HOUSE LABOR AND COMMERCE STANDING COMMITTEE February 10, 1997 3:19 p.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative John Cowdery Representative Bill Hudson Representative Jerry Sanders Representative Joe Ryan Representative Tom Brice MEMBERS ABSENT Representative Gene Kubina COMMITTEE CALENDAR *HOUSE BILL NO. 101 "An Act relating to certain irrevocable transfers in trust, to the jurisdiction governing a trust, to challenges to trusts or property transfers in trust, to the validity of trust interests, and to transfers of certain trust interests; and providing for an effective date." - MOVED CSHB 101(L&C) OUT OF COMMITTEE (* First public hearing) PREVIOUS ACTION BILL: HB 101 SHORT TITLE: TRUSTS & PROPERTY TRANSFERS IN TRUST SPONSOR(S): REPRESENTATIVE(S) VEZEY, Bunde JRN-DATE JRN-PG ACTION 01/31/97 201 (H) READ THE FIRST TIME - REFERRAL(S) 01/31/97 201 (H) LABOR & COMMERCE 02/10/97 (H) L&C AT 3:15 PM CAPITOL 17 WITNESS REGISTER REPRESENTATIVE AL VEZEY Alaska State Legislature Capitol Building, Room 13 Juneau, Alaska 99801 Telephone: (907) 465-3719 POSITION STATEMENT: Prime sponsor of HB 101. VINCENT USERA, Assistant Attorney General Commercial Section Civil Division Department of Law P.O. Box 110300 Juneau, Alaska 99811-0300 Telephone: (907) 465-3600 POSITION STATEMENT: Answered questions on HB 101. DICK THWAITES, Attorney Richard S. Thwaites Law Offices 13741 Arne Erickson Anchorage, Alaska 99515 Telephone: (907) 345-5293 POSITION STATEMENT: Testified in HB 101. RICH HOMPESCH, Attorney Winfree and Hompesch 119 North Cushman, Number 400 Fairbanks, Alaska 99701 Telephone: (907) 452-1700 POSITION STATEMENT: Testified in support of HB 101. ROBERT L. MANLEY, Attorney Hughes, Thorsness, Powell, Huddleston and Bauman 550 West 7th Street Anchorage, Alaska 99501 Telephone: (907) 263-8251 POSITION STATEMENT: Testified in support of HB 101. KEVIN WALSH, Certified Public Accountant Walsh, Teleher and Sharp 330 Barnette, Suite 101 Anchorage, Alaska 99701 Telephone: (907) 456-2222 POSITION STATEMENT: Testified in support of HB 101. LINDA HULBERT, Insurance Agent 110 Cushman Street Fairbanks, Alaska 99701 Telephone: (907) 452-4400 POSITION STATEMENT: Testified in support of HB 101. ACTION NARRATIVE TAPE 97-9, SIDE A Number 001 CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce Standing Committee to order at 3:19 p.m. Members present at the call to order were Representatives Rokeberg, Cowdery, Sanders, Brice and Ryan. Representative Hudson arrived at 3:21 p.m. HB 101 - TRUSTS & PROPERTY TRANSFERS IN TRUST Number 073 CHAIRMAN ROKEBERG announced the committee would hear HB 101, "An Act relating to certain irrevocable transfers in trust, to the jurisdiction governing a trust, to challenges to trusts or property transfers in trust, to the validity of trust interests, and to transfers of certain trust interests; and providing for an effective date." Number 085 REPRESENTATIVE AL VEZEY, prime sponsor of HB 101, came forward to explain the bill. He said HB 101 was the result of an effort, on the part of his office, to look at what could be done to stimulate economic development in the state of Alaska and to look at why it is that Alaska couldn't be more of a financial center for the economy of Alaska, America and the whole world. He indicated he looked to see if there was an opportunity to change our laws that would encourage financial markets to headquarter in Alaska. With the help of a number of individuals who were also looking for a home for this type of an entity, they came up with some changes that could be made in Alaska to our trust laws that would make Alaska an attractive place to administer large trusts. The trend over the last 100 years in the trust law of this country has been to make trusts weaker and weaker. Even the state of Alaska has a law of perpetuities. Representative Vezey indicated he can't remember what Alaska's law is, but typically the law on perpetuities does not allow trusts to go on for more than 70 to 90 years, and more and more the corpus of trusts are being allowed to be invaded by so called creditors who may have come along long after the trust was created. They use the term "fraudulent transfer" for something that might have happened 50 years earlier as a reason for invading trusts. Representative Vezey pointed out Alaska has a fairly simple clean trust law. We don't have 200 years of court presidencies and supreme court rulings to muddy the waters in terms of what our laws mean. REPRESENTATIVE VEZEY said experts in trust law saw an opportunity in Alaska's law to amend the law to create a strong trust that would go on indefinitely, depending on the conditions of the trust. One thing that would be done if the bill is passed is to wave Alaska's law against perpetuities. The trust would be very very difficult to invade. At the same time, there are very deliberate precautions early in the trust bill to void any transfers in a trust if they are fraudulent transfers. It is very clear that you cannot put money in trust with the intent of defrauding creditors. Number 326 REPRESENTATIVE VEZEY pointed out that there is a huge market for trusts - very large assets where people are looking for ways of preserving these assets for future generations and more than just one or two generations. He noted that currently this market is largely going to foreign countries such as Asia, Caribbean, Cayman Islands and Cook Islands. Those countries have strong trust laws. He noted the Cayman Islands has 30 major banks as they are administering funds, including the trusts. REPRESENTATIVE VEZEY said he doesn't anticipate that all the funds or all the assets of these trusts would come to Alaska. Many of the assets will represent real estate all over the world. They will represent stocks, stock markets and a certain amount of liquid assets. It is the administration of these trusts that would come to Alaska and the administration fees. He informed the committee members the amount of money that is looking for home in trusts is estimated to be in the billions of dollars per year. The fees generated off of a billion dollars is somewhere between $1 million and $5 million. Potentially, there could be a very large industry here. If we don't do it, we won't know. If we do it, the down side risk is very low, it's slim to none. Representative Vezey said he genuinely believes we have a chance to create a substantial financial industry in Alaska. The spinoff is that these holders of large sources of wealth will have a strong reason to come to Alaska to see where their money is being managed. They will see the opportunity that we all see here and they may very well become interested in investing in Alaska. He noted there are some attorneys listening, by teleconference, who can answer legal questions. Representative Vezey said in talking to insurance companies, banks and various trust officers, he hasn't found anyone in opposition to the bill. The legislation passed the House during the Nineteenth Legislature with one opposition vote and the Senate with one opposition vote. Number 560 REPRESENTATIVE JOHN COWDERY asked why the previous bill was vetoed. REPRESENTATIVE VEZEY said he couldn't answer that question. He noted he believes it was very poor judgement on the part of the Administration. The reason stated in the veto message was that there was concern that this trust might allow people to circumvent Alaska's child support laws and would allow somebody to evade their child support payments. He said you have to have a very vivid imagination (indisc.) the law to believe