In the past decade, the Alaska legislature has begun to look for ways to decrease the state's economic dependence on natural resources. In 1997, the legislature responded positively to the financial community's proposals that Alaska become a trust administration center. The result was the Alaska Trust Act, which authorized the formation of self-settled spendthrift discretionary trusts and abolished the rule against perpetuities. In 1998, the legislature continued this effort by enacting a variety of trust administration provisions, and the Alaska Community Property Act.¹

Prior to 1998, nine states had community property systems in effect.² All of these existing community property states have mandatory community property systems in which the default property system is community property. A married couple in such a state, however, may opt out of the community property system--with respect to some or all of their property--by executing a community property agreement.

In 1998, Alaska became the tenth community property state and, in contrast, adopted an optional community property system. That is, the default property system is separate property, but a couple may opt into a community property system. Previously, both Oklahoma and Oregon adopted optional community property systems, and then repealed them.³ Quebec's community property system has been optional since 1970.⁴ The initial discussions of the approach for the Uniform Marital Property Act (UMPA) considered an opt-in system, but the drafters ultimately changed their approach to a mandatory community property system.⁵ Residents and nonresidents of Alaska may wish to elect the Alaska community property system for some or all of their property.

The Tax Motive: Full Stepped-up Basis

After the death of the first spouse to die, residents of community property states have a distinct income tax advantage over residents of separate property states. Assume that a couple's property is owned approximately equally between them. In a separate property state, at the death of the first spouse, the basis of the decedent's assets is adjusted to the fair market value (FMV) of such assets at death.⁶ In a community property state, the decedent's one-half share of the community property is adjusted pursuant to Code Section 1014(b)(1), as described above, and then Section 1014(b)(6) provides a similar adjustment for ". . .property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any state. . .if at least one-half of the whole of the community interest in such property was includable in determining the value of the decedent's gross estate. . ." Therefore, at the death of the first spouse, the basis of all community property, regardless of whether held by the decedent or the decedent's spouse, is adjusted.

This lack of parity can produce significant income tax differences if the surviving spouse sells the assets during the period between the first spouse's death and the surviving spouse's death. Furthermore, the sale of assets during this time of the surviving spouse's life is likely. The family business may need to be sold due to the decedent's lack of participation, or pursuant to an existing buy-sell agreement. Real property may be considered burdensome to manage. Market conditions may dictate the sale of assets before an expected downturn.

Alaska's opt-in community property system is designed to remedy this inequity between separate property and community property states. The goal of the Alaska legislature is to allow taxpayers to obtain the full "step-up" in basis accorded to community property, to the extent they so desire.⁷

The Alaska Community Property Act

Before analyzing the issues presented by this new Act, it is useful to review the basics of Alaska community property.

The Act and its 'election.' The Alaska Community Property Act, effective 5/23/98, is based on the Uniform Marital Property Act,⁹ which had previously been adopted only by Wisconsin. Unlike the Uniform Act, the Alaska Act is an optional community property system. Alaska's established separate property system generally will apply to marital property,¹⁰ but spouses may elect to have some or all of their property treated as community property.¹¹

If both spouses are domiciled in Alaska, the election occurs through the execution of a community property agreement or community property trust.¹² If one or both spouses are not domiciled in Alaska, this election can be made by the transfer of property to a community property trust.¹³

Community property agreement and trust. The community property agreement and community property trust have many similar characteristics. The spouses may agree on (1) the rights and obligations in the property, notwithstanding when and where the property is acquired and located; (2) the management and control of the property; (3) the disposition of the property on dissolution, death, or another event; (4) the choice of law governing the interpretation of the instrument; and (5) any other matter that affects the property and does not violate public policy.¹⁴ In addition, in a community property agreement, the spouses may agree (1) on making a will, trust, or other arrangement to carry out their agreement; and (2) that upon the death of either of them, the property passes without probate to a designated person, trust, or other entity by nontestamentary disposition.¹⁵

