beneficiary would still have the beneficial interest. He cited an example where he gives someone $10,000, and says, "This is yours. And you manage it. But ... if you make a profit on it, I want you to come back and give me some of it from time to time, as you decide when I should receive it." He could not ask for that $10,000 back because it was a gift. CHAIRMAN GREEN responded, "Okay, but the questions we were driving at now were if it's community property and both spouses are living but they get a divorce. They've agreed to put this thing in the trust, but now they get a divorce, and you say it's split in the middle." REPRESENTATIVE RYAN suggested that the attorneys answer that. CHAIRMAN GREEN asked whether Dick Thwaites had heard those questions. RICHARD S. THWAITES, JR., Attorney at Law, testified via teleconference from Anchorage, affirming that he had heard them. However, he requested that Jonathan Blattmachr speak first, saying he himself would address questions specific to Alaska. Number 0610 JONATHAN BLATTMACHR, Partner (Attorney at Law), Milbank, Tweed, Hadley and McCloy, testified via teleconference. He stated, "This provision which, as Representative Ryan has pointed out, has been in effect since the end of 1947, came about on account of certain disparities which existed under the federal tax law between people who resided in community property states like California and those who resided in other states such as New York. That's the reason we have (indisc.) joint income tax return and why Congress allowed a marital deduction for state tax purposes, which was originally limited to one-half of the estate of the first spouse to die. This provision contained in Section 1014(b)(6) was supposed to just kind of neutralize the playing field for people in community property states." MR. BLATTMACHR continued, "On January 1, 1982, the estate tax marital deduction became unlimited. And probably this provision, 1014(b)(6), should have been changed, because it does provide that if a couple owns some community property, when the first person dies, the inherent profit is forgiven not just on the one-half which is includible in the estate of that spouse but even the survivor's one-half. And it's such an advantage that Wisconsin, in the mid-1980s, opted into a community property system. The IRS promptly thereafter conceded, in an official ruling, that it meant that people in Wisconsin who owned community property would be entitled to this double income-tax-free step-up in basis (indisc.). It's possible that would be changed, but it is a law, and it applies in every state." MR. BLATTMACHR continued, "In addition, Alaska and New York and, in fact, most of the other non-community property states, in order to preserve this advantage for people who move there and who own community property from other states, have enacted a law known as the `Uniform Disposition of Community Property in Death Act.' So, if someone comes to Alaska from the state of Washington, which is a community property state, Alaska preserves the community property nature of those assets in the event of death; so, if the husband dies first, the family - the surviving spouse - gets this double step-up in basis. And so, whether the IRS likes it or not, that is what the federal law is. And the federal law almost always determines the state income tax consequences as well. Of course, if the couple lives in Alaska, it doesn't (indisc.) an income tax." MR. BLATTMACHR continued, "So, it appears that it will work. As Representative Ryan said, it's an `opt-in' rather than an `opt-out' system, which Wisconsin has. In addition, it can be troublesome for married couples in some circumstances to trade their assets. But in this case, there's going to be an explicit agreement as to what is or non-community property. And, as a consequence, it's probably easier record-keeping than exists right now." He said a judge in Alaska who does quite a bit of family law and divorce work has advised Mr. Thwaites that she quite regularly deals with community property already, because so many people who move to Alaska have brought community property with them. MR. BLATTMACHR specified that he is admitted to the bar in Alaska, California and New York. CHAIRMAN GREEN asked about Mr. Blattmachr's testimony that "it appears it will work." He asked whether Mr. Blattmachr had received something substantive from the IRS in support of that. MR. BLATTMACHR explained, "When Wisconsin did this, the IRS, within a year or two, officially conceded that it did work to make property owned by Wisconsin couples community property for purposes of this step-up-in-basis rule. The law appears to be very clear that ... if it is community property under the law of any state or possession of the United States or a foreign country, it's entitled to this treatment. This would make it community property under the law of the state of Alaska. And it would appear, based on that, that it should work. But until you have a court rule on it, one can never be sure of the effect of a law." CHAIRMAN GREEN asked: What might happen if we get these millions of dollars up here and the court holds that it doesn't work? MR. BLATTMACHR replied, "Well, then, the people are back where they were before." He cautioned that there are real-world consequences of converting assets into community property. He explained, "If a husband owns a million dollars' worth of assets and he converts them into community property, he has now made a gift of one-half of his property to his wife. She will own it. She can do with it as she pleases, including bequeathing it, at her death, to whomever she wishes." Based on conversations with his clients, Mr. Blattmachr guessed that only people in long-term, stable first marriages would take the risk of converting their assets to community property because of this real-world effect in their lifetimes, especially if there was a divorce. Number 0901 CHAIRMAN GREEN said he had mentioned to the sponsor the possibility that a judge would bequeath half to each party in a divorce. He asked whether each half would then remain in trust or whether one party could opt out. He expressed concern about an IRS ruling on something so fluid. MR. BLATTMACHR replied that right now, that basically exists in the other community property states. For example, when California couples marry, everything they acquire thereafter is community property. But often couples elect for more assets to come in, including