SENATE JUDICIARY COMMITTEE March 22, 2000 1:44 p.m. MEMBERS PRESENT Senator Robin Taylor, Chairman Senator Rick Halford, Vice-Chairman Senator Dave Donley Senator Johnny Ellis MEMBERS ABSENT Senator John Torgerson COMMITTEE CALENDAR SENATE BILL NO. 277 "An Act relating to the elimination of the Alaska Administrative Journal and the establishment of the Alaska Online Public Notice System; amending public notice publication requirements for regulations; and providing for an effective date." -MOVED CSSB 277(JUD)am OUT OF COMMITTEE SENATE BILL NO. 286 "An Act relating to the duties and powers of the attorney general." -MOVED CSSB 286(JUD)am OUT OF COMMITTEE CS FOR SPONSOR SUBSTITUTE FOR HOUSE BILL NO. 275(JUD) "An Act relating to the Uniform Probate Code, including trusts and governing instruments; relating to trustees; relating to under productive trust property; and relating to conveyances of real property and interests in real property by or to trusts." -HEARD AND HELD CS FOR SENATE JOINT RESOLUTION NO. 14(JUD) Proposing amendments to the Constitution of the State of Alaska relating to the election and the duties of the attorney general. -MOVED CSSJR 14(JUD) OUT OF COMMITTEE PREVIOUS SENATE COMMITTEE ACTION SB 286 - See Judiciary Committee minutes dated 3/6/00. SB 277 - See Judiciary Committee minutes dated 3/1/00. HB 275 - No previous action to report. SJR 14 - See State Affairs minutes dated 3/18/99 and 4/7/99. Judiciary minutes dated 4-12-99, 2-9-00 and 3-6-00. WITNESS REGISTER Ms. Deborah Behr Department of Law PO Box 110300 Juneau, Alaska 99811-0300 POSITION STATEMENT: Testified on SB 277 Mr. John Lindback, Chief of Staff Office of the Lieutenant Governor PO Box 110015 Juneau, Alaska 99811-0015 POSITION STATEMENT: Testified on SB 277 Ms. Annette Kreitzer Staff to Senator Leman State Capitol Building Juneau, Alaska 99801 POSITION STATEMENT: Testified on SB 277 Mr. Mark Johnson Subcommittee on Privatization for the Department of Law 13631 Windward Circle Anchorage, Alaska 99516 POSITION STATEMENT: Testified on SB 286 Senator Jerry Ward State Capitol Building Juneau, Alaska 99801 POSITION STATEMENT: Sponsor of SJR 14 Ms. Wilda Rodman Staff to Representative Therriault State Capitol Building Juneau, Alaska 99801 POSITION STATEMENT: Testified on HB 275 Mr. Steve Greer Attorney PO Box 24-2903 Anchorage, Alaska 99524 POSITION STATEMENT: Supports HB 275 Ms. Tammy Troyer Staff to Representative Cissna State Capitol Building Juneau, Alaska 99801 POSITION STATEMENT: Testified on HB 275 Mr. David Sheftel Estate Planning and Business Attorney 550 West 7th Avenue, #705 Anchorage, Alaska 99501 POSITION STATEMENT: Testified on HB 275 ACTION NARRATIVE TAPE 00-15, SIDE A Number 001 CHAIRMAN ROBIN TAYLOR called the Judiciary Committee meeting to order at 1:44 p.m. Present were Senator Halford, Senator Donley and Chairman Taylor. The first order of business to come before the committee was SB 277. SB 277-ONLINE SYSTEM REPLACES AK ADMIN JOURNAL MS. DEBORAH BEHR, Assistant Attorney General for the Department of Law (DOL), commented that during the March 3 Judiciary Committee meeting a question was raised about the definition of "newspaper of general circulation." This wording appears twice in SB 277. The first time is on page 3, line 26 and it sets out the current statutory requirement that notice of an agency's intent to adopt a regulation must be "published in the newspaper of general circulation..." Then on page 5, line 7, the bill uses the same language in setting out the method for notifying the public of updated documents already incorporated by reference in a regulation. Both references use the phrase in the context of regulation adoption. The Administrative Procedures Act does not have a definition of "newspaper of general circulation." When Ms. Behr reviews regulations, she looks to see that they are published in a readily available newspaper of wide distribution throughout the state. Often times she will advise agencies to publish in more than one newspaper to make sure that the distribution reaches the area affected by the regulation. Number 297 SENATOR HALFORD said he was asked by another member of the legislature about a possible amendment requiring an abbreviated form to be used in publications. MS. BEHR commented that she has seen the amendments, and it is her understanding that the Lieutenant Governor's Office prefers to keep the bill focused on the online public notice. The language she has seen is old language from a prior bill that does not reflect on the online public