With a few exceptions, a community property agreement or community property trust can vary any of the provisions of the Alaska Community Property Act.¹⁶ Extensive provisions are included to protect the rights of creditors of a spouse, and bona fide purchasers dealing with the spouses.¹⁷ An agreement or trust may not be enforced against a spouse who proves that the instrument was unconscionable when made or was not executed voluntarily, or if the spouse against whom enforcement is sought was not given a fair and reasonable disclosure of the assets and financial obligations of the other spouse.¹⁸ The Act imposes a "good faith" conduct requirement on the spouses.¹⁹

To provide a nexus with Alaska for nonresidents who wish to use an Alaska community property trust, a number of additional requirements are added. At least one trustee must be an individual domiciled in Alaska or an Alaska trust company or bank.²⁰ Other co-trustees may be nonresidents and may include the spouses. The Alaska trustee's powers must include maintaining records for the trust on an exclusive or a non-exclusive basis, and preparing or arranging for the preparation of any income tax returns that must be filed by the trust, again on an exclusive or non-exclusive basis.²¹

What is Alaska community property? A spouse has a present undivided one-half interest in Alaska community property.²² The couple may "pick and choose" what property they desire to be community property. If, however, a community property agreement provides that all property acquired by either or both spouses during marriage is community property, then the property of the spouses acquired during marriage and after the determination date²³ is presumed to be community property.²⁴ The Act does not require that each spouse's earnings be community property. When all property is agreed to be community property, the "income" earned or accrued by a spouse or attributable to property of a spouse during marriage and after the determination date is community property.²⁵

Unless varied by the agreement or trust, the following property is not considered community property: property acquired prior to the determination date; property acquired by gift or inheritance; appreciation or income from a spouse's separate property; or a recovery for damages to property or from personal injury. Special provisions focus on life insurance policies and proceeds.²⁷ Upon divorce, community property will be equitably divided between the spouses.²⁸ If the words "survivorship community property" are used, then on the death of a spouse the ownership rights of that spouse vest solely in the surviving spouse by nontestamentary disposition.²⁹

Management and control. . The general management and control of Alaska community property depends on title and agreement. A spouse acting alone may manage and control the following: community property held in that spouse's name alone; a policy of insurance held in the name of that spouse; deferred compensation benefits that accrue as a result of that spouse's employment; and community property held in the name of both spouses in the alternative ("or").³⁰

Community property held in the names of both spouses other than in the alternative is managed and controlled by both spouses acting together.³¹ Management and control of community property held in a trust is determined by the terms of the trust.³² An individual's right to manage and control does not include the right to make gifts to third parties, except for relatively nominal amounts.³³ On the other hand, if both spouses report such a gift on their federal gift tax returns, or if the non-donor-spouse consents to "split gifts" on the donor-spouse's gift tax return, then this is treated as the spouses acting together in making the gift.³⁴

Will Alaska community property qualify for a full basis step-up?

A present vested interest. There are varying forms of community property regimes across the world. There are also significant differences among the community property systems of the nine states of the U.S. that have adopted community property. Despite these differences, the U.S. Supreme Court has stated that the community property law of the jurisdiction in question must give each spouse a "present vested interest" in the property of the community before that property will be considered community property for U.S. tax purposes.³⁵

U.S. Supreme Court decision in Harmon. The IRS agrees that the Wisconsin version of the Uniform Marital Property Act creates a community property system for federal income tax purposes.³⁶ But Alaska has modified that Act by making it elective. Alaska's new opt-in community property system is the only such elective system presently in effect in the U.S.

Prior to the allowance of joint income tax returns, Oklahoma briefly experimented with a similar optional community property system from 1939 through 1945. Oklahoma's legislature was motivated by the much larger income tax burden on a wage earner spouse in a common law state than on a couple in a community property state, who could each report one-half of the income. Under Oklahoma's opt-in system, the Harmons elected to have that state's new community property law apply to them. They each reported one-half of their income on their separate returns. The IRS challenged this splitting of income, arguing that the husband was taxable on all the income derived from his earnings.