property brought to the marriage or inherited, or gifts they receive, which under basic California law are not part of the community property. However, because of the income tax advantage, the couple will opt in. Sometimes they will opt out later. Mr. Blattmachr stated, "And again, this provision, Section 1014(b)(6), is quite explicit: Whatever is treated as community property under local law gets this tax-free treatment." MR. BLATTMACHR continued, "In fact, California has a rule known as `quasi-community property.' It basically says that if a couple from a non-community property state like Alaska moves to California, at the death of them - the first of them - their property which is not community property is treated as quasi- community property, and it's treated as though it had been community property all along, when the first spouse died. And the IRS - and I know this (indisc.) an experience in administering California estates - the IRS does permit the double step-up in basis there. So, it appears that the fact that the couple can change it anytime they want doesn't change the nature of its actually being community property." MR. BLATTMACHR continued, "I want to point out two important distinctions when something is community property. (Indisc.) of Alaska, and most other states which don't have community property, like New York and Florida, when a couple divorces, the judge can award any percentage of the property the judge wants to the husband and any percentage the judge wants to the wife. But with community property, one-half is the wife's and one-half is the husband's, and the judge has no power to change that." MR. BLATTMACHR continued, "The second thing is what happens at death. Under the law of Alaska and most non-community property states, a certain percentage of the estate of the first spouse to die goes to the surviving spouse. For example, in Alaska, as a general rule, if a man dies with $900,000 in his estate, his wife must get at least one-third. Now, that right of the wife to get a portion of his estate, with respect to the husband's half of the community property, doesn't happen." He said half of the assets would be hers already, and the husband could do whatever he wants to with respect to the other half. For example, he could leave it to children of a prior marriage or to charity. The wife cannot demand any portion of his half. She gets her half, and that is it. MR. BLATTMACHR continued, "So, there is a real change in what happens to the property during lifetimes. And people should be advised of that before they jump into a community property agreement. And most Alaskans will be doing it by agreement. They will just continue to own it; there will not be a trust. If they have it in a trust, it will be owned one-half by the husband and one-half by the wife, as community (indisc.), or legal title will be held by the trustee. And what happens in the event of a divorce or a death will be determined by the terms of the trust." Number 1097 REPRESENTATIVE PORTER commented, "My wife, the accountant, has always told me there's a thin line between tax avoidance and tax evasion." He asked what the ramifications would be if a couple established community property and opted in, or established a trust, for property that had previously been the property of one spouse, and then, for whatever reason, they opted back out. He further asked whether the original owner of the asset would have a tax consequence for being gifted the portion that was transferred to the other spouse and then back. MR. BLATTMACHR explained, "The answer generally is no, because transfers to a husband and wife are free of income tax and gift tax consequences. However, if your spouse is not a U.S. citizen - for example, if an Alaskan is married to a Canadian citizen - there is basically no marital deduction allowed. So, if a husband is an American who lives in Alaska and the wife is Canadian, and the husband took a million dollars and made it community property, he would be making a gift to her of $500,000 and would have to pay gift tax. So, there could be consequences in those circumstances." MR. BLATTMACHR continued, "But if it's a married couple who are both American citizens, there will be no income or gift tax consequences of either making the asset community property or changing it back to separate property. And, again, I know that because I've practiced for many years under California law, where people do come in and out of community property." Number 1202 CHAIRMAN GREEN cited an example where two Americans have low-cost stock and opt into a trust. The stock appreciates significantly as community property, then one spouse dies. He asked, "The other one gets it all and then opts out?" MR. BLATTMACHR replied, "No, once the first spouse dies, the community nature of the property ends. So, if you and your wife owned the stock in community property and you die, she would own her half and you would bequeath your half to whomever you wanted to. If you'd left it to her, she would simply own 100 percent. If you'd left it to a child, your wife would continue to own her one- half, which she owned before your death, and your child would own the other half. And they would not own it in community property. They would own it by what's known as `tenants in common.'" CHAIRMAN GREEN inquired about the appreciation value. MR. BLATTMACHR replied that both the half that the wife previously owned and the half the child received upon the husband's death would have all of this inherent income tax liability forgiven. CHAIRMAN GREEN asked, "Even if we opt out?" MR. BLATTMACHR replied, "If you opt out before death, no. If you opt out, it will not be community property. And then only the (indisc.) includible in your estate would get the step-up in basis. It would have to remain community property through the death of the first spouse to die for this to work." CHAIRMAN GREEN asked, "Community property or in the trust? Or both?" MR. BLATTMACHR responded, "If you're Alaskans, you're not going to put it into a trust. Alaskans presumably will do this merely by a written agreement where they declare certain of their assets to be community property. And under the bill, that's known as a `community property agreement.' The community property trust will probably be used by people where only one of them is an Alaskan and the other one is not, or where neither is an Alaskan but they want their assets to be treated as community property under Alaska