HOUSE JUDICIARY STANDING COMMITTEE March 22, 2000 1:14 p.m. MEMBERS PRESENT Representative Joe Green Representative Norman Rokeberg Representative Jeannette James Representative Lisa Murkowski Representative Eric Croft Representative Beth Kerttula MEMBERS ABSENT Representative Pete Kott, Chairman COMMITTEE CALENDAR CS FOR SENATE BILL NO. 162(JUD) "An Act relating to the rule against perpetuities, nonvested property interests, and powers of appointment; and providing for an effective date." - MOVED HCS CSSB 162(JUD) OUT OF COMMITTEE HOUSE BILL NO. 369 "An Act relating to property exemptions under the Alaska Exemptions Act; and providing for an effective date." - HEARD AND HELD HOUSE BILL NO. 398 "An Act relating to the Alaska Life and Health Insurance Guaranty Association." - HEARD AND HELD PREVIOUS ACTION BILL: SB 162 SHORT TITLE: RULE AGAINST PERPETUITIES Jrn-Date Jrn-Page Action 4/22/99 1040 (S) READ THE FIRST TIME - REFERRAL(S) 4/22/99 1040 (S) JUD 4/28/99 (S) JUD AT 1:30 PM BELTZ 211 4/28/99 (S) -- MEETING CANCELLED -- 5/03/99 (S) JUD AT 1:30 PM BELTZ 211 5/03/99 (S) MINUTE(JUD) 5/05/99 (S) JUD AT 1:30 PM BELTZ 211 5/05/99 (S) -- MEETING CANCELLED -- 5/07/99 (S) JUD AT 1:30 PM BELTZ 211 5/07/99 (S) -- MEETING CANCELLED -- 5/10/99 (S) JUD AT 1:30 PM BELTZ 211 5/10/99 (S) SCHEDULED BUT NOT HEARD 5/10/99 (S) MINUTE(JUD) 5/11/99 (S) JUD AT 1:40 PM FAHRENKAMP 203 5/11/99 (S) SCHEDULED BUT NOT HEARD 5/12/99 (S) JUD AT 2:30 PM BELTZ 211 5/12/99 (S) MOVED CS (JUD) OUT OF COMMITTEE 5/13/99 (S) MINUTE(JUD) 5/13/99 1425 (S) JUD RPT CS 1DP 2NR SAME TITLE 5/13/99 1425 (S) DP: TAYLOR; NR: ELLIS, DONLEY 5/13/99 1425 (S) ZERO FISCAL NOTE (LAW) 1/12/00 (S) MINUTE(RLS) 1/13/00 1959 (S) RULES TO CALENDAR AND 2 OR 0 1/13/00 1960 (S) ZERO FISCAL NOTE (LAW) 1/13/00 1964 (S) READ THE SECOND TIME 1/13/00 1964 (S) JUD CS ADOPTED UNAN CONSENT 1/13/00 1964 (S) ADVANCED TO THIRD READING UNAN CONSENT 1/13/00 1964 (S) READ THE THIRD TIME CSSB 162(JUD) 1/13/00 1965 (S) PASSED Y19 N- A1 1/13/00 1965 (S) EFFECTIVE DATE(S) SAME AS PASSAGE 1/13/00 1967 (S) TRANSMITTED TO (H) 1/14/00 1918 (H) READ THE FIRST TIME - REFERRALS 1/14/00 1918 (H) RLS (HB 219 IS THE COMPANION BILL) 1/18/00 1937 (H) RULES TO CALENDAR 1/18 1/18/00 1937 (H) READ THE SECOND TIME 1/18/00 1938 (H) ADVANCED TO THIRD READING 1/21 CALENDAR 1/21/00 1974 (H) READ THE THIRD TIME CSSB 162(JUD) 1/21/00 1974 (H) REFERRED TO JUD 1/26/00 (H) JUD AT 1:00 PM CAPITOL 120 1/26/00 (H) 3/22/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 369 SHORT TITLE: PROPERTY EXEMPTIONS Jrn-Date Jrn-Page Action 2/11/00 2183 (H) READ THE FIRST TIME - REFERRALS 2/11/00 2184 (H) L&C, JUD 3/01/00 (H) L&C AT 3:15 PM CAPITOL 17 3/01/00 (H) Moved Out of Committee 3/01/00 (H) MINUTE(L&C) 3/03/00 2389 (H) L&C RPT 2DP 2NR 3/03/00 2389 (H) DP: HARRIS, ROKEBERG; NR: MURKOWSKI, 3/03/00 2389 (H) HALCRO 3/03/00 2389 (H) ZERO FISCAL NOTE (LAW) 3/03/00 2389 (H) REFERRED TO JUDICIARY 3/22/00 (H) JUD AT 1:00 PM CAPITOL 120 BILL: HB 398 SHORT TITLE: LIFE AND HEALTH INSURANCE GUARANTY ASSN Jrn-Date Jrn-Page Action 2/16/00 2218 (H) READ THE FIRST TIME - REFERRALS 2/16/00 2218 (H) L&C, JUD 3/03/00 (H) L&C AT 3:15 PM CAPITOL 17 3/03/00 (H) Moved CSHB 398(L&C) Out of Committee 3/03/00 (H) MINUTE(L&C) 3/06/00 2420 (H) L&C RPT CS(L&C) 3DP 2NR 3/06/00 2420 (H) DP: HARRIS, CISSNA, ROKEBERG; 3/06/00 2420 (H) NR: HALCRO, MURKOWSKI 3/06/00 2420 (H) ZERO FISCAL NOTE (DCED) 3/06/00 2420 (H) REFERRED TO JUDICIARY 3/17/00 2598 (H) CORRECTED L&C CS 3/22/00 (H) JUD AT 1:00 PM CAPITOL 120 WITNESS REGISTER LESIL McGUIRE, Legislative Assistant to Representative Pete Kott Alaska State Legislature Capitol Building, Room 118 Juneau, Alaska 99801 POSITION STATEMENT: As Committee Aide for House Judiciary Standing Committee, provided overview of SB 162 and Version M. STEPHEN GREER, Attorney at Law 4041 B Street, Number 205 Anchorage, Alaska 99503 POSITION STATEMENT: Explained changes in Version M of SB 162; emphasized its importance in trying to create a trust industry in Alaska and in allowing creation of trusts that can go on for 1,000 years without being subject to federal estate tax. Testified on HB 369. DAVID SHAFTEL, Attorney at Law 550 West 7th Avenue, Suite 705 Anchorage, Alaska 99501 POSITION STATEMENT: Testified in support of SB 162 [Version M], saying it is important to remedy the "Delaware tax trap." Testified on HB 369. DOUGLAS BLATTMACHR, President and Chief Executive Officer Alaska Trust Company 1029 West 3rd Avenue Anchorage, Alaska 99501 POSITION STATEMENT: Testified in support of SB 162 [Version M]. RICHARD THWAITES, JR., Attorney at Law 500 L Street, Suite 301 Anchorage, Alaska 99501 POSITION STATEMENT: Testified in support of SB 162 [Version M]. JOHN MANLY, Staff to Representative John Harris Alaska State Legislature Capitol Building, Room 110 Juneau, Alaska 99801 POSITION STATEMENT: Presented HB 369 and HB 398 on behalf of the bill sponsors. JOHN GEORGE, Lobbyist American Council of Life Insurance 3328 Fritz Cove Road Juneau, Alaska 99801 POSITION STATEMENT: Discussed HB 398, CSHB 398(L&C) and the Ford I.2 amendment. DON THOMAS, Executive Director Alaska Life and Health Insurance Guaranty Association (Address not provided) Anchorage, Alaska POSITION STATEMENT: Urged the committee's support of CSHB 398(L&C) and the Ford I.2 amendment. MARY BETH STEVENS, Alaska Legislative Director and Counsel American Council of Life Insurers (Address not provided) POSITION STATEMENT: Reviewed changes encompassed in CSHB 398(L&C). ACTION NARRATIVE TAPE 00-35, SIDE A Number 0001 REPRESENTATIVE JOE GREEN called the House Judiciary Standing Committee meeting to order at 1:14 p.m. Members present at the call to order were Representatives Green, Rokeberg, James, Murkowski and Croft. Representative Kerttula arrived as the meeting was in progress. SB 162 - RULE AGAINST PERPETUITIES [HB 219 was the companion bill heard previously in the House Judiciary Standing Committee.] REPRESENTATIVE GREEN announced that the first order of business would be CS FOR SENATE BILL NO. 162(JUD), "An Act relating to the rule against perpetuities, nonvested property interests, and powers of appointment; and providing for an effective date." [SB 162 was sponsored by the Senate Judiciary Committee by request. The companion bill, HB 219, had been heard and moved out of the House Judiciary Standing Committee on 5/12/99. In committee packets was proposed House CS for CSSB 162, Version M (1-LS0485\M, Chenoweth, 3/6/00).] Representative Green asked Lesil McGuire, Committee Aide, to make opening remarks. Number 0070 LESIL McGUIRE, Legislative Assistant to Representative Pete Kott, Alaska State Legislature, speaking as the Committee Aide to the House Judiciary Standing Committee, explained that the companion bill [HB 219] had already passed through this committee. There was a little bit of confusion in the process, however, and the bill version [that passed out of the Senate] had a glitch. MS. McGUIRE advised members that in April 1997, the legislature amended AS 34.27.050(a) of Alaska's trust law to include a [paragraph] (3), which made the rule against perpetuities inapplicable to those trusts where a trustee has the ability to make a distribution to a person living when the trust is created. In adding this language, the legislature in effect abolished the rule against perpetuities, making it possible to create a trust that can continue forever. The abolition was significant for Alaska's trust business, booming since 1997. With careful drafting, perpetual trusts can avoid all federal estate tax and continue to grow for the use of successive generations; that is the goal in creating those trusts. The tax advantage has caused at least ten states to abolish the rule against perpetuities, and