notice. Number 379 MR. JOHN LINDBACK, Office of the Lieutenant Governor, noted that in 1997 the Governor proposed, as a bill, what is embodied in these amendments. Because the lieutenant governor's office is in charge of filing regulations, it was designated as the lead agency. The regulations were proposed because there were too many complaints being received from the public about regulations being adopted without a public hearing. Mr. Lindback said the newspaper industry hated the Governor's bill, and since that time an effort has been made trying to convince them that these amendments are not something they need to be afraid of, but they have not been convinced. Because the amendments are controversial, it is requested they not be attached to this bill. MS. BEHR noted that there is a technical problem on page two, line 3 of the amendment. This section requires the lieutenant governor to provide additional public notice, which adds an unnecessary cost. All of section 4 can be deleted with no effect on the bill. SENATOR HALFORD noted this will not remove the requirement to publish, it will only shorten the form. Number 816 MR. LINDBACK commented there is a long list of requirements in the statute of what is required for an ad. The amendments being discussed remove some of these requirements, opening the door for some agencies to take the notices out of the back of the newspaper and put them into display ad space. There is also a provision allowing a coordinated advertising approach allowing municipal advertising pages. The newspaper industry has been dead set against these provisions. SENATOR HALFORD moved to adopt amendment 1-LS1407\A.1, as modified. SENATOR ELLIS objected. The roll was taken on the motion. Voting yea: SENATOR DONLEY, SENATOR HALFORD and CHAIRMAN TAYLOR. Voting nay: SENATOR ELLIS, and so the amendment was adopted. SENATOR HALFORD noted the bill now has a positive fiscal note because it saves the state money. MS. BEHR commented that the last time DOL asked for a fiscal note, they were told it would be awash because display ads are a little more expensive. MR. LINDBACK said the idea behind the amendment is to get a more prominent ad for the money, not that it will cost any less. MS. ANNETTE KREITZER, staff to Senator Leman, thanked the committee for entertaining the amendment. The amendment does give the lieutenant governor some discretion in terms of what state agencies are required to do with legal notices. The Department of Transportation (DOT) has found a way to save money--about $100,000, by using the smaller and shorter format, while still informing the public. Number 1068 MR. LINDBACK stated that DOT has in deed saved money, but it is not because of these provisions. The provisions being discussed were not required at the time--DOT just wrote better ads. Display ad space is more expensive and that is why the fiscal note was considered to be awash. There is a possibility that advertising money can be saved by using the coordinated approach that is contemplated in one section of the amendments. Number 1130 SENATOR DONLEY moved SB 277am from committee with individual recommendations. There being no objection, the motion carried. SB 286-DUTIES AND POWERS OF ATTORNEY GENERAL CHAIRMAN TAYLOR moved to delete on page 1, line 5 the words "state, including the," because an inherent conflict is generated. This restores the original language of the bill requiring the attorney general to be subject to the power of the legislature in making appropriations and settling civil action cases. There being no objection, amendment 1 carried. Number 1305 SENATOR DONLEY recommended a new provision saying the attorney general shall defend the constitution of Alaska. SENATOR DONLEY moved to insert in Section 1(b), (1) defend the constitution of the state of Alaska, and to renumber the rest of the section accordingly. There being no objection, amendment 2 carried. MR. MARK JOHNSON, Subcommittee on Privatization for the Department of Law (DOL), noted the legislature has the ability to define the scope and nature of the responsibilities of the AG. CHAIRMAN TAYLOR asked Mr. Johnson to further discuss the remaining provisions on page 2 of SB 286--both the new language and the deleted language. MR. JOHNSON commented that on page 2, lines 8 and 9 there is a significant deletion relating to common law powers. This language was deleted because, if a limited constitutional government is desired, the powers granted should not reflect a blank check, which is what the present