law." CHAIRMAN GREEN said, "Now she lives a long time and we opt out." MR. BLATTMACHR stated, "If you opt out, then you're not going to get the benefit of the tax-free step-up in basis." He cited an example. CHAIRMAN GREEN asked about couples who have not died but have opted out. MR. BLATTMACHR said then there would be no change in basis at all. Nothing would happen to the basis until someone died. The tax benefit only occurs upon the death of the first spouse to die, and only to the extent that the assets at that time constitute community property under the law of any state. Number 1395 REPRESENTATIVE CROFT cited an example where someone is married in Washington, a community property state. At the time of marriage, the husband had stock that he got for nothing when he founded a company now worth $20 billion. Therefore, the stock's basis had been zero but was now $20 billion. He dies and his wife sells all the stock for $20 billion. Representative Croft asked: She pays what tax? MR. BLATTMACHR replied, "Zero." REPRESENTATIVE CROFT asked: For the same situation in Alaska, if the court divided the marital property 50/50 and she sold it all, would she pay taxes on $10 billion? MR. BLATTMACHR replied, "That is correct. Again, I know this sounds like a very peculiar rule, and this area of the tax-free step-up in basis is an area where I do a lot of practice. There is even an historic exception for people who live in non-community property states, with property jointly owned with rights of survivorship, which was required by the couple before 1977. And like many areas of the tax law, these rules are there for historic reasons. And it's difficult to justify them today, but if they are available and being made to be available to the citizens of a particular state, it just may be appropriate to give them an opportunity to (indisc.)." Number 1515 REPRESENTATIVE CROFT stated his understanding that the theory on this is: "We don't have to figure out the public policy rationale for this federal statute; we should just allow our citizens and any other citizens to take advantage of it." MR. BLATTMACHR said that is what he believes is being recommended by the sponsor. He noted that no one is forced to take advantage of this. He emphasized that it would result in significant changes in ownership. If a man put $20 billion from a company into a community property format, his wife would own half of it. MR. BLATTMACHR stated, "Of course, today an Alaskan couple could sit down and decide that they wanted to own their assets under a regime which would mirror precisely what it would be under community property; they would do that by agreement. But because it is not community property under Alaska law, even though the agreement treats it that way, they would not get this potential income tax benefit." MR. BLATTMACHR pointed out that the change in basis at death can also be a reduction in value. For example, if someone bought stock at $150 but it was worth $90 when that person died, his or her family would inherit a basis of $90 rather than $150. He cautioned, "So, people are going to have to be careful as to what they decide to treat as community property. Any asset which has gone down in value, or they think might decline in value, presumably would not be covered by the community property agreement. It would only be those assets where they ... had appreciated or that they were confident that appreciation would hold would they do it; at least, I think that would be the case." REPRESENTATIVE CROFT stated, "And Jonathan, we had a discussion in my office about the power to invade the separate property. You said at one point that the courts in California have no power to change the 50/50 division. That's not the way I remembered it from ... the California bar. But whatever the case there, here we have a very limited ability to invade the separate property, usually the premarital estate. It's much more limited than the ability to divide equitably marital property. But there are situations where, because it's so unjust, the small amount that's left in the marital estate, for some reason, that a court takes premarital assets to make that up. I take it that this would define ... the portion allocated into community property, in effect, as 50/50 separate property for purposes of invasion for equitable reasons." MR. BLATTMACHR replied, "That is exactly correct. So, again, you are basically saying that whether there's a death or a divorce, or a contrary agreement at a later time, this asset is owned by the husband and wife 50/50. And the husband gets half and the wife gets half, and that's it." MR. BLATTMACHR said presumably a couple would receive counseling about this, and he emphasized that couples need to know the consequences. He stated, "Also under the bill, because this was provided for in Wisconsin law, the (indisc.) can modify the rules that are contained. For example, if the couple says, `Well, you know, we think that the Alaska courts do such a great job in allocating assets between a husband and wife that we don't want to have it automatically split 50/50, so we'll provide in this agreement that even though we're saying it's community property, if we get divorced, the court can allocate it in an equitable fashion, as it sees fit.'" MR. BLATTMACHR continued, "Now, I can't tell you whether or not that will eliminate the community property nature so the tax benefit will be lost. The IRS has never ruled in a court and, as far as I know, has never ruled on that. But a couple could do that; if they said, `We want the courts to be able to equitably divide it,' they could. But if they want to increase the probability of getting this income tax benefit which is available to people in community property estates, presumably they will label certain of their assets community property and ... have Alaska community property law apply in its full force on that." Number 1820 REPRESENTATIVE BUNDE asked: Why the "opt-in" system, rather than the "opt-out" system that Wisconsin has? MR. BLATTMACHR said that was an important, interesting and insightful question. He noted that he practices in both a community property state, California, and the non-community property states of New York and Alaska; he has also lived as a married person in both situations. Number 1856 MR. BLATTMACHR stated, "I think community property is a much more rational system because it truly treats the marriage as a partnership, and everything that's acquired during