that. Number 615 CHAIRMAN ROKEBERG referred to the veto message mentioning child support as one of rationales. He asked Representative Vezey if he has done anything to the bill to correct it. REPRESENTATIVE VEZEY said the bill before the committee has been changed from the bill that was passed last year. He said it was changed to explicitly address the aspect of child support obligations and to clarify that you can't fraudulently transfer money into this trust or any other trust with the intent of evading child support. Representative Vezey said he isn't talking about people putting small sums of money into trust. These are expensive to manage and unless you have a large capital base to justify the fees that go with managing them, you're not going to be interested in paying the overhead costs. People in the trust business estimate that nobody with less than $5 million worth of assets that they want to give away would be willing to pay the fees associated with managing the trust. He noted they are giving away control of the money or asset. REPRESENTATIVE VEZEY urged the committee to adopt the proposed committee substitute, Version B, 0-LS0391\B, dated February 10, 1997. Number 811 REPRESENTATIVE TOM BRICE asked Representative Vezey to discuss the child support wording. REPRESENTATIVE VEZEY read page 6, lines 4 and 20, "if a trust contains a transfer restriction allowed under (a) of this section, the transfer restriction prevents a creditor existing when the trust is created, a person who subsequently becomes a creditor, or another person from satisfying a claim out of the beneficiary's interest in the trust,". He said that says that you can't attack the trust unless, "(4) at the time of the transfer, the settlor is in default by 30 or more days of making a payment due under a support judgment or order for a child of the settlor." Number 907 REPRESENTATIVE BILL HUDSON said if the bill becomes law, how would we elicit the interest in support. He asked if it would come from the banks. REPRESENTATIVE VEZEY responded that Alaska banks already have affiliations with national banking corporations, Alaskan trust companies and insurance companies. We are part of the national and international scene. Banking interests in New York have made input into the writing of the bill and are well aware of it. He said he has heard estimates that the day the bill becomes effective, there will be dozens of very large trusts established in Alaska. REPRESENTATIVE VEZEY said he believes the main answer to Representative Hudson's question is it's a small world, especially if you're talking about something as small as a specialist in trust management. Number 1147 REPRESENTATIVE COWDERY asked if the ripple affect to our state's economy will be very desirable. REPRESENTATIVE VEZEY said he thinks it will be a very desirable economic affect. The downside risk is minimal. The upside potential is tremendous. Number 1211 REPRESENTATIVE JOE RYAN discussed a study done in 1986, weighing the possibilities of Anchorage becoming an international financial center. It wasn't exactly favorable, but the basic infrastructures were there if someone wanted to do it. He continued to discuss the study. Number 1147 REPRESENTATIVE COWDERY made a motion to adopt committee substitute for HB 101, Version B, Bannister, dated February 10, 1997. CHAIRMAN ROKEBERG asked if there were any objections. Hearing none, CSHB 101, Version B, was adopted. REPRESENTATIVE VEZEY explained when the legislature dealt with the tort reform legislation last year, he became aware that the Alaska statute of repose law is very very vague. Concurrent to that, there was a federal bankruptcy court decision last March or April that said our law is vague and, therefore, that the statute of repose doesn't start counting until you get a court judgement. Representative Vezey explained that the statute of repose, for the purpose of a trust (indisc.) under this law is four years. CHAIRMAN ROKEBERG said he believes it is on page 6, starting on line 30. REPRESENTATIVE VEZEY referred to the wording and said it is the finding of the statute of repose for creditors that existed at the time it was created. It was four years or, if for some reason, the transfer into the trust cannot reasonably be discovered, it was done in a manner to hide that it happened, one year after it can be discovered which could be any number of years down the road if it was hidden. He said a creditor who becomes a creditor after the trust is created has four years to bring an action. Since Alaska's law on the statute of repose for fraudulent transfers is very vague, the bill defines fraudulent transfer for the purpose of this trust only. REPRESENTATIVE BRICE questioned whether it is four years or one year. REPRESENTATIVE VEZEY said, "For four years, you know, if you have reason to know that it took place and if it was hidden from you, then you have a year after your discovery." Number 1347 VINCENT USERA, Assistant Attorney General, Commercial Section Civil Division, Department of Law, came before the committee to testify on HB 101. He said last year this trust was proposed and the Department of Law was asked to review it. He stated that this particular trust does not really come under the aegis of any agency of state government since it's, for all intents and purposes, a transaction between individuals. State government really doesn't have any concerns except in the area of child support and possibly spousal support. The bill last year was actually silent on the issue and perhaps vague enough that a person could read into it that the trust could be used as a vehicle for avoiding child support obligations. He referred to the current bill and said there is perhaps a flaw in it. Mr. Usera said the provisions (1), (2), (3) and (4) on page 6, appears to allow the trust to be invaded if one of the four events occur. He noted (4) doesn't seem to belong in the bill. Mr. Usera said they don't believe that the intent would be have to the trust voided simply because settlor was 30 days behind in child support payments. He suggested that the committee consider taking that out and include another section that would allow the trust to be invaded at any time that the settlor is in default on a child support or a spousal support obligation. The current language simply deals with the case of a child support obligation established prior to the trust being created and that the settlor be in default by 30 days or more prior to the trust being created. A situation could occur where a child is born after the creation of the trust and could be cut off entirely. Additionally, if one were intending to use it as a means of avoiding child support obligations, simply being up to date on the day the trust is created would avoid the operation of that particular section since they would not be 30 days in arrears. MR. USERA said it only provides for a child of the settlor and there are obligations, not too frequently, that arise for stepchildren and others as well. There are two other legal issues and one is the burden of proof for the proposition that the trust should be invaded. He informed the committee the department has been provided with a letter from an attorney in New York, addressed to Lieutenant Governor Ulmer, stating that the burden of proof issue had been fixed. He read from the letter, "As the bill appears to be worded, the burden of proof as to whether it was intended to avoid or defraud a creditor is on the person attempting to void the trust or invade the trust." Mr. Usera said "If