language reflected. The addition of subsection (c) will set into statutory law that which was believed to be the case all along. Number 1426 CHAIRMAN TAYLOR moved to amend line 15 by adding the words "enact laws." The following is how Section 1(c) will read: (c) The attorney general may, subject to the power of the legislature to enact laws, make appropriations,.... There being no objection, amendment 3 carried. Number 1597 SENATOR ELLIS commented he thinks it is a mistake to eliminate the common law powers of the AG. He wonders what specific abuse of power has cause the Chairman to want to limit the office like this in the future. There are areas of the law that change rapidly, and he does not understand why the committee should want to minimize the powers of the office rather than leave them as they are--being fairly expansive in terms of purview and power. Legislatures are slow to keep up with changing areas of the law and it is good to know there is a chief legal officer who will keep up with these things and exercise power in the public interest. Number 1658 CHAIRMAN TAYLOR commented that he and Senator Ellis would like an analogy of specific abuses that went beyond the AG's power, and where that abuse limited the private sector or stifled business in some way. MR. JOHNSON noted the Exxon Valdez settlement is an example of where things were stretched about as far as they could go. SENATOR DONLEY said Cleary and Molly Hootch are also examples of the AG's abuse of power. CHAIRMAN TAYLOR asked Mr. Johnson to get back to the committee with a further analysis on this subject. SENATOR DONLEY moved SB 286 as amended from committee with individual recommendations. SENATOR ELLIS objected. The roll was taken on the motion. Voting yea: SENATOR HALFORD, SENATOR DONLEY and CHAIRMAN TAYLOR. Voting nay: SENATOR ELLIS, and so the motion carried. SJR 14-ELECTION OF ATTORNEY GENERAL SENATOR WARD, sponsor of SJR 14, commented he likes the 1-LS0588\H, (Kurtz) draft of SJR 14 more than any version being offered. SENATOR HALFORD moved CSSJR 14(JUD) from committee with individual recommendations. SENATOR ELLIS objected. The roll was taken on the motion. Voting yea: SENATOR DONLEY, SENATOR HALFORD and CHAIRMAN TAYLOR. Voting nay: SENATOR ELLIS, and so the motion carried. Number 1877 HB 275-UNIFORM PROBATE CODE/TRUSTS/PROPERTY MS. WILDA RODMAN, staff to Representative Therriault, stated that HB 275 is intended to enhance the estate planning climate in the state of Alaska. The bill augments and clarifies the Uniform Probate Code that was adopted in 1996. The changes in HB 275 were drafted by estate planning attorneys and have been through extensive review on a state and national level. The changes are, for the most part, based on other state statutes and allow Alaska residents to take advantage of federal tax provisions that have been passed since the enactment of the uniform probate law. MS. RODMAN gave the following sectional analysis of HB 275. Section 1 pertains to "nonademption of specific devises." This section deals with the specific instance of nonademption when the person creating the will (decedent) has sold the gift (specific devise) prior to the decedent's death and is still owed money for the property. The question of who ultimately receives the proceeds should not depend on whether the decedent received full or partial payment before death. Presently if the property were sold and the decedent did not receive full payment before death, the payment received after death and any promissory note will go to the specific devisee--this will not happen under HB 275. Instead, the payment and any promissory note will be treated in the same manner as all other property that the decedent owned, and will be distributed equally among the beneficiaries. Section 2 makes the rules of construction under 13.12.606 applicable to trusts as well as wills. The second part of section 2, section 13.12.720, allows Alaska residents eligibility for a new IRS deduction for a family-owned business. In addition to the present $600,000 tax shelter, people will be eligible for an additional $675,000 tax shelter for their new family-owned business. This is to prevent people from having to sell their business in order to pay the taxes on their inheritance. This lowers and raises the ceiling between the tax shelter and family owned business deduction. Section 3 will change the amount of interest that is paid on a pecuniary devise. By state law if a person wills money, that pecuniary bequest has to accrue