the marriage, other than inheritances and gifts during that time, belongs to the partners, the husband and wife, 50/50. And that, to me, makes very good sense. You have the same rule of ownership at divorce as you do at death, whereas under Alaska law and New York law, the husband's and wife's interest in the property is different in divorce than it is in death. And I find it difficult to justify that. In fact, a divorcing spouse may get more than one who has been a loyal husband or wife for 50 years and his or her husband or wife dies and they get less." MR. BLATTMACHR continued, "But the change to community property from the system Alaska has always had is a very significant one. And there were many members of the Wisconsin bar I knew who felt it was unfair to say, (indisc.), a Wisconsin couple which has been married for 45 years and said, `You thought your property was owned this way? Guess what: We're changing it in the legislature, and you have nothing to say about it unless both of you agree to opt out of the system.' So it seems like it will have less of an impact in the state to have an `opt-in' system. But I certainly think one could make a rational case, which the Wisconsin legislature did, is that in studying the matter, one could go to an entire community property system and mandate it on (indisc.), even though the two have been married for decades and decades." REPRESENTATIVE BUNDE asked: If this is such a good deal, why make it available only to those who are clever enough to figure it out and perhaps hire a trust attorney to help them get there? He also asked why Mr. Blattmachr was willing to invest his time. MR. BLATTMACHR replied that he was doing it for several reasons. First, he plans to take advantage of it himself because in due course, he will move to Alaska. He said it is a great deal and that the tax-free step-up in basis is the most important tax savings mechanism in estate planning. MR. BLATTMACHR said second, he has numerous clients in long-term marriages who will benefit from this bill. Some are wealthy Alaskans and some live elsewhere but have told him they will "run to create trusts and transfer their assets to Alaska." MR. BLATTMACHR stated, "And that brings up the third reason. I would like to see Alaska's state of financial markets increase significantly. And I was one of the principal draftsmen of the Alaska trust bill, and I'm the principal (indisc.) for this bill. And I believe that those bills will result in the shifting of financial services business to Alaska. And I think that that would be great for the state." He said he had no sponsor, no one was paying him to do this, and he had paid his own way to Juneau the previous week. He concluded, "I just personally think it's a good thing for everybody." REPRESENTATIVE BUNDE agreed that this not only would possibly be good social policy, but it was also an economic development issue. Number 2187 REPRESENTATIVE BERKOWITZ inquired about the law firm Mr. Blattmachr is with. MR. BLATTMACHR said Milbank, Tweed, Hanley and McCloy is a large international law firm with 10 or 11 offices worldwide. They represent many wealthy individuals and handled the estate of Jacqueline Kennedy Onassis, for example. They also represent a number of large corporations in the United States. REPRESENTATIVE BERKOWITZ asked who opposes this bill. MR. BLATTMACHR replied, "I don't believe there is anyone who opposes this bill. In fact, as with the Alaska trust act, I think the major concern that I had is that they will very quickly catch our ball." He suggested other states would opt for it. For example, the California legislature may offer people from out of their jurisdiction to create community property trusts within their jurisdiction, because they will be interested in getting the business. "And it may be that California, with such a high income tax, will tend to frighten people away," he commented. Mr. Blattmachr said he does not believe there is any down side. However, someone from his law school had suggested the consequence will be that Congress will repeal Section 1014(b)(6), because that will make this available to every American. CHAIRMAN GREEN inquired about the history of the provision. MR. BLATTMACHR responded that there was a man named Mr. Seaman (ph) who resided in California. Under California law, half of Mr. Seaman's income, the moment he earned it, belonged to his wife because it was community property. TAPE 97-62, SIDE A Number 0006 MR. BLATTMACHR explained that Mr. Seaman reported half of his income on his income tax; his wife reported the other half. Because income tax rates are progressive, getting increasingly higher as income increases, he and his wife paid less income tax than they would have had he reported all his income on his own return. MR. BLATTMACHR stated, "The IRS said, `Well, it may be true that under California law, your wife owned half the income, but this is a federal tax system, and federal law is supreme, so you couldn't split your income.' That case went to the Supreme Court of the United States, and the Supreme Court held that what Mr. Seaman had done was perfectly proper and the federal tax law had to respect the property rights as they existed under state law." MR. BLATTMACHR continued, "That also gave people a big advantage when it came to death, because if Mr. Seaman had an estate of a million dollars and he lived in New York, he would have to pay estate tax on the whole million. But living in California, and because this million dollars would be community property, he'd only have to report $500,000 on his return. And his wife would have already owned the other half, and there'd be no estate tax." MR. BLATTMACHR continued, "When the income tax rates leapt so high during World War II, when, I think, the income tax got up to 91 percent and the estate tax up to 77 percent, almost all states in the United States decided that they would become community property states, to give their citizens the same tax break that people in California and Texas and other community property jurisdictions were enjoying." MR. BLATTMACHR continued, "Well, the IRS, in a fit of sanity, came to the Congress and said, `Look, rather than make all these states convert to community property' - and I believe that two states, in fact, did, Pennsylvania and Kansas, and New York was going to - they said, `why don't you adopt the concept of the joint income tax return, which will have the effect of splitting the income 