five others have pending legislature that would do so. MS. McGUIRE told members that the legislation before the committee seeks to fix a problem discovered by a group of Anchorage trust and estate attorneys. Affectionately called the "Delaware tax trap" - because when Delaware enacted something similar to this legislation, the Internal Revenue Service (IRS) found a way to collect tax on that - this problem is fatal to numerous trusts created in Alaska since passage of the 1997 Act. MS. McGUIRE explained the problem: Any person who creates a perpetual trust usually wants to give the trust beneficiaries the power to direct the disposition of their assets at death, as a means of making the trust more flexible; that is the power of appointment. Under present law, however, if a beneficiary exercises a special power of appointment by directing that the trust assets continue in trust for the benefit of an individual who is the beneficiary, and if that beneficiary also is given a special power of appointment in the trust, then the trust assets eventually will be subjected to either an estate or a gift tax liability. MS. McGUIRE told members the problem is fixed in this bill by stating that the trust will vest in 1,000 years. Practically speaking, that makes it perpetual but provides an end-point; for tax purposes, that seems to cure the "Delaware tax trap" problem. Ms. McGuire deferred to Steve Greer, who she said had provided effective explanations to herself and Chairman Kott in Anchorage a month before. Number 0420 STEPHEN GREER, Attorney at Law, came forward, noting that he is a sole practitioner in Anchorage who focuses on estate and gift tax planning. He told the committee this is a technical bill, remedial in nature. He agreed that the rule against perpetuities was rendered ineffective in April 1997 so that trusts could go on forever, and that there is a tax reason for wanting to do this; however, it created the little-known problem known as the "Delaware tax trap." He said he wouldn't be surprised if all 50 states have similar legislation within five years. Number 0482 REPRESENTATIVE CROFT asked what tax consequences there are to abolishing the rule against perpetuities. MR. GREER posed an example where he wants to create a trust, using his own money, for Ms. McGuire. He can give Ms. McGuire rights to this trust that are really almost tantamount to outright ownership, and as long as he falls short of that threshold, the properties in the trust won't be subject to estate tax at her death; they can pass on to her children, and to their children. The rule against perpetuities says that cannot be. It says all interest must vest "within the lives in being" at the time the trust is created - Ms. McGuire's life, in this instance - plus 21 years, at which point the trust must terminate and the assets must be distributed to those beneficiaries. MR. GREER continued. If it were possible to have a trust continue forever - because the rule against perpetuities has been done away with - he could give Ms. McGuire the following: the right to be trustee of her own trust; the right to all of the income that the trust generates; and the right to as much of the principal as she determines, in her position as trustee, is necessary for maintenance and support. Furthermore, he could give her a special testamentary power to appoint those assets to other beneficiaries at her death, either outright or in trust for the benefit of those beneficiaries. MR. GREER emphasized that giving Ms. McGuire that testamentary special power of appointment is incredibly important for these kinds of trusts, because if they can run on in perpetuity, one wants the beneficiaries - whose properties these really are - to be able to change the disposition of that trust to meet changing conditions. In this instance, his own trust would probably say that if Ms. McGuire doesn't exercise this testamentary special power of appointment at her death, [the trust assets] will go to her children in equal shares, per stirpes. MR. GREER continued. If one of Ms. McGuire's children has a disability, for example, Ms. McGuire could exercise her testamentary special power of appointment and leave that property in trust for the benefit of that child. Or if she had two children, a doctor and a drug addict, she could diminish the amount that the drug addict would receive, or at least leave it in trust for that child, and give the other share to the child who has done well in life and has worked hard. MR. GREER again emphasized the importance of including the special power of appointment. He said this is why all of these states are getting in line to abolish the rule against perpetuities. When he creates this trust, he has to allocate an amount of generation- skipping tax exemption equal to the value of the trust when he funds it, but from that point forward, this trust can grow to whatever value. As long as he doesn't give those beneficiaries rights that exceed the threshold which he had just described, these properties can pass on and on and on, in further trust. This legislation allows people to essentially create a fund that can go on forever without being subject to a federal estate tax. Number 0766 REPRESENTATIVE CROFT said the object, then, is to give Ms. McGuire the money; if it were given straight out, then at the end of her life she would have to pay estate tax. This gives it to her, in effect, with almost all of the rights of it but in a way that avoids estate tax forever. MR. GREER affirmed that, saying that is the law now. He reiterated that within ten to fifteen years all fifty states will have similar legislation; he pointed out that most of the ten states onboard now came onboard within the last three years, and five others have pending legislation. "We all wonder at what point the federal government's going to get tired of this," he commented, saying the federal government is in a state of flux with the whole estate and gift tax regime. "But all we can do is form trusts on the basis of the law as it now stands, and that's the way it is right now," he concluded. Number 0835 REPRESENTATIVE GREEN asked: If Ms. McGuire has the authority to modify the trust and pass that right on to her doctor child [in the hypothetical situation], how does that differ from having full authority? MR. GREER responded that this is a tax definition; that is all it is. If he said that [Ms. McGuire] has the power to appoint these assets at her death to her estate or to creditors of her estate, then she has a general power of appointment, and all that property would be subject to estate tax at her death. "As long as you exclude those two individuals, you can include everybody else," Mr. Greer said, "and yet, under ... the federal estate and gift taxation of what defines a general power of appointment and a special power of appointment, ... it will not be included in her estate because it's considered to be a special power of appointment." Number 0905 REPRESENTATIVE GREEN said without the rule against perpetuities, then, his own [trust] could go on for another 1,000 years. However, he thought that was the whole purpose of the rule against perpetuities. MR. GREER agreed the trust could go on and on. He said this is a "technical thing" and isn't meant to get into the argument of whether to abolish the rule against perpetuities, which has already been done. This tries to fix a problem, to give beneficiaries of a perpetual trust a special power of appointment so that the trust can retain flexibility. There is even a public policy reason for that, he suggested. However, a provision in the Internal Revenue Code passed in 1951, found under Sections 2041(a)(3) and 2512(d), says that if Ms. McGuire, in this case, takes