In 1998, Alaska enacted an optional community property system for its residents, and for non-residents who desire to use such a system. Couples may elect to have some or all of their property characterized as community property. Residents accomplish this election by entering into a community property agreement or executing a community property trust. Nonresidents can elect to have some or all of their property characterized as Alaska community property by executing a community property trust, which has at least one trustee who is an Alaska individual or an Alaska bank or trust company.

The Alaska optional community property act provides the non-tax benefits of sharing and equality of ownership. In addition, several significant tax benefits are provided. At the death of the first spouse to die, both halves of the community property receive an adjustment in basis. As a result, if the surviving spouse sells community property, capital gain is minimized. Second, after the death of the first spouse, the ability to use non-prorata funding of the bypass and marital share often provides advantageous income tax and property ownership benefits.

Alaska's community property system was patterned after the Uniform Marital Property Act (UMPA), originally drafted in 1983. This uniform act provides a good overall structure, but has some ambiguities, and there have been significant tax developments since it was originally drafted. Amendments contained in House Bill 181, enacted by the Alaska Legislature this year, are designed to solve some of the issues and supplement gaps presented by the UMPA draft.

1. Obligations of a Spouse. The first amendment changes the portion of the community property which is subject to the claims of a creditor of only one of the spouses. If the spouses held their property jointly, but not as community property, then a creditor of only one spouse could only reach the assets of that spouse. Under the UMPA draft, an obligation incurred by a spouse during marriage is presumed to be incurred “in the interest of the marriage or the family.” All of the community property is liable for such an obligation. This enlargement of the property exposed to the liability of one spouse has caused some couples to hesitate to use this community property system.

Wisconsin, the only other state to adopt the UMPA version of community property, amended its law to restrict tort creditors to only the share of the community owned by the spouse who committed the tort. A variety of approaches are taken by the other community property states in regard to a liability of only one spouse. In House Bill 181, the Alaska Legislature has amended the law to provide that the creditor of only one spouse may only reach the separate property of that spouse and that debtor spouse's one-half of the community property.

2. Transfers of Property to a Community Property Trust by Beneficiary Designation. This new provision allows property such as life insurance and IRAs to be transferred to a community property trust (and thereby characterized as community property) by designating the trust as the beneficiary of such property. This amendment will assist couples using joint revocable trusts, and nonresidents using Alaska community property trusts, in characterizing such assets as community property.

3. Life Insurance. This amendment focuses upon the use of community property funds for the payment of premiums on life insurance policies. AS 34.77.120(b)(5) is amended to create a presumption that the use of community property funds to purchase a life insurance policy for the benefit of certain family members, or a trust for those members, is presumed to be made with the consent of the other spouse. The existing statute creates such a presumption if the beneficiary is the parent or child of either spouse. The amendment expands this category to ancestors or descendants of either spouse, or a trust for the benefit of such persons.

A new subsection (7) is added to AS 34.77.120(B). The purpose of this provision is to protect the spouses from undesired and unexpected federal estate tax consequences. Assume that one of the spouses forms an irrevocable life insurance trust and contributes funds to the trust so that the trustee may purchase a life insurance policy on such spouse's life. Typically such a trust will be for the benefit of the surviving spouse, and then the family's children. If the funds contributed to the trust came from a community property source, the IRS may argue that if the surviving spouse is a beneficiary of the trust, then pursuant to Internal Revenue Code Section 2036 the trust will be partially included in the surviving spouse's gross estate for federal estate tax purposes. To avoid this undesirable consequence, the amendment creates a presumption that any funds contributed to such a trust were first converted to the separate property of the insured spouse. The testimony of the spouse whose life is not insured is sufficient to rebut either of the presumptions described above.

4. Division of Community Property at Death. This amendment clarifies that on the death of a spouse, one-half of the community property reflects the share of the decedent and the other one-half reflects the share of the surviving spouse. Further, the Alaska Legislature has adopted the aggregate form of ownership of community property. Upon the death of a spouse, the deceased spouse's personal representative and the trustee of a community property trust each have the power to distribute property in divided or undivided interests and to adjust resulting differences in valuation. A distribution of community property in kind may be made on the basis of a non-prorata division of the aggregate value of the community property, on the basis of a pro rata division of each individual item or asset of community property, or by using both methods. This amendment was patterned after recent similar amendments adopted by California. The goal of this amendment is to allow for flexibility in the division of assets, after the death of the first spouse. For example, a couple's assets may consist of a large qualified plan or IRA account plus an approximately equal amount of other assets. Assume that all of the assets are community property and the spouse who acquired the retirement assets dies first. A non-prorata division of the community property on an aggregate basis would allow the retirement assets to be transferred to the surviving spouse, as his or her one-half of the community property, and the other assets to be used to fund the bypass trust created by the deceased spouse's will. Such a non-prorata division would maximize both income tax and estate tax planning benefits.

House Bill 181 amends Alaska statutes 34.77.070, .100, .120, and adds a new section .155. The bill takes effect on the date of its passage, which was May 8, 2001. House Bill 181 is presently awaiting transmittal to the governor of the State of Alaska.