there is no concern on the part of the bill's proponents about the burden of proof, that is if the letter from the attorney in New York expresses the concerns of the proponents and the intent that the burden of proof not be shifted to the individual, then perhaps some language might considered there to make a finding that the operation of the trust, in actuality, does hinder delay or defraud a creditor, it might be primafacie evidence of the intent as opposed to having prove intent." MR. USERA indicated he would make the letter available to the committee members. He noted the letter reviews the bill point by point and it also addresses some the concerns that were raised last year. Number 1645 MR. USERA explained the only other two issues are policy issues. He said one policy implication is the bill's primary intent is to allow formation of trusts to shield assets from creditors, including the Internal Revenue Service (IRS). He said the department would not express an opinion, but that is the intent of the trust. MR. USERA said a second concern is the repeal of the rule against perpetuities. That has both negative and positive implications. He noted the they will not express an opinion as to whether the outcome is good or bad. The positive aspect of doing away with the rule means that an individual can control and preserve the handling of assets within his or her trust any number of generations down the road. It would not be subject to being dissipated by two or three generations in the future. On the opposite side of that, there are implications, especially in the area of real property, where the operation of the trust would actually never end. The possibility that heirs of property could multiply (indisc.), at some point years down the road there could be so many heirs that this property would actually have very little value. There is an underlying philosophy in the law that property ought to be freely alienable and doing away with the rule against perpetuities was meant to enhance that. Doing away with the rule would mean that there are possibilities of certain portions of assets never being alienable, especially in the area of real property it could become a problem. He noted that is simply for the committee's consideration. It is not to express an opinion as to the positive or negative affects or values of either. Number 1760 CHAIRMAN ROKEBERG said the abolishment of the rule against perpetuities would make a lot of law students very happy. He said Mr. Usera indicated that there may be a policy concern about that and its impact on real property transactions. He said it is his understanding that if a trust took title to a property and there was no ending date on the trust, it's possible that there could never be alienability. He asked if the trust could sell the property. MR. USERA said the trust could sell the property. He noted what he expressed is not a certainty, but a possibility. One could structure the trust so that the land or property would be devised to the settlor's heirs and their heirs ad infinitum and perhaps including a provision that the property could be alienable with the consent of all the beneficiaries of the trust. He said there could be possibilities that would prevent certain assets from being ever alienable. It may not be good or bad, but is something to consider. Number 1860 REPRESENTATIVE HUDSON asked Mr. Usera if the Administration sees the potentials of the changes in the statutes in this regard as to the additional revenues that might be generated, not to the state but to other private parties. He asked if that has been discussed with the Administration. MR. USERA indicated not in his presence. He said he doesn't believe that the Administration would argue with the fact that it is probably going to mean the generation of considerable funds to them. He pointed out the concern last year was the fact that the trust could have used by people with a purpose of people avoiding child support obligations. Mr. Usera said, "Perhaps those fears were - perhaps they were exaggerated, I don't know, but certainly there was a lot of room for litigation there. It was vague enough that it would have provoked a fight if that's what somebody had intended to do. We think the proponents have indicated they want to correct that and I simply would point out that there is a minor flaw in the correction itself that if we want to correct it, lets do it all the way." Number 1926 REPRESENTATIVE RYAN said Mr. Usera has asked that the invasion of the trust be allowed past the time the settlor settles the trust. He said, "Once a settlor creates the corpus of the trust and the entity of a trust is created with that corpus, the settlor no longer owns..." MR. USERA responded that legally, that is correct. Number 1965 REPRESENTATIVE RYAN said what Mr. Usera has recommended is that sometime in the future if he or she encounters a child support obligation, they're allowed to go back and get money from something he or she doesn't own. He indicated he is having difficulty understanding this. MR. USERA said he understands Representative Ryan's point. He said the point the department is trying to make is that this trust should not be usable by somebody for the purpose of avoiding a child support obligation. If one has the assets that it is anticipated one would have to take advantage of this particular vehicle, there probably will not be intentions of avoiding child support. However, any statute that is not strongly worded and perhaps has vague aspects to it can be used perhaps by those intending to do just that - establish a trust to avoid a child support obligation. People do it all the time in other ways such as husbands selling a house to a brother for $1 in order to try and keep it from being a part of marital assets. People try these types of things all the time. Mr. Usera said they're usually subject to being upset by the courts. Number 2027 REPRESENTATIVE RYAN said, "I'm trying to get it in my mind how -- if I give something away, how my subsequent actions down the line, someone could come back and get that which I've given away which I no longer own. If we were allowed to do this it would kind of beget the whole purpose of the trust because either I want something or I don't. If I've given it away or sold it, I no longer have possession of it. How could someone put a claim on it?" MR. USERA said if a person is a beneficiary of the trust, then the fact that he is no longer the legal owner is, to some degree, a fiction. He said what he is suggesting is that we avoid the possibility of this trust vehicle being used for an obviously improper purpose and that is to avoid a child support obligation. It wouldn't be equitable for an individual to set up a trust, be a beneficiary of the trust, reaping the benefits and yet avoiding his or her child support obligation. Number 2138 DICK THWAITES, Attorney, Richard S. Thwaites Law Offices, testified via teleconference from Anchorage. He stated he worked on the bill and Representative Vezey has expressed the basic thrust of it. He referred to the more recent testimony from Mr. Usera and said the rule against perpetuities that has been discussed is an older rule of the United States in that we have followed the uniform rule against perpetuities and have adopted an earlier form of that. More recently, we have seen that South Dakota, Wisconsin, Idaho and Delaware have repealed, in its entirety, the rule against perpetuities. There is also a bill pending in Texas to do the same. South Dakota, as a result of that repeal, since