her special power of appointment and creates a trust for the benefit of her child, in turn giving that child a special power of appointment regarding those assets in trust at his or her death, that sets off the "Delaware tax trap." She would be considered to have created a general power of appointment, and all that trust property would be thrown into her estate. MR. GREER acknowledged how technical this area is. Offering some history, he said at first the desire was to abolish the rule against perpetuities and make that clear, instead of doing this sleight of hand that essentially rendered it ineffective. Therefore, they had proposed SB 162. However, Mr. Greer had started wondering whether that created a "Delaware tax trap" problem; he knows national experts and had posed this question to others. He had wanted to actually initiate the "Delaware tax trap" to get out of the generation-skipping tax problem. He had talked to a University of Tennessee law professor, Amy Hess (ph) and then to Jonathan Blattmachr, who was instrumental in the legislation and who at first dismissed the idea. MR. GREER provided further history, noting that he had continued his correspondence. He mentioned the University of Miami estate planning program, from which he had graduated, then said Bruce Stone (ph), who heads the legislative drafting committee in Florida, had put out legislation for that state; that legislative history included a concern that many states which had abolished the rule against perpetuities had stumbled into the "Delaware tax trap." With Mr. Stone's corroborative report, Mr. Greer had returned to Mr. Blattmachr and his own attorney group, who saw the need to fix this problem. His solution, then, was to abolish the rule against perpetuities, but with respect to this limited circumstance where one takes a special power of appointment and exercises it to create a further special power of appointment, the property subject to that special power of appointment must vest within 1,000 years. Number 1151 REPRESENTATIVE CROFT asked whether there wasn't some logic, however, to the decision interpreting the [1951] tax code. If one exercises a special power to grant that special power again, isn't that coming so close to a general power that it is general? And shouldn't taxes be paid at that point? "Or no one should ever pay estate tax," he added. MR. GREER said that is a philosophical question. REPRESENTATIVE CROFT suggested that it is a public policy discussion which legislators should be concerned with. MR. GREER responded that the legislature took the position in 1997 that abolishing the rule was a good thing, and other states apparently feel the same way. This is probably the most important piece of legislation that exists as far as trying to create a trust industry here in Alaska, he said. Many states have recently enacted these statutes and fallen into the "Delaware tax trap"; he cited Rhode Island as an example. Mr. Greer said he has even declined to write an article in the country's most prestigious estate planning magazine on this unless [Alaska] fixes its legislation to cure this; he doesn't want to highlight any other states' problems, which would, in turn, highlight Alaska's problems. If this isn't fixed, he believes millions or possibly hundreds of millions of dollars are at stake. As far as the estate and gift tax question, he asked whether that isn't a congressional debate, in the federal government's hands. Number 1353 REPRESENTATIVE GREEN said this sounds like a really fine line. He asked whether it is certain that the IRS would agree that this change [to 1,000 years] still would not be quite full ownership. MR. GREER said it would fix the problem, for a number of reasons. He had submitted the draft [legislation] to Jonathan [Blattmachr]'s law firm, which he believes is composed entirely of Harvard Law School graduates and which has represented Jackie Onassis and the Rockefellers, for example; he had received revisions back as recently as last month. Mr. Greer stated: Yes, we think it will work ... To be honest with you, we know it'll work with respect to all future trusts because this legislation [hinges itself] on a Wisconsin statute; in fact, we just mimicked the Wisconsin statute. And the [United States] Tax Court, in the Estate of Murphy [Murphy, Mary Margaret, Estate of v. Comm.], says, "Yes, indeed, it does work if the statute reads this way." But we had to go further. We had to fix all those existing trusts that were created since April of '97. And so this legislation does two things. We've actually got two lines of defense here. We've got the Estate of Murphy, and we go further and we set up a perpetuity period of a thousand years in that limited circumstance where a special power is exercised to create a further special power. REPRESENTATIVE GREEN surmised that when the thousandth year is reached, some taxes would have to be paid if the trust still exists. MR. GREER clarified, "Well, someone's got to get the money." Number 1371 REPRESENTATIVE MURKOWSKI referred to the retroactivity to April 1, 1997. She asked how many trusts are in this "Delaware tax trap." She further asked whether this remedies the situation not only for trusts created after the date of passage of SB 162 but also for other trusts caught in the trap, without having to go into those individually to fix them somehow. MR. GREER said the answer is yes to all. He cannot imagine a competent attorney setting up a perpetual trust without giving beneficiaries special powers of appointment, which provide flexibility to meet changing conditions over time. He noted that [Internal Revenue Code] Section 2041(a)(3) is complicated but essentially states that to determine whether the "Delaware tax trap" will be set off, one must look at local law. If, by looking at local law, the time in which a property subject to that special power of appointment vests cannot be ascertained without looking back to the date of the creation of the instrument creating the first special power of appointment, then the "Delaware tax trap" exists. He likened it to rocket science. MR. GREER explained that by changing the law to read that this property has to vest within 1,000 years of that date of creation of the original trust instrument, it now falls outside of the literal reading of 2041(a)(3), and "we're home free." He referred to retroactivity. Noting that the ability to create a perpetual trust has only existed since April of 1997, he said they are looking at perpetual trusts created between then and the date of enactment for this current bill. The solution is already found in our law, adopted from the uniform statutory rule against perpetuities passed by the national commissioners. In that law, [AS] 34.27.07(a), the second sentence says that if one exercises a special power of appointment, the law in effect at the time that occurs will be the law that controls. If Alaska were to pass a law that is different from what the law was back then, someone who exercises a special power of appointment with respect to one of these old trusts would look to the laws that now exist. Mr. Greer explained: And the reason they did that was ... because previous to enacting this law, we only had the common law rule against perpetuities, which says all property interests must vest within the lives in being plus 21 years. And the uniform statutory rule said, "You know, this is a pretty difficult thing to understand." I think in law school, if you can remember, ... that was the one area of law we [were] told you could never malpractice in; it's just too complicated for anyone to understand. ... What they did with the uniform statutory rule against perpetuities, they put in a wait-and-see provision of 90 