The U.S. Supreme Court, in :Harmon,³⁷ upheld the IRS. The Supreme Court's main concern was that the consensual nature of Oklahoma's opt-in community property system in effect allowed the couple to assign one-half of the husband's income to his wife in violation of the principles of Lucas v. Earl^.38 The majority of the Court found that the Harmons' agreed election of community property status under Oklahoma's opt-in system was so similar to the Earls' contractual agreement (that the husband's earnings would be joint property), that the assignment-of-income doctrine should be similarly applied. In its opinion, the majority emphasized the distinction between a consensual (opt-in) and a legal (opt-out) community property system.

The key issue here is whether Harmon's consensual-versus-legal distinction should be limited to assignment-of-income situations. Certainly, a taxpayer's ability to shift the burden of income taxes by agreement must be controlled. The consensual-versus-legal distinction has served this purpose. The control of assignment of income, however, is no longer necessary in the marital situation, since joint returns were allowed in 1948.

More importantly, the consensual-versus-legal distinction becomes very tenuous in the community property area. This was pinpointed by Justice Douglas in his dissent in Harmon. He observed that "in some of the so-called `legal' community property states separate property of one spouse may be converted by contract or deed into community property or vice versa"³⁹ This ability to convert property allows residents of community property states to opt out of or opt into the state's community property system by execution of a community property agreement.⁴⁰ The courts and the IRS have given tax effect to such optional changes set forth in a community property agreement.⁴¹

Even though residents of the nine community property states may opt out of or opt into the system at will, the Service has not attempted to deny these individuals the separate reporting of taxable income, nor the full basis adjustment of Section 1014(b)(6). It seems unfair for the IRS to acquiesce in this "consensual" characteristic of existing community property states, yet deny it to elective community property systems.

Therefore, Harmon, and its consensual-versus-legal distinction, should probably be limited to the assignment-of-income context. This may well be the Service's position. In Rev. Rul. 77-359,⁴² a Washington couple agreed to convert their separate property to community property. The Service ruled that such conversion was effective for federal tax purposes, and then added:

To the extent that the agreement affects the income from separate property and not the separate property itself, the Service will not permit the spouses to split that income for Federal income tax purposes where they file separate income tax returns. (See Comm'r v. Harmon, 323 U.S. 44 (1944), 1944 C.B. 166.)⁴³

The conservative planner may wish to "draft around" Harmon's assignment-of-income issue. A provision could be included in the community property agreement or trust requiring the couple to file joint income tax returns during the existence of such instruments.

In summary, the expansion of Harmon to the basis adjustment of Section 1014 seems unwarranted. Assignment of income is not involved, and the consensual-versus-legal distinction is not viable in the community property context.⁴⁴

Must 'earnings' be included to qualify as community property?

Another issue confronting the Alaska Act is whether the absence of a vested property interest in the other spouse's earnings precludes community property recognition for tax purposes. Our community property roots lie in the "ganancial" Spanish system, which defines community property as the community of acquests and gains during marriage.⁴⁵ Fundamental to any understanding of the ganancial system of community property is the need to differentiate between lucrative title and onerous title.

Property acquired by lucrative title is acquired through gift and inheritance.⁴⁶ Unless transmuted, this property is not community property. Property acquired by onerous title is received in exchange for the time, labor, effort, or skill of the spouses or for other valuable consideration.⁴⁷ Unless elected out, property acquired onerously during marriage is community property and lies at the heart of the Spanish community property system and hence our own.⁴⁸

Comparison of the Uniform Marital Property Act and the Alaska statute indicates a significant difference in the definition of "income." UMPA includes a spouse's wages and earnings; the Alaska Act does not.⁴⁹ Alaska residents may execute a community property agreement in which they agree that their earnings will be community property. Nonresidents may elect community property status only through formation of a trust and contribution of assets to the trust. Thus, nonresidents cannot commit to future earnings being classified as community property. At most, they can voluntarily contribute their net earnings to a trust after such earnings accrue.

Does the absence of a vested property interest in the other spouse's earnings preclude community property recognition for tax purposes? In his dissent in Harmon, Justice Douglas wrote:

The distinctive feature of the community property system is that the products of the industry of either spouse are attributed to both; the husband is never the sole "owner" of his earnings; his wife acquires a half interest in them from their very inception. 1 de Funiak, Principles of Community Property (1943) § 239.