they did not have an income tax, Citibank has opened a branch and over a billion dollars in assets have come in just because of the rule against perpetuities repeal. He said they asked the uniform commissioners what their feeling was and their preference was that we not repeal the Uniform Act, but instead we provide an exception to it. Mr. Thwaites said Richard Welman and Larry Wagner provided some language which provides an exception to the rule against perpetuities for these trust in particular. He noted it is included in the bill. MR. THWAITES referred to the idea of a substitution of the language to specifically permit child support and said the actual bill is structured in a way to fit within the revenue code provisions. He said he believes Mr. Usera actually misspoke when he said that this trust puts it out of the reach of the IRS when, in fact, one of the things we think we are doing is bringing these trusts under the purview of the IRS as it will be subject to the Alaska Court System and the Federal Court System as well. Mr. Thwaites said we are using the IRS code, as drafted, and the various regulations to the utmost with regard to these provisions. The provision allowing for the invasion of child support would avoid the necessity of the completed gift transaction, thus making it an irrevocable transfer. Mr. Thwaites explained that if language was added after the fact, it is clear from the IRS opinions and letter rulings that have come down that we couldn't have a completed gift. If we did not have a completed gift, it would be "invadable" by anyone and everyone. The problem is by providing a minimum crack in the shield, it opens the door for everyone. He noted they tried to adopt language to make it clear that it was not intended for that. MR. THWAITES said, "Having to be current on child support up front is the one thing we thought would be effective at least to show that intent. Going so far as to making an absolute exception to allow the invasion would then bring us back into not having done a completed gift and then everything is for not." MR. THWAITES referred to the current irrevocable trusts and said the court will have jurisdiction over those. He said he spoke to several practitioners that suggested even today if you have a irrevocable trust and there is a problem with that irrevocable trust, the Alaska court has jurisdiction. The court can make an amendment and has done so many times. Mr. Thwaites said the focus of this legislation is to create an Alaska trust subject to the Alaska rules. The Alaska court would then have the authority to make any such changes that might be required down the road, especially if you had a piece of property with too many (indisc.) and some other problems that might arise because of trustee acquiring the property that became (indisc.) and he wasn't able to sell it. Certainly, the court could step in and remedy that issue. MR. THWAITES said he doesn't think that the bill is aimed at child support individuals. He stated he doesn't think the trust will be focused on child support types of issues. For example, what very often happens is someone will take the property and move it into a trust and move to California or another jurisdiction which requires our Child Support Enforcement Division (CSED) employees to chase them down in other jurisdictions. By putting it into an Alaska trust, if you are an Alaskan father or mother it means that it is there and available and if there has been a fraudulent transfer and if you put this into trust knowing full well that you have a child support, then it is invadable under the Fraudulent Transfers Act. That ought to be the mechanism and if that mechanism is left in place, it doesn't create the problem that we have with the IRS and the completed gifts because that is outside of the settlor's jurisdiction. It would be the court that does it. Number 2399 CHAIRMAN ROKEBERG asked Mr. Thwaites if he has reviewed the language in the committee substitute. MR. THWAITES indicated he hasn't received the committee substitute, but noted he thinks he is familiar with the changes. Number 2420 REPRESENTATIVE RYAN asked Mr. Thwaites if he is familiar with the period of time to discover an action to invade a trust in the Cook Islands. MR. THWAITES said he believes it is very short, about six months. Number 2442 RICH HOMPESCH, Attorney, Winfree and Hompesch, testified via teleconference from Fairbanks. He referred to Representative Vezey mentioning that the international trust market may be as great as $1 billion. Mr. Hompesch said he thinks Representative Vezey vastly understated that market. He referred to a state conference for attorneys that he attended in Miami and said at that conference he was told that over the last 20 years as much as $200 billion to $300 billion has been transferred in foreign trusts. TAPE 97-9, SIDE B Number 001 MR. HOMPESCH said "...with the Cook Islands, there are jurisdictions in the Caribbean and a few in Europe, mainly (indisc.), and I think Alaska will be very effective in that competition. I was in the Cook Islands in January of 1996, and my specific reason was to evaluate the trust (indisc.) there and the laws there. I was very impressed with what I found. You know in a small island nation with a population less than the Fairbanks North Star Borough, I found three trust companies, possibly 25 solicitors, an equal number of charter accountants all working in the trust business on the Cook Island." MR. HOMPESCH referred to there being a question about the statute of limitations on the Cook Island law and said he believes it is one to two years, but in most instances it's one year. An important point is that in Alaska we think the statute begins upon discovery of a fraudulent conveyance. In the Cook Islands, there is no rule regarding discovery, the statute begins when the transfer is made or the trust is established. So the difference in the statute of limitations between Alaska and Cook Islands is very very significant. Number 070 MR. HOMPESCH explained there was a question of how the Alaska trust will be promoted. He stated that in his view it will spread like a wildfire. As soon as the act is passed and the information gets out on the Internet, attorneys all over the United States will become interested in this act and will be interested in setting up trusts in Alaska. The information will be passed along very quickly. MR. HOMPESCH stated he agrees with Thwaites on the proposed amendment by Mr. Usera regarding child support obligations. If the trust could be invaded for child support obligations that arose after the fact, the entire trust would be included in the settlor's estate. If the trust is included in the settlor's estate upon death, then there will be little incentive for Alaskans and people outside of Alaska to set up these trusts. Therefore, in his view, if the proposed bill is changed to provide for invasion after the fact for child support obligations that arise down the road, the bill will not be very well received across the country. It will probably be fairly useless for most planning. Number 136 MR. HOMPESCH said in response to Mr. Usera's comment he would like to point out that on page 6, lines 25 through 29, of Version A, subsection (d), as he reads it, if the person establishes an Alaska trust in defraud of his child support obligations, the trust could be levied. If the trust ever does pay any money back to the settlor, the settlor isn't going to get the money because the CSED can enforce court obligations against any distribution