years: ... "We'll wait and see whether or not ... these property interests vest within this 90-year period, okay? And this will affect all those old trusts that you may have created, where you haven't exercised the special power of appointment .... We'll wait and see if it vests within the 90-year period from the date that you exercise that special power of appointment." So, ... the body of law is already there to make it retroactive back to April of '97. MR. GREER remarked that the complexity of the rule against perpetuities is one reason why a lot of states have decided to abolish it. He asked what good a law is that no one understands. Number 1706 REPRESENTATIVE MURKOWSKI referred to Mr. Greer's mention of comments from Florida. She asked whether Alaska is the first state to figure out how to get around this "Delaware tax trap" with legislation like that before the committee. MR. GREER answered yes, except that if Alaska essentially had abolished the rule against perpetuities back in April of 1997 and had put in its place another statute, a rule against the suspension of the power of alienation, "we would have been home free." He added, "We wouldn't even have to address this problem because under the Estate of Murphy, we ... wouldn't have to reckon with this 'Delaware tax trap.' But we did not." Mr. Greer told members, "What's novel about our statute is this: ... it provides ... a vesting regime with respect to property interests that are subject to the exercise of this special power of appointment; and we're saying that it has to vest within the 1,000-year period." He indicated the 1,000-year period was an idea offered by a Florida professor. Number 1780 REPRESENTATIVE GREEN asked what happens if ten years from now the legislature modifies this law. Could that negate this? Would [Ms. McGuire's] hoped-for estate be "tax due" at the end of her lifetime? Once established, could her estate falter? MR. GREER said no, it is fixed; this is just a fixing statute. However, there is no guarantee that what they do will be good ten years from now. "And we're all wondering what the federal government is going to do," he added. In response to a further question about what happens if the federal government passes superseding legislation, Mr. Greer suggested the need to keep current no matter what the area of law or life. Number 1906 REPRESENTATIVE ROKEBERG referred to Section 7 of the bill and said he was trying to understand the thrust of that. Mentioning the hypothetical situation discussed earlier by Mr. Greer, he asked how one manages the corpus of the trust regarding selling [assets], for example, if one is "restricted from your power of alienation." MR. GREER suggested that the public policy reason behind the rule against perpetuities is to ensure free marketability of the property in trust. He added, "Well, in a sense we're doing that now." He said previously [Alaska] never had a rule against the suspension of power of alienation; that rule says one must always be able to give someone the ability to sell property, which makes it transferable. The gist of Section 7 is that one cannot suspend that power for more than 30 years; in other words, even though this trust can continue on forever, one has to be able to give the trustee the ability to sell the property while it is in trust. That is one good reason for including Section 7. MR. GREER pointed out that the principal reason for including Section 7, however, is this is what the Estate of Murphy hinged on. He commented that the [United States] Tax Court and the IRS - the [Department of the] Treasury - have both misinterpreted the rule against perpetuities, and he really wonders what they were reading. He noted that the seminal article on this, "Perpetuities in a Nutshell," was written by Profession Leach (ph) in 1934 in the Harvard Law Journal. MR. GREER told members that, in short, the tax court says that some states have characterized their rule against perpetuities as a rule against the remote vesting of property, whereas other states have characterized theirs as a rule against the suspension of the power of alienation. In the latter instance, as long as the special power of appointment relates back to the date of the original trust instrument, the "Delaware tax trap" will not be violated. The irony is that one can give a trustee the power to sell property - which every trust would do - and never violate the rule against the suspension of the power of alienation; nonetheless, the property can still stay in trust forever and still be excluded from estate taxes that pass from one generation to the next. He said that really makes one wonder if the [Department of the] Treasury knew what they were doing. MR. GREER noted that the tax court, in fact, pointed that out, saying, "But you wrote the regulations, and now you're stuck with it." Furthermore, the IRS acquiesced and now agrees they will be stuck with this decision. However, the big point is what will happen down the road and whether Congress will put forth a rule that says these trusts cannot go on forever without being subject to some sort of estate and generation-skipping tax. "But that isn't the case now," Mr. Greer added. Number 2106 REPRESENTATIVE ROKEBERG requested confirmation that the State of Alaska has no inheritance taxes. MR. GREER responded that it does, but it works like this: "If you pay the federal government a dollar, ... the state may get 20 cents out of that dollar - it's not even really that high - ... but the federal government will get the remaining 80 cents. ... You don't end up paying $1.20; ... it's a type of revenue sharing." REPRESENTATIVE ROKEBERG posed a scenario where one uses a special power [of appointment] to change the nature of the asset mix. He asked whether one must keep a trail of the corpus of the principal at all times. He stated his understanding that Mr. Greer had said one even could use up a substantial portion of the principal of the trust. He said presumably there would be some remainder to be passed on to the next generation. MR. GREER agreed but said that with the special power of appointment one could actually say that the trust is coming to an end and distribute the assets. It only continues if that is desired. One wants the special power of appointment so that one can terminate the trust down the line. Number 2204 REPRESENTATIVE MURKOWSKI recalled that when [HB 219] was heard in committee previously, it was addressing that the charitable lead trust aspect had been overlooked. She said she assumes that with the newly revised and updated SB 162, they are rolling all the good things from the former versions into this one. MR. GREER affirmed that and said he feels comfortable with it. Number 2304 DAVID SHAFTEL, Attorney at Law, testified via teleconference from Anchorage. He agreed that a number of states have abolished the rule against perpetuities for tax and non-tax reasons. A number have avoided the glitch by prohibiting suspension of the power of alienation; when they combine that with the use of the power of sale, they don't have the problem that Alaska and a few other states have stumbled into, the "Delaware tax trap," which is obsolete but nonetheless exists in the law. All this bill does is provide a way to avoid that glitch. The unfortunate alternative would be to not use special powers of appointment in these perpetual trusts, which are very popular right now, because those special powers of appointment provide flexibility so that generation after generation can make adjustments. This amendment places Alaska on the same footing as other states that have already done this in a little different way. Mr. Shaftel concluded: I think it's a very good bill. There are a number of us up