50/50 between the husband and wife and also allow a 50 percent estate tax marital deduction for assets other than community property?' Congress did that, and that became effective on January 1, 1948." MR. BLATTMACHR continued, "Then the community property lawyers came back and they said, `Wait a minute. We now have a disadvantage. If Mr. Seaman dies as a resident of New York with his million dollars, because (indisc.) will be in his estate, there'll be 100 percent tax-free step-up in basis on the million. But he'll only pay tax on half because he can leave $500,000 to his wife free of estate tax, whereas if Mr. Seaman died in California, only $500,000 is in his estate; so, there's only a $500,000 step-up in basis.'" MR. BLATTMACHR continued, "`So, what we think you want to do is to put people in community property states on par with the wealthy men - people with property in their own names - in non-community property states. We think you ought to allow both halves of the community property [to be] stepped up for income tax purposes when the first spouse dies.' And Congress adopted that. And that's why that thing says, `for decedents dying after December 31, 1947.'" MR. BLATTMACHR continued, "When the unlimited marital deduction came down on January 1, 1982, probably somebody should have thought through that this (indisc.) provision under 1014(b)(6) for community property probably should be eliminated. But it wasn't. And then Wisconsin lawyers got together and said, `Well, why don't we convert to community property? That way, the residents of our state will get this benefit.' And they did that around 1985." MR. BLATTMACHR continued, "But most of the states haven't done it because they regard community property as too big a change to the property rights which currently exist between their married couples. Again, this bill will allow Alaskans, if they don't want to take advantage of this or feel that community property is not the right system for them - as it may not be for a couple in a second or third marriage, with children from prior unions - they won't have to do it. But for those who think it's a good system, they'll go ahead and do it." Number 0342 CHAIRMAN GREEN asked why a state like Texas would not have enacted this and why it was coming so late in Alaska's statehood. MR. BLATTMACHR replied, "I don't think anybody ever thought about it before. It sounds terribly immodest of me, but when I discussed this with a different professor last Sunday night, he said, `This is absolutely ingenious. Why hasn't anybody ever done it before?' And I just can't tell you why." Number 0384 REPRESENTATIVE JAMES referred to the relationship between the trust program set up in Alaska, the community property exemption, and the fact that people will come to Alaska. She asked Mr. Blattmachr to explain the advantage of going into the trust with community property. She also mentioned the possibility of other states following Alaska's example and the advantage of setting up the trust, relating to the law of perpetuity. MR. BLATTMACHR replied, "Well, I apologize if I've kind of confused things. The Alaska trust act, which ... became effective on April 2, really has nothing to do with the community property bill or the community property trust. The Alaska community property act does effectively eliminate the rule against perpetuities. And there are other states currently trying to play `catch-up ball.' I understand that Texas is thinking about repealing its." MR. BLATTMACHR continued, "I got a call two weeks ago from the Washington state bar association, asking (indisc.) the tax consequences of it, because there's a very peculiar federal tax known as the `generation-skipping' tax, which sometimes can be affected by the rule against perpetuities. And I've written extensively about that, and they were calling me about that. But they are thinking of recommending, to their legislature, repeal of the rule against perpetuities. So, I think on that one, as well as this community property bill, there may be `catch-up ball' by the other states. But one of my goals - and I hope the legislature agrees with it - is to try and keep Alaska in the forefront, to keep it an extremely desirable jurisdiction in which to do estate planning and financial business." Number 0565 REPRESENTATIVE CROFT said his concern, talking with the sponsor and Mr. Blattmachr, was this 50/50 division. He had talked to local family lawyers about the ability to do this anyway, but without the tax benefit. A married couple could decide to divide an asset 50/50 and the court would generally enforce it. Representative Croft asked whether Mr. Blattmachr had the bill in front of him. MR. BLATTMACHR said no. Number 0565 REPRESENTATIVE CROFT stated, "You had a number of disclaimers that had to be on the community property agreement or be waived after reasonable disclosures. And I proposed to Representative Ryan that we add a fourth. You had three: fair and reasonable disclosure of the property of the other spouse; a written consent waiving that disclosure; and that the spouse didn't have notice of the property or financial obligations. ... All three are dealing with the assets. It's sort of a prenuptial-type of disclosure, `Here's how much I have.'" REPRESENTATIVE CROFT continued, "I'm concerned that we disclose, to Alaskan couples in particular, some aspect of the legal jump that they're making, from equitable distribution in a marital property state to a basically 50/50 distribution in a community property state, with some limited way to change that. Do you have any objection to requiring that, before they enter into these community property agreements, there be something about the legal jump they're making?" MR. BLATTMACHR said no, he did not. He recommended making it as clear as possible what would be required. One possibility would be requiring the community property agreement or trust agreement to contain an explicit heading in bold letters, cautioning that the parties should be aware that it could significantly change the ownership of property between the couple, including entitlements of property in the event of a divorce or death. Number 0780 REPRESENTATIVE CROFT asked for confirmation that currently there is no such requirement in the bill. MR. BLATTMACHR said that is correct. He explained that he derived the bill from the Uniform Marital Property Act (UMPA), which was adopted, with some slight modifications, by Wisconsin. He believed all the requirements