The Tenth Circuit in Hammonds⁵¹ stated, "It is a fundamental postulate of the community property system that whatever is gained during coverture, by the toil, talent or other productive faculty of either spouse, is community property. Indeed, the sole source from which the community estate must arise is the toil, talent or other productive faculty of the spouses and the earnings and income from community property itself."

Moreover, the Service apparently thinks earnings are of some importance. In ruling favorably on the community property status of the Wisconsin Act, the Service noted that under that Act marital property (community property) included income derived during marriage.⁵²Finally, a leading commentator has concluded that a system of acquests and gains--making the earnings and gains of the husband community property but not those of the wife--is nothing more than a pretense of being a community property system. ⁵³ Consequently, an argument can be made that a system which by its default rules does not give each spouse an immediate vested ownership interest in the other's wages and earnings is not a community property system.

In response, and in defense of the Alaska system, the argument is that the scope of inquiry should be limited to an examination of the spouses' rights in the subject property. In other words, if the spouses' rights in the Alaska community property are similar to the rights enjoyed by spouses in the nine other community property states, then there is no meaningful reason for denying the classification of the property as community property. Furthermore, as discussed above, all nine other states allow a couple to agree that certain property (such as their earnings) will not be characterized as community property. Such flexibility does not prevent them from being recognized as valid community property systems for federal income tax purposes.

Will property contributed by nonresidents to an Alaska community property trust qualify?

If nonresidents of Alaska who reside in a state with a common law property system contribute property to an Alaska community property trust, which state's property law system should apply to the trust and its assets? Analysis of this issue is based on the Restatement (Second) of Conflict of Laws--both its general principles and sections discussing marital property, contracts, and trusts.

The property in an Alaska community property trust will normally be intangible personal property, broadly characterized in Restatement terminology as "movables."⁵⁴ In the absence of a choice of law provision, the classification of movables is usually determined by the law of the domicile at the time of acquisition.⁵⁵ However, couples using an Alaska community property trust will invariably include a choice of law provision indicating their intent that the property be classified as community property under Alaska law.

The relevant issue is whether the couple's choice of law will be upheld. Assuming there is no local statute that requires the forum to apply its own laws in the determination of the issue, the Restatement lists seven factors to consider in deciding the applicable rule of law. One of these factors is the need to protect the justified expectations of the parties using the law chosen by the parties to govern the instrument.⁵⁶ The Restatement notes that in the case of contracts and trusts of movables, protection of the parties' expectations comes to the fore.⁵⁷

Section 187, the Restatement provision regarding contracts, states that the parties' choice of law will be refused only to protect a fundamental policy of the domiciliary state, provided that the domiciliary state has a materially greater interest than the state of the chosen law in the determination of the particular issue. Interestingly, the Restatement provides, "The more closely the state of the chosen law is related to the contract and the parties, the more fundamental must be the policy of the state of the otherwise applicable law to justify denying effect of the choice of law provision."⁵⁸ It is difficult to imagine a closer relationship of a state's law to a contract than the case of Alaska law as it relates to the Alaska community property trust.

Section 270, the Restatement provision regarding trusts of movables, is very similar to the choice of law provision found in contracts. This section provides that the parties' choice of law will be upheld unless it is found to violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship.

Section 258, the Restatement provision concerning marital property, applies a test similar to that applicable to contracts and trusts of movables. Comment (d) of this section makes clear, however, that this section is not applicable if a valid contract between the spouses provides otherwise. In other words, section 187, involving contracts, has priority.

In summary, pursuant to the principles of the Restatement, the couple's choice of Alaska law should control unless it is found to have violated a fundamental or strong public policy of laws of their domicile. It is difficult to imagine this circumstance. It would seem that the domiciliary state would be most interested in protecting the non-propertied spouse. Analysis of the nontax consequences of electing Alaska community property (discussed later) demonstrates that the non-propertied spouse is generally better off under a community property system than under a common law system.

The above analysis and conclusion are supported by the Tax Court decision in Estate of Richman.⁵⁹ This case involved a factually similar situation to that confronting a nonresident using an Alaska community property trust. The court upheld the settlors' choice of law although it differed from the law of the state where the settlors were domiciled.