here who have discussed this and looked at it. And, as I've mentioned to you before, we're an informal group of estate planning attorneys who have a lot of experience in this area. There have been a lot of these trusts created by Alaskans. They have created them with the expectations that they will get the same ... advantageous treatment that the residents of other states are getting in their estate planning. ... And so, it really is very important, in my view and the view of our informal group, that this glitch be remedied. So I'd urge your support of ... this bill. Number 2430 REPRESENTATIVE GREEN asked Mr. Shaftel whether he concurs with Mr. Greer that until the law is changed, either at the federal or state level, people who set up these trusts would be protected with the passage of this legislation. MR. SHAFTEL affirmed that. Number 2449 DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska Trust Company, testified via teleconference from Anchorage, agreeing that the bill [Version M] corrects a glitch. He concluded, "Probably 99 percent of the trusts that we have, have that provision in there, so we would strongly recommend that the committee approve this legislation." Number 2465 RICHARD THWAITES, JR., Attorney at Law, testified briefly via teleconference from Anchorage that he supports the legislation [Version M], a worthwhile change to the statute that would assist in "the planning that we do" and would keep Alaska in the forefront. TAPE 00-35, SIDE B Number 0001 MR. SHAFTEL, in response to a question by Representative Rokeberg, emphasized the importance of retroactivity and the immense popularity of perpetual trusts, which have been set up by Alaskans and nonresidents of Alaska who desire that perpetual characteristic for their trusts. The bill is designed to provide that type of benefit. "I don't see any downsides, nor have I heard any downsides discussed of the retroactivity," he concluded. "It's a pure positive." REPRESENTATIVE ROKEBERG stated: Just for the record, Mr. Chairman, I would assume that the public policy that this legislature decided on in '97 when we introduced the first legislation to establish the trust, this is merely a ratification thereof, making sure that those particular instruments that were created by that policy are retained in place and not changed. And this is a vote of confidence, if you will, for that. Number 0060 REPRESENTATIVE GREEN asked whether most attorneys are aware of this in Alaska or it is only shared by a few. MR. GREER reiterated that estate tax planning is very complicated; typically, it requires him to spend two months every year, at no pay, on continuing legal education, and Mr. Shaftel does the same. The people who engage in this must dedicate their lives to it. He said he had attempted to share this problem with the entire estate planning section of the bar association on countless occasions; however, perhaps only five or six people really understand it. REPRESENTATIVE GREEN thanked Mr. Greer, saying he believes it is an extremely important issue. Noting that there were no further testifiers signed up, he closed public testimony. He asked whether there was any discussion; none was offered. Number 0132 REPRESENTATIVE ROKEBERG made a motion to adopt the proposed HCS for CSSB 162, Version M [1-LS0485\M, Chenoweth, 3/6/00], as a work draft. There being no objection, it was so ordered. REPRESENTATIVE ROKEBERG made a motion to move HCS CSSB 162, Version M, from committee with individual recommendations and the attached zero fiscal note. There being no objection, it was so ordered and HCS CSSB 162(JUD) was moved from the House Judiciary Standing Committee. HB 369 - PROPERTY EXEMPTIONS REPRESENTATIVE GREEN announced that the next order of business would be HOUSE BILL NO. 369, "An Act relating to property exemptions under the Alaska Exemptions Act; and providing for an effective date." Number 0210 JOHN MANLY, Staff to Representative John Harris, Alaska State Legislature, testified on behalf of the sponsor of HB 369. He explained that HB 369 changes the "exemption statute," which is Title 9, Chapter 38. Basically, HB 369 would increase the dollar amounts of specified assets that would be protected under this exemption statute. Furthermore, it provides new protection to assets that are not covered under the current law. He pointed out that "AS 09.38, exemption statute, delineates what assets are protected from creditors when a person is sued and loses and has a judgment entered against him; it can also apply in some cases of bankruptcy if the person opts to take state exemptions as opposed to federal exemptions." MR. MANLY specified that HB 369 will increase the homestead exemption to $250,000 per individual. Currently, the homestead exemption is set in statute at $54,000, although it has been increased to $63,000 per the formula in statute. The legislation would also increase the exemption for the cash value of life insurance policies and/or annuity contracts owned by the individual to $250,000. Furthermore, HB 369 provides an unlimited exemption on the proceeds of a life insurance contract or an annuity paid to a beneficiary that is not the person seeking protection under the exemption act. MR. MANLY pointed out that HB 369 increases the ability to trace assets that an individual could have claimed as an exemption from six months to two years. He noted that the new exemptions proposed in HB 369 are located in Section 4. Those exemptions address the reserves held by a condominium association. These reserves are usually held for maintenance and such and would be protected against some lawsuit against the association. Section 5 provides an exemption for a government employee's deferred compensation plan in order that a deferred compensation plan would have the same protection as a 401K plan, for example. He noted that Section 6 has a limited cash and liquid asset exemption of up to $8,075. Number 0335 REPRESENTATIVE GREEN inquired as to what that is based on. MR. MANLY said he believes that [limited cash and liquid asset exemption amount] is related to the Internal Revenue Services' (IRS) allowance. However, he deferred to Mr. Greer. MR. MANLY moved on to Section 13, which addresses how certain revocable trusts are treated. When HB 369 was heard in the House Labor & Commerce Committee, the Department of Labor & Workforce Development (DOLWD) discovered a problem with the reference to indexing in Sections 11 and 12 of the bill. He explained that on page 4, line 24, the bill references the index for January of 1998, but there is no index for January because the indexing is performed for the first half of the year and the second half of the year. There is also an average annual index. The amendment would propose that [the reference to January be changed] to the average annual index as would also be the case for the other two occurrences on page 4. On page 5, DOLWD had a problem with how the additional portion of the percentage increases. He indicated that the department recommended the deletion of the following language in Section 12(b)(1), "portion of the percentage change in the index in excess of a multiple of 10 percent is disregarded". It was felt that this phrase would cause the adjusted dollar amounts to understate inflation to a greater amount over time. The suggestion was to replace the deleted language in Section 12(b)(1) with the following language, "the dollar amounts only change in multiples of $100" and thus one would be rounding to $100 each time. REPRESENTATIVE ROKEBERG noted that the Anchorage [index], the proxy for the Alaska Index, "seems to have been raising it to a lesser degree, historically over the last two decades, than the All U.S. Average, All Urban Index. So, there