interest, which comes from the residuary estate. Presently, the money accrues interest at the legal rate of 10.5%. HB 275 changes the interest rate from 10.5% to a discount borrowing rate (variable rate) taken from AS 45.45.010(b). The provisions in section 4 do not apply to a marital pecuniary devise, this section enables people to qualify for an IRS deduction. Section 5 gives the personal representative more discretion over how to distribute the residuary estate assets to devisees, as long as it is in the best interests of the distributees. HB 275 has added AS 13.16.560(a)4 which says a person can make non pro-rata distributions of assets. This means if there are two devisees, and a decedent has a life insurance policy and an IRA account both policies can be split down the middle and half of each account can be given to each devisee, this is so neither devisee will have to bear the full tax consequence. Section 6 relates to restrictions on exercising certain trustee powers. This section says that for tax purposes a person who is both the trustee and beneficiary can only distribute those assets to himself for his reasonable comfort. There is a difference between "reasonable comfort" and "comfort and happiness." Support in "reasonable comfort" is not taxable but support for "comfort, welfare or happiness" is taxable. The bill says that unless specifically stated in the trust document, the spouse will only have the right to distribute principal in a manner limited to an ascertainable standard. Tape 00-16, Side B Section 7 relates to new IRS allowances that allow a person to divide a single trust into two or more separate trusts as long as each trust remain substantially identical in terms of the existing trust, the only difference is that they be administered separately. Trusts written before this new IRS ruling may not have this provision, and section 7 allows for the division of a trust without having to go to court for approval. Section 8 is the application of special distribution provisions. This section takes the tried and true provisions that apply to the distribution of wills and applies them to the administration of a trust. Section 9 relates back to Sections 6 and 7, Title 13, Chapter 36. The only other place that "party in interest" appears in Chapter 36 is in sections 7 and 9. These sections are the restrictions on the trustees power to distribute assets (ascertainable standards), and the division of trust. This section says if a person knows of the tax benefits and they still want to give Uncle Sam more money, they can opt out. Section 9 defines who has to sign off on the trust in order to opt out of these two provisions. Number 2310 SENATOR ELLIS asked about mandatory distribution in section 9. MS. RODMAN answered that this language causes there to be an increase in the number of people who have to sign. This provision is only to opt out--not who can go to court or who is a party of interest. MS. RODMAN explained that section 10 is for tax purposes. The beneficiary of the trust can require the trust to produce income, this relates to the qualification for the marital deduction. This section provides that in those trusts where the spouse is entitled to all the income earned by a trust paid no less frequently than annually, and a marital deduction is claimed for the trust, the spouse has the power to require the trustee to make the trust assets produce income. This simple provision is a required statement in all trusts intending to qualify for the marital deduction. This section provides the required language for those trusts lacking this provision. MS. RODMAN noted that section 11 ends the confusion over the ability to transfer real property to or from a trust in the name of the trust. This section also helps title companies prevent future legal problems. MS. RODMAN indicated the amendment she distributed to the committee has been reviewed by the Department of Law, resulting in one change being made to the conveyance section. Number 2081 CHAIRMAN TAYLOR moved to amend page 8, line 24, deleting the word "mandatory," and on page 8, line 26, also deleting the word "mandatory." The new language will read: (ii) each beneficiary entitled to receive a distribution of income or principal from a trust or, if a beneficiary entitled to receive a distribution of income or principal from a trust is not 19 years of age or is incapacitated, the beneficiary's legal representative under applicable law or the beneficiary's agent under a durable power of attorney; and MR. STEVE GREER