a settlor may receive down the road. Mr. Hompesch said he believes the biggest reason why deadbeat dads are not going to use this type of trust is because of the cost of setting up one of these trusts. He discussed how he assisted a client in setting up a trust in the Cook Islands. He contacted a law firm in Denver and they quoted a fee of $17,500 to set up a Cook Island trust. Mr. Hompesch explained he isn't sure what attorneys will charge in Alaska, but certainly $17,500 is not the type of fee that a deadbeat dad who is working in a cash economy and is changing jobs frequently is going to pay. The people who will be setting up these types of trusts will have significant networks and will be setting them up to benefit their families, spouses and children, not to defraud them. Mr. Hompesch urged the committee members to support the bill. Number 246 CHAIRMAN ROKEBERG referred to O. J. Simpson setting up a $5 million trust on the Isle of Man and said he would point out that those trusts and opportunities exist throughout the world. He noted Representative Vezey had said this would set up what is called a "strong trust." He questioned if that means that Alaska's trust law is currently a light trust. Number 286 REPRESENTATIVE VEZEY explained a "strong trust" is a term he invented. He said when you're going to argue with lawyers, you have to go off into a field they don't know anything about before you have a chance of winning, so you invent some of your own terms. Number 304 MR. HOMPESCH explained under current law, probably in every state with the exception of Missouri, if he sets up a trust and the beneficiaries are his spouse, children and himself, his creditors can attach the assets of that trust. Under current law, if he sets up the trust and he is a beneficiary, creditors can attach. He said he supposes that is what Representative Vezey means by "weak trust." If his creditors can attach the assets of the trust, then under state tax laws, the trust assets will be included in his estate. He pointed out a significant difference under the Alaska Trust Act is that the matriarch sets up one of these trusts for the benefit of her family, she can also be an eligible beneficiary of the trust, but under a unique provision in the bill, predators arising after the trust is established may not attach the trust assets. They could attach any distributions that the matriarch may receive, but the creditors arising after the fact could not invade the trust itself. He pointed out this law is not much different from existing law regarding IRA accounts. Mr. Hompesch explained under current law, Alaskans can establish an IRA account which in effect is a trust. He said he is the owner and is a beneficiary of his IRA account. Under Alaska law, the IRA is exempt from his creditors. Mr. Hompesch said he believes the Alaska Trust Act is an expansion of that principle or philosophy. That is what a strong trust is. Number 403 REPRESENTATIVE VEZEY said, "I think I might have misspoke or been misunderstood. I was taking about the markets for these trusts and I said billions of dollars per year, and then as an example I said the fees on a billion dollars would be somewhere in the $1 million to $5 million range per billion dollars." Number 433 ROBERT MANLEY, Attorney, Hughes, Thorsness, Powell, Huddleston and Bauman, testified via teleconference from Anchorage. He said he has been practicing in the area of trusts of the state law for about 20 years. He noted he is state chairman of the American College of Trusts and State Councils. He is also a fellow of the American College of Tax Councils and is a member of the Executive Committee of the Probate and Planning Section of the Bar. Mr. Manley explained he really likes the legislation as it is an opportunity to bring good clean industry and commerce to Alaska. The state of Delaware has been doing this for years. They've set up their corporate code in a fashion which is very corporation friendly. The same thing was done with their limited partnership law and to a certain extent their trust law. Mr. Manley said the state of Delaware has been bringing in this type of commercial activity for years. South Dakota has just recently gotten into the game. They've repealed the rule against perpetuities and have brought in substantial trust activity. Before that they repealed the law, (indisc.) the maximum interest rate. Accordingly, all the national credit card companies set up their credit processing systems in South Dakota in order to take advantage of the unlimited interest charges so they're governed strictly by market force. He said it has been a big industry boom there. MR. MANLEY said he believes the kind of trust business Alaska will attract will primarily benefit attorneys, bankers, certified public accountants and money managers. He said that kind of money will circulate and float around in the Alaskan economy, but noted the money really doesn't stay here anymore than it stays in Switzerland, Hong Kong or New York. You have build an infrastructure and have a group of people to manage and control that money. He said that is a benefit that will be brought to Alaska. In addition, we will have wealthy people that will have more contact with Alaska and they're going to see investment opportunities. MR. MANLEY referred to before they passed the trust (indisc.) at the Cook Islands, and said it was a small place somewhere out of New Zealand. They didn't have any hotels at all. They set up the trust business. Rich and famous people started going there. They wanted hotel accommodations and now there are luxury hotels. MR. MANLEY said another thing we can do is attract money from foreign countries. Often times there is a concern in foreign countries about political instability and taking advantage of these trusts to protect their assets. He said he believes the United States and Alaska's political structure is even more stable. We can bring in a lot of foreign money that's going to be invested in Alaska and America MR. MANLEY explained under HB 101, the trustee must be a bank with its principal offices in Alaska, an Alaska resident or a trust company organized under Alaska law. He said there is the opportunity to maintain a lot of Alaska contact. Some of the money management is going to be outside if we're talking about huge volumes, but it is a chance to grow the Alaska money management. Number 577 MR. MANLEY referred to comments regarding child support issues and said the way he analyzes it is any distributions that are made to the person who set up the trust, the CSED can get to that money. MR. MANLEY referred to the discussion about the rule against perpetuities and said the reason we have it is it was established by the kings in England during the feudal times so they could extract the "death tax" when the feudal properties were transferred from one person to another. Currently, the rule against perpetuities works primarily to confuse law students and to allow the federal government to impose what's known as a generation skipping transfer tax, a second level of estate tax. There is some concern about (indisc.) running in perpetuity, but right now a corporation can be established in perpetuity and can own land in perpetuity. MR. MANLEY referred to the O. J. Simpson trust on the Isle of Man and said it wouldn't work here because it was made quite clearly to defraud creditors. He already has a judgement against him. Number 671 MR. MANLEY explained the bill that was passed last session didn't include any specific provisions on the statute of