seems to be a preference to use that because it shows somewhat less inflation." Representative Rokeberg said that this [HB 369] does clean it up. Number 552 REPRESENTATIVE ROKEBERG moved that the committee adopt [Amendment 1], labeled 1-LS1266\G.1, Bannister, 3/22/00, which reads as follows: Page 4, line 24: Delete "index for January of" Insert "annual average of the index for [JANUARY OF]" Page 4, line 26: Delete "index for January of" Insert "annual average of the index for" Page 4, line 31: Delete "index for January of that" Insert "annual average of the index for the year preceding [JANUARY OF] that even-numbered" Page 5, lines 2 through 6: Delete "(1) the portion of the percentage change in the index in excess of a multiple of 10 percent is disregarded and the dollar amounts change only in multiples of 10 percent of the amounts appearing in this chapter on the effective date of this Act for the dollar amounts in AS 09.38.010, 09.38.020(f), and 09.38.025(a) and (d) and on August 26, 1982, for the other dollar amounts in this chapter; and" Insert "(1) the [PORTION OF THE PERCENTAGE CHANGE IN THE INDEX IN EXCESS OF A MULTIPLE OF 10 PERCENT IS DISREGARDED AND THE] dollar amounts change only in multiples of $100 [10 PERCENT OF THE AMOUNTS APPEARING IN THIS CHAPTER ON AUGUST 26, 1982]; and" There being no objection, [Amendment 1] was adopted. Number 0577 STEVE GREER, Attorney, informed the committee that what prompted HB 369 is essentially a provision found in Section 4 of the bill. He related the following disaster, which could have left hundreds of people disposed from their homes. Mr. Greer noted that he lived in a condominium complex known as Foxwood Condominiums. A couple of years ago the [Foxwood Condominium] association hired a painter, who covered a lighting fixture without letting the paint fully dry, which led to a fire. The entire building, eight units, went up in flames. One unit was occupied by a tenant who did not have renter's insurance and thus, in an attempt to cover his/her losses, the renter sued the painter. The painter was bonded and the lawsuit went on to include the condominium association as well as the individual board members on the association, who happen to be retired folks. MR. GREER continued. This lawsuit went to a jury trial and fortunately, the resulting judgment was less than the amount of the insurance which the condominium association had. If that had not been the case [and the judgment had been more than the amount of the insurance held by the condominium association], all of the reserves would have been up for grabs. Mr. Greer pointed out that each month, people pay a certain amount into the condominium association. That money is analogous to a trust account. This could have been a disaster. Therefore, this situation prompted this legislation in order to protect these reserves. Upon review of the remaining exemption amounts, it was felt that the exemptions should be updated as that had not occurred since 1982. MR. GREER turned attention to the dollar amount for the homestead exemption. As was indicated earlier, 13 states provide more protection than Alaska does for its citizens even though it is more expensive to live in Alaska versus other states. Of these 13 states, five provide unlimited exemptions. Although an unlimited exemption for a homestead was discussed, it was determined that would probably not ever happen. Therefore, a dollar amount of $250,000 was proposed. He explained that in 1997 Congress said that if one sells a principal residence, $250,000 per person can be excluded of capital gains. The thought was if that is the level the federal government set for a principal residence, then the same limit should be used for the purposes of the homestead exemption in Alaska. However, now there is a U.S. Senate and a U.S. House of Representatives bankruptcy bill pending before Congress. The bills have been referred to a joint committee for resolution. The U.S. Senate bill sets a limit of $100,000 person while the U.S. House of Representatives bill sets a limit of $250,000. MR. GREER pointed out that HB 369 would also raise the amount of the cash value of an insurance policy from $12,000 per person to $250,000 per person. This increase is very important because as people age, they become uninsurable. If one cannot keep an insurance policy, there will be no insurance to pay to beneficiaries in the case of an untimely death. This change would also apply to annuities as annuities and insurance products are practically treated the same under the IRS code. He pointed out that typically, annuities are meant for retirement and the money cannot be withdrawn before the age of 59.5 without a 10 percent penalty. The current law provides protection for retirement benefits, except with respect to government employees. He noted that presently, deferred compensation plans [of government employees] under Section 457 are not protected. Therefore, HB 369 includes that as well. Number 0967 REPRESENTATIVE GREEN referred to page 1, line 7, and asked if the $250,000 homestead exemption was to apply to each individual or for the homestead in total. MR. GREER answered that it [the $250,000] is meant for each individual. REPRESENTATIVE GREEN said the language in Section 1(a) seems to say that the maximum for the homestead is $250,000. MR. GREER said he could see that, although he knew the intent. REPRESENTATIVE JAMES interjected that [the language] is existing law. MR. MANLY pointed out that the key language in Section 1(a) is "the individual's interest in property", which would key the amount to the individual. MR. GREER asked if this problem could be resolved by the following: on page 1, line 7, following "exemption", insert "for the individual's interest". REPRESENTATIVE JAMES said that she read this language to mean that the maximum homestead exemption is $250,000. She did not think that two joint owners of a homestead would receive $250,000 each. MR. GREER clarified that the intent was to have each individual receive $250,000; a marriage penalty was not intended. REPRESENTATIVE JAMES related her understanding, then, that a property with a $500,000 value can be exempted by two parties. MR. GREER replied yes. However, if one person is liable, then only that individual can protect his/her interest to the amount of $250,000. REPRESENTATIVE GREEN said that would be a fairly sizable protection; is that what the committee desires? Number 1180 REPRESENTATIVE GREEN pointed out that there was a recommended amendment, Amendment 2, which read as follows: Page 1, line 7, following "exemption" Insert "for the individual's interest" There being no objection, the adoption of Amendment 2 was ordered. REPRESENTATIVE ROKEBERG noted that the bill packet should contain letters from some Anchorage accountants, who believe that a $500,000 exemption for a married couple's house is too high. This is a public policy issue. He said, "The combination of the $250,000 in cash value of insurance and a $500,000 in real estate value and a few other little things, you could -- I would ask Mr. Greer, how much can you stash in a year and go bankrupt?" MR. GREER clarified that Representative Rokeberg's example [of a $500,000 exemption] suggests that both couples are liable for the damage. He specified, "It is really $250,000 per person for the household exemption." Therefore, one could have $500,000 cash value in insurance plus $250,000 worth of equity in a home, which could be protected. REPRESENTATIVE CROFT interjected that there could be $8,000 in miscellaneous and all one's retirement accounts. MR. GREER noted that the $8,000 comes from the bankruptcy code and the [money from one's] retirement accounts is currently the law. Mr. Greer