In Richman, a Texas couple used community property to purchase beneficial interests in a Massachusetts business trust. The trust had a standard account application, and the couple chose to hold their beneficial interests as a joint tenancy with rights of survivorship (JTROS). The trust had a choice of law provision stating that Massachusetts law, which recognized JTROS accounts, would govern the validity and construction of the trust. The husband died, and his estate claimed a marital deduction for his interest in the account, which passed by operation of Massachusetts law to his wife.

The Service denied the marital deduction and contended that, under the law of Texas at the time, the account could not be held as JTROS, with the result that the decedent's interest in the account passed under the terms of his will to individuals other than his wife. The issue for the court was whether the account should be characterized as community property under Texas law or as a JTROS account under Massachusetts' law. The court, after examining sections 6 and 187 of the Restatement, upheld the couple's choice of Massachusetts' law and the right of the estate to claim a marital deduction. The court concluded the JTROS designation did not contravene a fundamental policy of Texas.⁶⁰

Gift Tax Consequences

Potential gifts upon execution of agreement or trust. If the property that is the subject of the agreement--or that is contributed to the trust--is owned unequally between the spouses, a gift will occur upon execution of the agreement or transfer of the assets to the trust.⁶¹ If the gift occurs upon execution of a community property agreement, it is important that this gift qualify under the federal gift tax marital deduction provisions. Accordingly, the property cannot be terminable interest property, and both spouses must be U.S. citizens.⁶² If the gift occurs upon contribution of assets to a community property trust, an unusual dispositive plan could result in a terminable interest that would not qualify for the gift tax marital deduction.⁶³ Hence, it is important to draft the trust so that this will so qualify.⁶⁴

Gifts to other parties upon the death of the first spouse. When Wisconsin adopted the Uniform Marital Property Act, the Wisconsin legislature included a new feature added by UMPA: the ability of a couple to make a nontestamentary disposition under a community property agreement.⁶⁵ Alaska enacted the same provision originally added by Wisconsin.⁶⁶ The new Alaska community property trust will similarly provide nontestamentary dispositive provisions.⁶⁷

In 1985, the Seventh Circuit decided Pyle,⁶⁸ which involved an Illinois joint will. The court held that, upon the death of the first spouse, the surviving spouse made a taxable gift to the residuary beneficiaries who would inherit after the surviving spouse's death. The court's decision rested on the fact that after the death of the first spouse, the surviving spouse could no longer amend the joint will. As a result, the gift was complete.

Wisconsin practitioners became concerned, and the Wisconsin legislature amended its statute to create a default rule that a surviving spouse may unilaterally amend the community property agreement with respect to property to be disposed of at the death of the surviving spouse.⁶⁹ The Alaska statute does not contain this type of express unilateral amendment authority for either a community property agreement or trust.⁷⁰ Rather, the Alaska statute contains language that an agreement and trust ". . .may not be amended or revoked unless the agreement itself provides for revocation on a particular date or on the occurrence of a particular event. . . ."⁷¹

To avoid the Pyle issue, the drafter of an Alaska community property agreement or trust should provide express authority allowing the surviving spouse to amend the agreement with respect to property to be disposed of at the death of the surviving spouse. An argument can be made that the surviving spouse's act of amendment is the "occurrence of a particular event," and therefore allowed by the existing Alaska statutory language. It is probable that the Alaska legislature will consider a technical amendment similar to that enacted by Wisconsin.

Nontax Consequences of Electing Alaska Community Property

Conversion of a spouse's separate property into Alaska community property has significant nontax consequences, which are analyzed as follows.

Management and control. This right is broadly defined under the Alaska Act.⁷² In most common law states, the separate property owner, alone, would have all of these management and control rights. Under the Alaska Commmunity Property Act, often the spouses will share this right.

Gift giving. In many common law states, the owner would be allowed to unilaterally make gifts. Under the Alaska Community Property Act, the fact that a spouse has the right to manage and control does not permit gifts of community property, except in very limited circumstances.⁷³ Both spouses together may make gifts.