cited by Representative Croft were contained in the UMPA and the Wisconsin act. Mr. Blattmachr said giving a couple an extra warning that they were about to do something significant, with a real-world financial impact during their lifetimes, was certainly commendable. Number 0840 REPRESENTATIVE PORTER asked whether any other states currently have the ability of a nonresident to establish something like this to avoid taxes. He further asked, "And if not, why wouldn't IRS go after us on that point?" MR. BLATTMACHR said that was a good question. He stated, "Believe it or not, I've had a number of California lawyers ask me for a way in which they could offer California community property to non- Californians. And, in fact, from time to time, couples do move to a community property jurisdiction such as Texas, which has no income tax and no additional state tax, to get that benefit." MR. BLATTMACHR continued, "I think that this will work, but I don't think it's a matter so much of IRS attacking it. I think it's that the other states, once they realize the simplicity of doing this, and the fact that it will bring business and assets to their state, will jump on it like a duck on a bug. I mean, there's just no down side." MR. BLATTMACHR said this will, in fact, be community property under the state of Alaska. And that seems to be all that 1014(b)(6) requires for it to be effected. He said he obviously could not guarantee that people from outside of Alaska would get this tax break. However, for those in long-term, happy marriages who trust each other anyway, there appears to be little harm in trying. He concluded, "And it does appear to be that, under both the code and the treasury regulations interpreting it, that it will work." Number 0962 REPRESENTATIVE NORMAN ROKEBERG referred to the attached materials and asked Mr. Blattmachr to clarify what appeared to be a partial definition: "If at least one-half of the whole community property interest of such property is includible in determining the value of the decedent's gross estate ...." He expressed concern about what "at least one-half" means. MR. BLATTMACHR replied that he understands there are some jurisdictions, such as in South America, where "the husband and wife are equal but the husband's a little more equal." For example, the husband might own 60, 70 or 80 percent, whereas the wife might own less. MR. BLATTMACHR stated, "And Congress, I understand, when it enacted this, said, `We don't want you guys going back to your estates and giving the wife, for example, a 1-percent interest in the asset (indisc.) community property. And then, if that 1 percent is in her estate, the other 99 percent would get this 100-percent-tax- free step-up in basis. So, it was a safeguard to do that." MR. BLATTMACHR continued, "The way it would work under Alaska law, the husband and wife would each own 50 percent. So, we would meet that `at least 50 percent' standard. It would be exactly 50 percent." REPRESENTATIVE ROKEBERG stated his belief that under provisions of HB 199, which assets go into the trust could be designated. He asked whether that was correct and whether the purpose of that was to be able to designate assets. MR. BLATTMACHR said that was correct. In the community property agreement or community property trust, couples can pick and choose. Number 1099 REPRESENTATIVE ROKEBERG asked whether, under HB 199, a prenuptial agreement could mandate an opt-in for community property, with the further mandate that in the event of a divorce, an opt-out would occur prior to the divorce. MR. BLATTMACHR said that was a two-part question. First, HB 199 explicitly says that a couple can enter into a community property agreement before marriage. However, it will be effective if and when they marry. Second, Mr. Blattmachr did not believe a provision to opt in but mandate an opt-out in the event of a divorce would work. Although as a matter of contract law, he supposed that could be done, it would not operate like community property. Therefore, he did not believe it would be treated as community property for federal income tax purposes. Number 1190 REPRESENTATIVE ROKEBERG asked whether there was a provision for contracting certain classes of assets in the bill. MR. BLATTMACHR said yes, designations could be class-by-class. For example, stocks but not bonds could be community property, or residences but not nonresidential real estate, however the couple wanted to designate their assets. REPRESENTATIVE ROKEBERG stated, "I would be a lot more comfortable if my scenario would be allowable here, and there seems to be some question about that. Maybe we should look at the law of prenuptial agreements in the state of Alaska and codify it to go along with this. If I had more time, I might look at an amendment." MR. BLATTMACHR restated that although a couple could legally do that under contract law, he was not sure it would be treated as community property by the IRS. Number 1272 CHAIRMAN GREEN, noting that Mr. Blattmachr had said "property," asked whether whatever became community property and subject to this trust could be property outside of Alaska. MR. BLATTMACHR said that is true. In fact, today if a California couple uses their community funds to buy a piece of real estate in New York, that is treated as community property under California law. He cited a personal experience. CHAIRMAN GREEN asked, "What about the state with the real property in it? You're talking about an IRS agreement. But what about, for example, if it were in California or some state that has a significant property tax and other taxes?" MR. BLATTMACHR said if someone owned a piece of property in Oklahoma, whether it was transferred to a trust, corporation or partnership, the municipality would have the power to continue to impose real estate taxes or an estate tax. For example, the Commonwealth of Pennsylvania does not permit an unlimited marital deduction. However, if a Californian, Alaskan, or New Yorker owned property there, Pennsylvania would impose its inheritance tax on that. The Supreme Court has ruled that a state may impose a (indisc.) tax on lands physically located within its borders, even if the owner resides in a different state. Number 1404 CHAIRMAN GREEN commented that all this addresses is the IRS. Number 1412 REPRESENTATIVE PORTER stated, "I'm given to understand that the IRS has a large bucket of case law and regulation that they usually look at as, `these kinds of things are shams