remarked that this is, no doubt, a public policy issue in which one would be saying that one is in support of someone being able to keep their home. REPRESENTATIVE GREEN commented that when a painter comes to his home and the house burns down, the painter is fairly well protected. MR. GREER said, "That's the other aspect of this thing." REPRESENTATIVE ROKEBERG reiterated that this is a public policy issue in regard to what degree would the aggregate of exemptions be allowed as use for shelter purposes for potential bankruptcies. Number 1334 DAVE SHAFTEL, Attorney, testified via teleconference from Anchorage. He pointed out that HB 369 and the particular provisions in it have been discussed at length over the past couple of years both among the informal group of attorneys as well as the Estate Planning Section of the Alaska Bar Association. This has also been discussed before the Anchorage Estate Planning Council, which is a mixed membership of attorneys, CPAs, trust officers, insurance brokers, securities brokers and financial planners. Mr. Shaftel said that he has heard very few negative comments as most comments surrounded the need to update and adjust these provisions. He noted that there is quite a bit of information in regard to what other states have done, which he believes Mr. Greer has. He also noted that there are a handful of states that have unlimited exemptions in regard to both the personal residence and life insurance. There are other states that have specific dollar limitations that vary. Currently, Alaska is at the low end of these exemptions. REPRESENTATIVE CROFT acknowledged that the $8,075 was chosen because it matched federal law, and the $250,000 exemption is suggested because it would match federal law as well. However, it is indexed to the Anchorage consumer price index (CPI), in effect. He surmised, "These are going to go off-line from the federal, gradually, right?" He asked if any of the federal numbers are indexed and if so, on what index? MR. GREER replied no. REPRESENTATIVE CROFT suggested that a solution could be to set the [homestead] exemption at $250,000, but not index [that amount]. Therefore, the amount would be tied to the federal law and it does not continue to grow unless "we" decide it should. Number 1537 MR. MANLY interjected that Chris Miller, DOLWD, has recommended that indexing be eliminated altogether as it is burdensome and confusing in the statutes. Mr. Manly commented that he did not believe Representative Harris would mind if indexing was eliminated. REPRESENTATIVE ROKEBERG said that the indexing is already in place and the amounts are a moving target annually. Therefore, he surmised that there could be a delay in the disposition of a case pending verification of the numbers. MR. MANLY noted that he believes with the bill as written, the numbers would change in October of even-numbered years. REPRESENTATIVE CROFT pointed out that what [is in statute] is a $54,000 statute that really was $63,000; one just had to know that or find someone who did because of the lack of clarity in this statute. Therefore, he preferred to have a statute that specified the amount and if the amount increases at the federal level, there can be discussion at that time in regard to whether to increase the state's amount. REPRESENTATIVE GREEN indicated that such a scenario made sense to him. MR. GREER noted that he did not have it [indexing] in the bill to begin with, but Teresa Bannister, Attorney, Legal and Research Services Division, added the indexing provisions. If it takes deletion of the indexing to make HB 369 more palatable to the legislature, then he suggested its deletion. Number 1719 REPRESENTATIVE ROKEBERG moved that the committee adopt a conceptual amendment to delete Sections 11 and 12 and the attendant statutory conforming draft that would be necessary with the removal of the CPI provisions. There being no objection, it was so ordered and Amendment 3 was adopted. REPRESENTATIVE GREEN pointed out that Amendment 3 in effect deletes Amendment 1. REPRESENTATIVE ROKEBERG agreed. REPRESENTATIVE KERTTULA related her understanding that the underlying statute, which maintains the index, is not being removed. She said, "We're not putting in Sections 11 and 12 of the bill." REPRESENTATIVE ROKEBERG specified, "That's right, just as related to the bill." REPRESENTATIVE KERTTULA pointed out, then, that the index would still remain in the underlying statute. The CPI is still in statute. She commented that there could be deep drafting impacts. REPRESENTATIVE CROFT suggested that a committee substitute (CS) be brought back before the committee. REPRESENTATIVE GREEN interjected that the CS would need to be [based] on the intent of removing indexing. REPRESENTATIVE KERTTULA indicated it would be helpful to have someone speak to how this works with indexing in the statute. REPRESENTATIVE GREEN announced that the committee would take a brief at-ease at 2:40 p.m. and he called the committee back to order at 2:42 p.m. Number 2030 REPRESENTATIVE ROKEBERG moved that the committee rescind its action in the adoption of Amendment 3 for the purposes of reading Amendment 3. There being no objection, it was so ordered and the committee rescinded its action in the adoption of Amendment 3. REPRESENTATIVE ROKEBERG moved that the committee delete the CPI clause as set forth in Sections 11 and 12 "so as not to directly effect or change those provisions within the bill before us and not other sections of the chapter." REPRESENTATIVE KERTTULA asked if the desire is to leave the CPI as it is and let it continue to impact everything or is the desire to remove the homestead [CPI]? REPRESENTATIVE ROKEBERG specified, "It was the insurance and the issues that are covered in the bill that are capped." REPRESENTATIVE KERTTULA turned to the medical savings in regard to the deferred compensation. If that is extended to the entire bill, then those sections are impacted. REPRESENTATIVE ROKEBERG commented that those are unlimited. MR. MANLY informed the committee that Mr. Miller, DOLWD, said the following: "The frequency of statutory intervention calls into question the necessity/efficacy of subsection 115 of the Act; it's deletion is recommended." Mr. Manly said that Mr. Miller is recommending the deletion of [AS] 09.38.115(a) and (b). REPRESENTATIVE KERTTULA pointed out that would take it out for everything and she was unsure as to what that would impact. REPRESENTATIVE CROFT suggested that be done in a CS. REPRESENTATIVE GREEN said he understood Representative Rokeberg's amendment to [apply] only to the references in HB 369 and not all of [AS] 09.38.115(a) and (b). REPRESENTATIVE ROKEBERG agreed that would be the motion before the committee. He suggested that there could be a CS that would take it [the index] out entirely and that could be reviewed by the sponsor. Number 2273 REPRESENTATIVE ROKEBERG restated his motion to delete the CPI provisions in Sections 11 and 12 of HB 369 to impact only those sections in the bill. There being no objection, it was so ordered and Amendment 3 was adopted. REPRESENTATIVE GREEN announced that two CSs will be prepared for the committee. One CS will include [Amendment 3], which only affects HB 369, and the other CS will include the deletion of the CPI [altogether]. Representative Green further announced that HB 369 would be held. HB 398 - LIFE AND HEALTH INSURANCE GUARANTY ASSN REPRESENTATIVE GREEN announced that the final order business would be, HOUSE BILL NO. 398, "An Act relating to the Alaska Life and Health Insurance Guaranty Association." [Before the committee is CSHB 398(L&C).] Number 2437 JOHN MANLY, Staff to Representative John Harris, Alaska State Legislature, explained that HB 398 would update