repose. Subsequent to that, the (indisc.) bankruptcy court to Alaska came down with a decision of Hocoshie (ph.) vs. Brown. He explained with that case some people set up some trusts in (indisc.) in 1989 and 1990. In 1995, they were sued and had a large judgement imposed on them. The bankruptcy court said they were going to look at this as having a six year period in which to attack this trust from the date you get the judgement and not from the date the transfer was made. One problem is that if HB 101 is passed without the amendment, he will have to advise his clients that this doesn't work effectively to protect their children's or spouse's assets that would be put in the trust because whatever happens, if you end up with a catastrophe, if the FDIC sues you, if the EPA sues you and you have a massive judgement against you, they can come in six years after that day forward and take a shot at the money you put in this trust. MR. MANLY explained Missouri attempted to passed a similar trust act a couple of years ago, but they haven't seen the kind of benefits that we're anticipating because of glitches in the Missouri trust law that doesn't allow it to work effectively. He stated he is concerned that if the amendment isn't adopted, we're going to have the same problem here. Once you transfer money into the trust, if you don't have existing creditors that are being paid, after four years, it's an old and cold transaction and the creditors cannot come in and claim it was a fraudulent conveyance. He said he is concerned that without this kind of change, even if he set up a simple trust of $10,000 a year for his client's children to go to college, if that client even whispers to him, "And you know what, if I go broke at least I know my kids are going to go to college," that is indicia of intent to benefit your children over your creditor. Some bankruptcy will come in and try to unravel that transaction. He urged that the amendment be adopted. Number 820 CHAIRMAN ROKEBERG asked if the language in the committee substitute is satisfactory. MR. MANLEY explained it is a policy decision. If you want the CSED to at any time come in and invade the trust proceeds that are set aside for the benefit of another person, then that would be a valid policy decision. The problem is that you then prevent the transfer into the trust from being a completed gift which has negative (indisc.) in the state tax consequences and makes the bill not the kind of thing that's going to attract the industry and commerce we want. He said he believes it is a balancing decision, but the proposed modifications absolutely address the CSED's concerns because if any money comes out to the deadbeat dad, that is available right away. Number 909 KEVIN WALSH, Certified Public Accountant (CPA), Walsh, Teleher and Sharp, was next to testify via teleconference from Fairbanks. He said he has practiced in the CPA profession for 20 years. Mr. Walsh informed the committee members he has seen a lot of business transactions, has done a lot of estate planning over the years and has run up against the rule against perpetuities a number of times. Mr. Walsh said he has heard a number of historical explanations for it, but has yet to hear a rational explanation for it in terms of how public policy is served by having such a rule. He said, "The most common explanation I get is that `Well at least at some point in the future some heir will vest in this property and have a chance to dissipate the property.' I remain unclear as to how a chance for an heir to dissipate the property serves some public purpose, but perhaps an explanation is out there. I just haven't heard it. I would encourage you to seek such an explanation if you can." MR. WALSH explained present law allows, in many instances, many transactions to occur which may impair the ability of some future creditor to obtain an asset. He said he can make gifts to charity, transfer stock or other assets to his children, make transfers to corporations and retirement plans, buy an insurance policy, invest in a limited partnership in a limited liability company, create a (indisc.) estate, impair his property with a covenant or an easement. All of these things may add to the detriment of some future creditor, however, he doesn't think that the rule that is being proposed in the bill adds to the detriment of future creditors. Mr. Walsh explained that creditors who lend to individuals who are beneficiaries of these trusts have every right to inquire what assets they have, what assets they're going to have available and what assets they can pledge as collateral for their obligation. If they don't want to do business with these people who are beneficiaries of these trusts, they don't have to. MR. WALSH referred to future creditors who may not have anticipated doing business with (indisc.) creditors and said he doesn't see how a transfer to this trust is any different than any one of the forms of different transfers that were mentioned earlier which may result in their reduced ability to obtain an asset. MR. WALSH said states in other jurisdictions such Texas and Florida have unlimited homesteading (indisc.) the way we have on our retirement account exemptions. He said he could have $1 billion in a retirement account or buy a home in Florida and be totally exempt from a creditor with respect to that asset. This type of trust is another form of that asset and he doesn't see why it should be treated any differently. MR. WALSH referred to discussion regarding transfers in anticipation to defraud a creditor and said he believes that present law probably very adequately addresses those concerns and if not, they could be addressed separately from the bill. Number 1068 MR. WALSH said, "I have probably been asked by clients six times this year about the benefits of foreign trusts. Many people besides rich people that are being referred to in other conversations during other testimony about coming to Alaska, many people in Alaska are talking about moving their money to foreign trusts. We have a very litigious climate. We have almost an era of uncertainty that people have about their ability to provide for future generations. This money will leave the state. There are other legal means to move this money off-shore right now. I would like the state of Alaska not to miss the boat this time like we did with LLC and come back 15 years or 10 years after the fact and say, `Gee, maybe we'll do it this time around.' I'd appreciate it if you'd consider this bill very carefully and pledge your support to it. I certainly think it's a fair bill and protect the citizens of Alaska adequately. Thank you very much." Number 1140 LINDA HULBERT, Insurance Agent, testified from Fairbanks. She stated she isn't an attorney or an accountant so she can't testify to the technical aspects of the bill. She explained she helps people plan their finances, their estates and how they transfer assets to future generations. Ms. Hulbert said she believes there are a lot of Alaskans, not necessarily wealthy Alaskans, who may want to take advantage of the opportunity that this bill would create. She said she thinks there are many people with special assets like rural homes that they would like to go to future generations. Ms. Hulbert said she doesn't see large amounts of money, but she does see families who have worked really hard and want to transfer things to future generations. Ms. Hulbert said she thinks this bill will make this available not only for people with mega wealth, but also to individuals have been here for