or abusive avoidances,' and don't let you have it. Aren't we getting kind of close to that with the ability to select which assets we want to put in and how long we want to keep them in? And why wouldn't they look at that as just an unnecessarily-too-good-a-deal-way to avoid taxes?" MR. BLATTMACHR replied that first is the real-world impact. Each spouse owns half of the community property. To opt out assets previously designated as community property requires both spouses' consent. For assets worth considerable money, he did not see that as being easy. In addition, from practicing in California, he knew that couples often opt in additional property for exactly the reasons Alaskans might, the step-up in basis. When a couple in a long-term, happy marriage comes to see a lawyer, often that lawyer will ask what assets they own that are not community property and then explain that if they want this income tax benefit, they should convert those into community property through an agreement. MR. BLATTMACHR advised members that sometimes there are also estate tax reasons to make community property into separate property, such as avoiding the estate taxation of certain life insurance. And that is done every day. "And I've never heard of the IRS even suggesting that it could challenge it on the ground that somehow the taxpayers are unfairly manipulating the ownership of their property to get an unwarranted tax break," he concluded. Number 1531 CHAIRMAN GREEN indicated he had questions regarding the IRS. He announced it was not his intention to move HB 199 that day. MR. THWAITES testified via teleconference that from his practice in Alaska as an estate planning attorney and doing probates, this bill would favorably affect one or two clients a week. Through probates over the years, he had observed many times when Alaskans would have benefited by the dual step-up in basis. Mr. Thwaites believed having that option would be a wonderful opportunity for most Alaska residents. Number 1585 CHAIRMAN GREEN agreed and indicated that the committee would not unduly hold the bill. MR. THWAITES mentioned that he had done audits with the IRS relating to capital gains treatment of property, such as for an "ARCO couple" who came up from Texas. When that couple rolled over capital gains from their Texas home to Alaska, the IRS had recognized the dual step-up in basis for the Alaska home, where that uniform act had been used. Number 1617 REPRESENTATIVE ROKEBERG asked whether this bill would affect the existing provisions of Alaska statute as they relate to tenancies by the entirety and other "co-tenancy allowables" in Alaska. MR. THWAITES replied, "No, it would not. It would add an additional category, which is the category of community property." REPRESENTATIVE ROKEBERG said Alaska has no joint-tenancy-with- right-of-survivorship statute, as some states do. He asked whether Mr. Thwaites believed this would be an additional benefit. He further asked whether those jurisdictions having joint tenancy with right of survivorship enjoy the step-up in basis. MR. THWAITES replied that this would only affect husbands and wives. It would be much the same as tenancy by the entirety, in that it would only affect marital couples. "And in those situations, they already have the joint ownership with right of survivorship," he stated. "So, it wouldn't change that, but it would add the additional benefit of this double step-up in basis." Number 1681 REPRESENTATIVE CROFT asked, "Why shouldn't we get rid of tenancy by the entirety if we've got this?" MR. THWAITES replied, "Because there are a lot of Alaskans who will not opt for the community property status and will still want to retain the joint tenancy with right of survivorship for, perhaps, the bank account or some other piece of property, especially those situations where there is a second or a third marriage and the couple together wants to acquire recreational property or residential property under the tenancy by the entirety (indisc.)." Number 1707 REPRESENTATIVE CROFT stated his understanding that for tenancy by the entirety, there is an automatic right of survivorship, whereas in community property "you can do it by regular will." He said they were distinct not just in tax consequence but in legal effect as well. MR. THWAITES concurred. RICHARD W. HOMPESCH II, Attorney at Law, Hompesch and Associates, PC, testified via teleconference from Fairbanks, saying he had been in practice for 13 years. He stated, "I feel that the difference in tax treatment between community property states and states like Alaska is an injustice. There's no reason that surviving spouses in Alaska should pay more income taxes than surviving spouses in community property states." He stated his belief that HB 199 would correct that situation. MR. HOMPESCH reported that he had seen up to half a dozen clients in the past few weeks who were waiting on their estate planning to see whether HB 199 passed, as they wanted to elect community property. He urged passage of the bill and concluded by saying he agreed with the testimony he had heard thus far. REPRESENTATIVE ROKEBERG asked Mr. Hompesch whether his specialty is domestic relations or estate planning and taxation. MR. HOMPESCH said his practice is limited to estate planning, probate and taxes. He does no domestic relations work. Number 1798 REPRESENTATIVE ROKEBERG suggested that Mr. Hompesch's view of the bill, then, was as an estate planning tool, not a domestic relations tool. MR. HOMPESCH replied that obviously it has impact in the event of divorce. He added that most of his clients who do estate planning, believe it or not, do not get divorced. Number 1817 LINDA HULBERT, Insurance Agent, testified via teleconference from Fairbanks. A 28-year resident there, she had been an agent for eight years. She had helped many people to do their planning, and she believed many people without a lot of assets would benefit from this bill. Many worry about providing for their spouses after they die. Many have recreational property, for example, and there may be difficult taxation issues on capital gains. MS. HULBERT stated her belief that it is important in many different situations, although not so much with real property, to be able to use that double step-up in basis. She believes it will help a broad spectrum of Alaskans, not only those who are necessarily doing estate planning now, but also those who can realize the impact that this will make on their surviving