the statutes relating to the insurance guaranty association in order to conform with the most recent model statute. TAPE 00-36, SIDE A MR. MANLY turned the discussion over to John George. REPRESENTATIVE ROKEBERG clarified that [HB 398] refers to life and health insurance. There is another bill, HB 310, that addresses an association related to property and casualty. He noted that there are two different guaranty associations in Alaska. Number 0229 JOHN GEORGE, Lobbyist, American Council of Life Insurance (ACLI), agreed with Representative Rokeberg that the life and health insurance guaranty association is very different from the property and casualty guaranty association as the two have very different operations. He explained that when a property/casualty insurance company becomes insolvent, there are claims that are outstanding which would need to be settled in order to collect and distribute the money. When a life insurance company becomes insolvent, there are ongoing policies for which people continue to make payments. The primary goal for a life insurance guaranty association is to find a home for policies that are in effect and transfer those to a new company which would take over that obligation. Therefore, years from now when a person makes a claim against the policy, that person would have the protection. MR. GEORGE stated that HB 398 is essentially the National Association of Insurance Commissioners (NAIC) model bill. The NAIC writes in a totally different language than the legislative bill drafters, and therefore there have been problems in converting NAIC language to bill drafter language. Those language problems have resulted in some committee substitutes. He noted that he has another amendment, labeled 1-LS1376\I.2, Ford, 3/22/00 [Ford I.2], to propose. Mr. George informed the committee that his clients met, via teleconference, with the Division of Insurance and there were about 20 differences, which were worked out [save one item]. The bill that was before the House Labor & Commerce Committee only required a two word change on page 13, lines 20 and 27, the words "to intervene" were added and thus there was a committee substitute (CS). With regard to the aforementioned amendment, Ford I.2, Mr. George believes that CSHB 398(L&C) with the Ford I.2 amendment is something that he and the division would agree upon, except for the two words inserted in the House Labor & Commerce Committee. Mr. George noted that he represents ACLI which supports the bill. Number 0615 DON THOMAS, Executive Director, Alaska Life and Health Insurance Guaranty Association, testified via teleconference from Anchorage. He stated that he is present to convey the association's support for CSHB 398 [CSHB 398(L&C)] as well as the amendment mentioned by Mr. George. The association supports the bill and the amendment for the reasons stated by Mr. Manly and Mr. George. The bill represents lessons learned over the previous ten years of the association's existence and these changes are based on the NAIC model act. He noted that HB 398 is, as noted earlier, similar in its intent as HB 310, which updates the guaranty association law regarding property and casualty policies. He pointed out that this committee moved HB 310 out of committee a few weeks ago and thus for consistency this committee should do the same with HB 398. REPRESENTATIVE CROFT inquired as to what this legislation does. He asked, "What are the major policy shifts that it accomplishes?" MR. GEORGE pointed out that financial products have changed. Furthermore, some insolvencies were found in other states due to the lack of appropriate tools. Therefore, this legislation essentially updates [the tools]. For further information, Mr. George deferred to Mr. Thomas. MR. THOMAS noted that he also serves as the association's attorney. He said that he could highlight those areas that make things simpler for the association. For example, there is a clarification of the definition of "policy ownership," which clearly excludes beneficial ownership. The law as presently written is not exactly clear on that matter. There is also a change which allows the domiciliary insurance director/commissioner receivership core to approve alternative plans and rates. Mr. Thomas noted that he has a summary of [changes] that was prepared by Mr. George's clients. REPRESENTATIVE KERTTULA referred to pages 2-4, which seem to list the ways in which people will not be covered. There seem to be a lot of new exceptions. She asked if that would be a correct assessment. Number 0971 MARY BETH STEVENS, Alaska Legislative Director and Counsel, American Council of Life Insurers (ACLI), testified via teleconference. She informed the committee that ACLI is a national trade association representing approximately 475 life insurance companies, the majority of which write business in Alaska. Although she said that she is not a detailed expert on this rule, she believes that the changes to the Alaska Act fall into one of four categories. She specified, "The first category of amendments includes proposals to change the situs of guaranty association coverage for unallocated annuities from the state of residence as the contract owner to the state of the principal place of business of the plan sponsor." She believes that much of what is included on pages 3 and 4 references coverage of unallocated annuities. She clarified that the purpose of this change is to eliminate "form" shopping by plan sponsors. Furthermore, the situs of coverage for structured settlement annuities was changed from the state contract holder to the state of residence of the payee or injured party. MS. STEVENS turned to the second category of amendments which clarifies that assessments can be authorized and called at different times. Furthermore, it eliminates coverage economically in material policy guarantees. She noted that the guaranty association's authority to act is broadened in the event of an impairment. The guaranty association's authority is also expanded to provide substitute coverage of annuities and the authority of receivership court to approve alternative policies. MS. STEVENS moved on to the third category of amendments which attempt to clarify rather than change anything. She explained that several sections of the [NAIC] model act have been the subject of constant litigation. The [fourth category of] amendments also include proposals to specifically eliminate synthetic guaranteed investment contracts (GICs) from coverage and from the $5 million cap on coverage for coverage of "Coly and Boly" (ph) policies held by one owner. There is also a one percent assessment rule on subaccounts. Furthermore, the amendments would allow guaranty associations to propose their own early access plan with no distributions received within 120 days of an insolvency. The amendments would also reduce the authority and the responsibility of guaranty associations with regard to insolvency prevention and reporting. Ms. Stevens commented that although she does not purport to know all the details of this legislation, she pointed out that all of these issues have been [discussed] over a number of years at the NAIC level with input from a variety of sources. REPRESENTATIVE ROKEBERG remarked that it is unfortunate that the current bill packet does not include all the supporting materials that were included in the House Labor & Commerce bill packet. REPRESENTATIVE GREEN suggested that the supporting information is necessary in order to understand this legislation. Therefore, Representative Green held HB 398 in order to obtain this additional material. ADJOURNMENT There being no further business before the committee, the House Judiciary Standing Committee meeting was adjourned at 3:10 p.m.