many generations and have planed for future generations. Number 1353 REPRESENTATIVE ROKEBERG read from page 3, line 7, Section 3(c) 1, "some or all of the trust assets are deposited in this state." He asked if there is any way, without destroying the intent of the bill, increase the percentage of some. For example, it appears that you could have $1 in the state of Alaska and the balance somewhere else. He said what you would be doing is shopping for the legal shield. Number 1296 MR. THWAITES said this issue was discussed extensively last year. In a lot of these situations it is the administrative (indisc.) of the trust that is important. The fee structure is going to be there and will be based on the total value of the trust and not just what is located in Alaska or somewhere else. Mr. Thwaites explained in modern financing, no matter what state you're in, most of the assets, in the way of corporate securities, etc., are always retained in New York physically. He said maybe 1 percent to 3 percent that would be invested into these trusts might spin-off to the local economy eventually. He said there is no way to guarantee that. He noted that on the Cook Islands it was a much greater percentage. Basically, they felt that was something they didn't want to quantify. CHAIRMAN ROKEBERG said, "Also for the record, Mr. Thwaites, even we had just $1 here the fact that the use of the law the state of Alaska would undoubtedly generate a substantial amount of legal business. Is that true?" MR. THWAITES responded, "I believe so. I believe that first of all an attorney in any other jurisdiction is not going to render an opinion with regard to state law with out running a file of his E and O coverage most likely." CHAIRMAN ROKEBERG said if there was any litigation revolving around the trust, it would have to be litigated in the courts of the state of Alaska which would be a tremendous economic value to the judicial system. Number 1425 REPRESENTATIVE VEZEY said he thinks it is important to remember that in managing money the new wealth that the industry creates for the managers are the fees that charged. It is irrespective of where the assets are located. He said he would anticipate that most of the wealth of the world is in some sort of intangible form like stocks and bonds issued by someone other than the state of Alaska. MR. THWAITES said a skyscraper in New York would be placed in a limited liability company and those certificates would be held by the trust here. All property management and the actual location of the property would still be in New York. That would create a substantial value for purposes of the trust in holding those certificates. CHAIRMAN ROKEBERG asked if they would be just pieces of paper in a safety deposit box. MR. THWAITES indicated that is correct. CHAIRMAN ROKEBERG asked what value that would be to the state of Alaska. MR. THWAITES explained the value of the asset is what the trust administration fees are going to be involved on. CHAIRMAN ROKEBERG said most investment bankers charge between 1 percent and 3 percent of the corpus of the principal of whatever portfolio they're managing. MR. THWAITES said that is correct, but noted something of this size it would be 1/10 of a percent. Number 1542 CHAIRMAN ROKEBERG said Mr. Hompesch made a statement that he had seen a legal fee of as much as $17,000. He asked what a typical ballpark legal fee would be to establish one of these trusts. Number 1562 MR. MANLEY responded that he honestly couldn't give a ballpark estimate as to what those fees would be. He referred to Chairman Rokeberg's question about the assets under management and said you can tinker with it however you feel is appropriate. He said, "You could say that a significant portion has to be under management in Alaska. You could say 5 percent entity, you could say 10 percent entity. What you're doing is, to a certain extent, you're negotiating with the marketplace. The big money folks usually have established relationships with national trust companies or national banks and they're uncomfortable perhaps with the money management included in my fee of NBA or First National, First Interstate or Key Bank. And I think that the market (indisc.) will probably work to bring this money up here and gradually establish a co-trustee relationship with our local bank. On the other hand, you can if you want to require a little more Alaska contact up front. We're to a certain extent shooting in the dark and I think that the group of people working on this thought that some or all was the most reasonable approach. But if you want some more immediate Alaska touching and feeling of the money in terms of the management as well as the administration, you can go for something higher." Number 1674 REPRESENTATIVE HUDSON asked what the implications would be to the attractiveness in Alaska if a state income tax or a statewide sales tax was implemented. MR. THWAITES said, "That would drastically impact it because there are other states that do not have the income tax. Delaware, when it has chosen to seek out these markets, has exempted particular industries from, you know the out of state people, from their local taxation. So what they have done there is if you are a Delaware resident, there is a tax on Delaware residents and they set up a Delaware trust or something then that is subject to the Delaware tax. But a New York resident coming into Delaware is not subject to the Delaware income tax and they have managed to effectively keep the market coming their way." Number 1750 REPRESENTATIVE VEZEY referred to page 3, Section 3, and said it talks about what has to happen for it be an Alaskan trust. There are four main items there and it is not one of those four items. All of the four items have to be satisfied. CHAIRMAN ROKEBERG referred to Mr. Manley being on the Executive Committee of the Probate and Planning Section of the Bar and said the it is his understanding that the Executive Committee has not taken a position on the bill because they would have to go to the Board of Governors of the Bar Association. MR. MANLEY indicated that is correct. He said the Bar Association doesn't permit its individual sections to take positions on bill absent their consent. Mr. Manley noted their experience over the last few years is that by the time the Board of Governors considers the matter, the legislative session is over. CHAIRMAN ROKEBERG said the lack of endorsement is not a negative. It is because of the procedural problems you have to go through to get that. MR. MANLEY said that is a fair assessment. Number 1874 CHAIRMAN ROKEBERG noted the letter to The Honorable Fran Ulmer, Lieutenant Governor, from Mr. Blattmachr in New York City, would be part of the committee file. He said the testimony of Mr. Usera indicated that if the proponents of the bill supported his positions on the burden of proof areas, then he thought that would be satisfactory. He asked Mr. Manley if he could speak to that. MR. MANLEY said he isn't entirely sure what point he was making in the letter to the Lieutenant Governor. On page 6 there is an indication that the bill doesn't change the burden of proof. He said that is correct. The burden of proof regarding a fraudulent conveyance is in no way touched. So we're not changing Alaska law at this point. CHAIRMAN ROKEBERG asked Mr. Usera for clarification. Number 1950 MR. USERA said, "I would like to clarify all of my remarks. One, I don't want it to be perceived that we're trying to attack the bill, we're not. One, there are no estate or taxation attorneys