spouses' well-being. She encouraged rapid passage of the bill. Number 1901 REPRESENTATIVE ROKEBERG noted that although HB 199 had been heard by the House Labor and Commerce Committee, he had been unable to be there. He had talked with a few members of the Alaska Bar Association (ABA) about it and had tried unsuccessfully to connect with the family law section of the ABA. He suggested it would be remiss to act on this bill without input from the family law section and perhaps from additional people dealing with estate planning. REPRESENTATIVE ROKEBERG said he believed the bill had merit but could have a significant impact on domestic relations law. He emphasized that most of the testimony that day related to estate planning and commercial aspects of the bill, not the domestic relations aspect with regards to Alaska law. Number 1953 REPRESENTATIVE CROFT said he would like to echo that; he said that was part of the reason he had drafted his amendment (not yet offered). He expressed willingness to conclude that the bill has a good estate planning purpose and achieves it in the right way. However, he did worry about its real-world impact, as Mr. Blattmachr had discussed. Representative Croft indicated the desire for input from the family law section as well. CHAIRMAN GREEN stated, "One of the questions I would like to have put on the record is that we had been led to believe that this would actually be of great consequence to the state because there would be people bringing large sums of money for the estate planning. And could you tell us how that will benefit the state?" MR. THWAITES replied, "I believe that the outside funds coming to the state will have to come in through some sort of trust relationship. So, you're probably looking at the banks, trust companies and so forth (indisc.--background noise) there, additionally, the accountants, (indisc.) and attorneys that are involved in doing that planning, because they're going to want local contacts to do that." MR. THWAITES continued, "I did talk with, just as a matter of fact, with one of the (indisc.) court judges regarding the divorce aspects, and I met with the family law section of the bar, as well, and didn't receive any adverse inquiries there about what the bill would do and what impact it would have. They suspected, as the superior court judge pointed out, it might be the first time in their career as a family law lawyer that they might have not only one but maybe even two people walking away from the relationship and were happy with it." MR. THWAITES continued, "There is a lot to planning these community property agreements, and the debtor and other relationships of the real-world aspects are probably best left to those practicing in the area of family law. So, I suspect it will open up an area of their practice they haven't experienced before." Number 2070 REPRESENTATIVE JAMES noted that the bill was brought to them and "sort of sold on" an expansion of the trust bill passed previously. However, they had discussed it in a totally different light, as a benefit separate from the trust issue. She asked for confirmation that this would become an advantage for those people who might otherwise be planning to put their money in a trust, as another way they could avoid some tax. MR. THWAITES said coupled with the step-up in basis, it would be highly attractive to many people with low-basis property coming to the state of Alaska to establish these trusts. Number 2140 REPRESENTATIVE BUNDE asked whether the economic impact would relate to people already in the state who would expand their businesses. He further asked whether they were talking about people moving their property to the state rather than actually moving to Alaska, as well as whether there was a sufficient cadre of Alaskans who would handle the anticipated business. MR. THWAITES said he did not know. He stated, "I do think we do have the sufficient cadre now to do it. I believe that if the demand picks up, if it picks up as -- perhaps to meet that trillion-dollar industry that's out there, then definitely we don't have, and you're going to end up with more people here. Mr. Manley, the other day, indicated to me that an East Coast trust department was looking at coming to the state and perhaps trying to open up a business here as well, because of the articles in the national journals that have appeared already ... for the trust bill." MR. THWAITES continued, "Likewise, I think that you will find the experience of other jurisdictions is that those people who have the assets aren't going to give the assets to somebody they aren't going to come and visit. And, principally, if you're looking at one of Mr. Blattmachr's clients with $20 million, I suspect they're not going to fly up here in coach; I suspect they're going to fly up first-class and visit the institution that will be handling their account." He said he suspected that a fair amount of tourism would result from it, if it takes off. REPRESENTATIVE ROKEBERG asked Mr. Thwaites whether there is any other method, under existing Alaska trust law, to accomplish similar benefits for existing residents. He provided an example: If one set up a irrevocable life estate, with proceeds going to the surviving spouse and "for further disposition at the surviving spouse's death," was there not a step-up in basis at that time? MR. THWAITES replied, "Yes, Representative Rokeberg, there is. It would be the gamble of who's going to die first. And estate planning would be a lot easier if you could get commitments from the spouse as to which one predeceased the other." MR. THWAITES continued, "... to get the step-up in basis using the device you're talking about, you need to make a commitment to allocate that asset either to one side or the other. Likewise, if one of the spouses had a terminal illness and you attempted to do that, it would still require a year to pass before the service would recognize it for the step-up in basis purposes. And it's not nearly as open and free as this bill would be." REPRESENTATIVE ROKEBERG responded, "I understand that. But there is a mechanism for existing residents to be able to estate-plan potentially; is that your testimony?" MR. THWAITES said it would be a 50-percent gamble. He stated, "You have to gamble that one spouse is going to predecease the other spouse to make it work." (HB 199 was held over.) ADJOURNMENT Number 2309 CHAIRMAN GREEN adjourned the House Judiciary Standing Committee meeting at 3:20 p.m.