commented there is no problem in going along with the amendment because Section 9 is a provision that no one will ever use. The entire bill is a safety net to protect against sloppy drafting, preventing a bad tax result. Section 9 is in the bill because Alaska has taken its laws from other states that have such a provision. CHAIRMAN TAYLOR said as long as the wording is "mandatory" there is a limited number of people involved, but once that wording is removed it will never be known who the signatures have to be collected from. MR. GREER noted the intent of the amendment was to protect people, but people are not protected because it is impossible to elect out of the provisions. He does not think that the people who drafted the amendment really understood what it was about. MS. TAMMY TROYER, staff to Representative Cissna, stated that Representative Cissna's concern is that beneficiaries who are not "mandatory distribution" and are at the discretion of the trustee, should not be allowed to be present when electing to agree to the provision to opt out. CHAIRMAN TAYLOR asked how people can be hurt by not being present when a group of people opt out of the trust enabling them to receive their distribution--this would be the only reason to opt out of the trust. MS. TROYER responded it is to opt out of the provisions outlined in sections 6 and 7 and not to opt out of the trust. MR. GREER responded that Representative Cissna did not know what she was proposing with the amendment. There is pending federal legislation, the Uniform Trust Act, which will help fill the void in states that do not already have detailed laws indicating how trusts should operate--section 9 goes beyond the Uniform Trust Act. This section was included only because it was felt that the other states Alaska looked at for direction included it for constitutional reasons. But if the category of people who have to opt out is opened up, it will be impossible for the trust to elect out of this provision. MS. TROYER interjected that Representative Cissna is aware of this, and the intent is not to include a distant relative who could potentially be a beneficiary. What Representative Cissna is trying to do is open the door for beneficiaries who are now at the discretion of the trustee. The statute, on line 24, says a person has to be entitled to a mandatory distribution, and often times there are no mandatory distributions--distributions are at the discretion of the trustee. Representative Cissna would like to make sure these beneficiaries are included. Number 1705 SENATOR DONLEY asked if notification is the intent of "party of interest." MS. TROYER answered to "elect to agree" to the provisions outlined in sections 6 and 7. MR. GREER responded that is not correct. It is to define those people who can elect to not be subject to provisions in sections 6 and 7. MS. TROYER agreed, and said it allows the beneficiaries to be part of the discussion of whether or not to opt out of the provisions. SENATOR DONLEY clarified it has nothing to do with notice. MS. TROYER agreed. MR. GREER explained that the whole bill, including sections 6 and 7, is safety net legislation that other states already provide. It is meant to protect people who have their trusts drawn by lawyers who do not keep current with state law and for people who have had their trust prepared by competent estate planning attorneys but who have not keep the trust updated. This bill is meant to take care of commonly occurring traps that allow the federal government to get more money than was originally intended. There is nothing controversial about this bill. The importance of section 9 is very low in comparison to the rest of the bill and it should have nothing to do with the bill passing or not. Section 9 is just about who can elect out of the safety net provisions. Number 1537 SENATOR HALFORD commented that he is not comfortable with moving the bill out of committee until he has more time to look at it. MR. SHEFTEL commented that HB 275 is a safety net piece of legislation that is designed to remedy obsolete trusts and poor tax planning. Most of the provisions in the bill have been taken from legislation that has been recommended by national experts. HB 275 is designed to bring Alaska law relating to estate planning up to contemporary standards with that of other states. SENATOR ELLIS asked to hold the amendment and the bill for further thought. There being no further business to come before the committee, CHAIRMAN TAYLOR adjourned the meeting at 2:56 p.m.