in the Department of Law. There is no need for any. As I think I mentioned, I preface my comments with there is no state agency that has any oversight responsibility for this bill. We were asked to take a look at it. We saw what we saw, what we perceived to be certain flaws. We wanted to raise them up. Some of them have been addressed and, quite honestly, with points that I have not considered. I just don't know tax law to the extent that Mr. Thwaites and Mr. Manley do and I appreciate their comments. I want it understood that we were not attacking this bill in any way. In the letter from Mr. Blattmachr there appears to be at least implicit in the statement to Lieutenant Governor Ulmer, it appears that he is trying to allay her concerns regarding the burden of proof, and yet in reading the bill it is very difficult to perceive anything that addresses the burden of proof. I was suggesting that if in fact Mr. Blattmachr and those who are in favor of the bill are not concerned about the burden of proof, perhaps there might be a consideration to word something a little bit more explicitly addressing that." MR. MANLEY responded, "It just occurs to me that if the bill doesn't say anything about changing the burden of proof, then in the ordinary course you wouldn't expect that it would change the burden of proof. You know to allay concerns it might be possible to explicitly say, `this doesn't change the burden of proof regarding fraudulent conveyances.' But I certainly think it's redundant unnecessary." Number 2108 CHAIRMAN ROKEBERG said there seems to be some concerns about the disinheriting a spouse or other family members using this trust to do what some people may think are immoral things. He asked Mr. Manley to comment. MR. MANLEY said, "Yes, in the recently passed Uniform Probate Code, the Alaska legislature has continued and expanded what is known as the spouse's elective share. Ever since at least 1976 and probably before it has been prohibited under Alaska law to completely disinherit your spouse. Under current law, the spouse is entitled to what's known as the elective share of one-third of the augmented estate. That includes not only the probate estate, but also a variety of non-probate transfers including life insurance, trusts, IRA, retirement plans and the like. And you put this entire pot together and the spouse - surviving spouse is entitled to at least one-third of those assets. The bill has been modified to specifically provide that these kinds of trusts are included within the augmented estate." CHAIRMAN ROKEBERG said the letter from Mr. Blattmachr indicates that there are some Alaska Native Claim Settlement Act (ANSCA) trusts. He asked Mr. Manley to comment. MR. MANLEY said, "At this point there is no connection. It was initially proposed that this bill would also include additional provisions to make ANSCA settlement trusts effective or more reasonably set up, but those weren't incorporated in the drafting process and I suspect those that are interested in that will propose that as a separate bill. Perhaps Mr. Thwaites is in a better position to answer that question." MR. THWAITES responded, "Yes, the settlement trust language, and in fact the letter to Lieutenant Governor Fran Ulmer there was language attached to -- there was a sample of the bill with language in the back that addressed the Section 39 ANSCA amendments for settlement trusts, and that has been pulled out. So that information is not relevant to this section because some of the corporations, and so forth, have wanted to propose that were going to do that perhaps separately. We don't know if we're short and have not heard exactly what the status is, but that will probably be addressed independently of this bill." Number 2349 CHAIRMAN ROKEBERG asked if there is a downside, particularly in the real property law or any other areas of estates where the repeal of the rule against perpetuities would be negative. He asked Mr. Thwaites if he is correct in that we aren't abolishing the rule against perpetuities in the state of Alaska, but only accepting it for this particular area. MR. THWAITES said that is correct. He explained, "Alaska has not the most current rule against perpetuities, but it has the next generation before that because they passed the Uniform Rule Against Perpetuities Act just a few years ago - the new uniform. They didn't adopt the newest one, but the one just before that. And when we talked to the Uniform Commissioners, they said rather than repeal it, because their job is make all acts uniform, rather than do that they would like us to just provide an exception within that Uniform Act for these types of trusts. So all we have in this bill is an exception for these trusts with regards to the rule against perpetuities. About four states, South Dakota, Wisconsin, Idaho and Delaware..." TAPE 97-10, SIDE A Number 001 CHAIRMAN ROKEBERG asked Mr. Hompesch if he would like to make comments. MR. HOMPESCH referred to the language that some or all of the trust assets must be deposited in this state and said his comment is that in order to develop the trust industry in Alaska, we need to start slowly because it's not very developed currently. We do not have the money managers and other professionals at this time that are necessary to manage hundreds of millions of dollars. He said he believes the "some or all" language is essential because it gets our foot in the international trust industry. He urged the committee not to require that a certain (indisc.) of the assets be deposited in the state of Alaska. He said he isn't sure that the people outside of Alaska who would be setting up these trusts, at this time would, have a lot of faith in sophistication of Alaska, but he believes this will change as the industry develops. Number 116 MR. HOMPESCH said if Alaska adopted an income tax law, so long as the trust itself was not taxed, it would have no effect. He said he agrees with Mr. Thwaites that one way would be to provide if the beneficiaries of the trust are Alaskan residents then they would pay income taxes on any distributions. If it was done in that way, the imposition of an income tax would not significantly affect the industry. Number 174 MR. HOMPESCH said he also agrees with Mr. Manley regarding the burden of proof. He said, "I think it would be superfluous to say that the burden of proof for these trusts do not change the burden of proof regarding fraudulent conveyance. I see nothing in the act that even suggests that the burden of proof has changed like that." MR. HOMPESCH referred to the rule against perpetuities and said he thinks it would be good policy, at some point, for Alaska repeal the rule wholeheartedly. He noted this bill does not do so. Mr. Hompesch pointed out that if you have a law that most attorneys can't explain, you have to ask whether or not it's a good law. Number 247 CHAIRMAN ROKEBERG closed the public hearing on HB 101. Number 260 REPRESENTATIVE HUDSON moved and asked unanimous consent to move CSHB 101, dated 2/10/97, Version B, out of committee with individual recommendations, with the zero fiscal notes. CHAIRMAN ROKEBERG said he wanted to point out, for the record, that he contacted the Division of Banking and Securities and they indicated they had no problems with the bill and provided a zero fiscal note. He asked if there was an objection to moving the bill. Hearing none, CSHB 101(L&C) was moved out of the House Labor and Commerce Committee. ADJOURNMENT CHAIRMAN ROKEBERG adjourned the House Labor and Commerce Committee meeting at 4:58 p.m.