Sale. In common law states, in most circumstances the owner has the power to sell for full and adequate consideration, without the consent of his or her spouse. Under the Alaska Community Property Act, the spouse or spouses with management and control will have this right.⁷⁴

Disposition at death. In common law states, the separate property owner may dispose of property in that owner's individual name. In many such states, the surviving spouse has the right to an elective share.⁷⁵ Under the Alaska Community Property Act, the deceased spouse may dispose of his or her one-half of the community property.⁷⁶ The surviving spouse does not have the right to elect against such community property.⁷⁷ Because the elective share may be less than one-half, the separate property owner may have the right to dispose of more property than his or her community property counterpart.

Liabilities. In many common law states, the property would be subject to the contracts or liabilities of only the owner.⁷⁸ Generally, neither spouse is liable for the separate debts of the other.⁷⁹ Under the Alaska Community Property Act, an obligation incurred by a spouse during marriage, including an obligation attributable to an act or omission during marriage, is presumed to be incurred in the interest of the marriage or the family.⁸⁰ After the determination date, an obligation incurred by a spouse in the interest of the marriage or the family may be satisfied from community property and the separate property of that spouse.⁸¹ Thus, the converted property may become subject to the obligations incurred by the other spouse during marriage.

Divorce. In Alaska, the court may divide the parties' property--whether joint or separate--acquired during marriage, "in a just manner and without regard to which of the parties is in fault. . . ."⁸² The court is directed to consider a number of factors. The new community property act provides a similar "just and equitable" standard, with similar factors.⁸³ The spouses may agree in a community property agreement or trust on the disposition of their property upon the dissolution of their marriage.⁸⁴

Planning

What will the IRS response be? The Service may decide not to challenge couples who have executed Alaska community property agreements or trusts.⁸⁵ The significance of the nontax aspects of opt-in community property, and the rational weaknesses of applying Harmon to situations other than those involving assignment of income, may direct such a decision.

Alternatively, the Service may argue that Harmon applies equally to an estate tax value basis adjustment as it did to splitting income. If so, the Service may cling to Harmon until it is overruled or found inapplicable by the Supreme Court. The Service could limit its challenge to nonresidents of Alaska, relying on choice of law arguments. Finally, the Service may seek a legislative change.

Upside/downside analysis. Estate planning for a basis adjustment at the death of the first spouse to die generally focuses on property that the spouses hold in their individual names or revocable trusts. Such property is usually not the subject of other transfer tax reduction approaches. Consequently, there does not seem to be a "lost opportunity" downside effect on transfer taxes when planning this area.

In separate property states, most planners use the "guess who" approach. That is, the planners and their clients try to decide which spouse is going to die first, and they transfer appreciated property to that spouse's ownership. Section 1014(e) must be considered.

This section provides that if appreciated property is acquired by the decedent by gift during the one-year period ending on the decedent's death, and such property is acquired from the decedent by (or passes from the decedent to) the donor, then the basis of the property will not be adjusted (i.e., the basis will not be stepped up). Because no Regulations have been issued under this provision, it is unclear whether a basis adjustment would be denied if the property was distributed to a bypass trust or marital trust rather than directly back to the donor-spouse. The obvious disadvantage of this "guess who" approach is that the guess may be incorrect.

If there is no significant information indicating which spouse is likely to die first, many planners may revert to a "hedge" approach. Appreciated property is split approximately equally between the spouses so that one-half of such property will receive a basis step-up at the death of the first spouse to die.

Instead of using the "guess who" or "hedge" approaches, the planner may encourage the execution of an Alaska community property agreement or the formation of an Alaska community property trust. Guessing and compromise concerning order of death are eliminated. It does not matter which spouse dies first.⁸⁶ If the Service challenges the basis adjustment and is successful, the result would probably be treatment of the property as equivalent to a tenancy by the entireties or tenancy in common for basis adjustment purposes.⁸⁷ Accordingly, the worst result appears to be a fall-back to the "hedge" outcome.

Thus, the planning choice appears to be between the "guess who" approach and the Alaska community property agreement or trust. If the planner and clients conclude that there is a high probability that a particular spouse will die first, the "guess who" approach is preferable. The full step-up in basis is highly likely.

If such predictability is not present, the Alaska community property agreement or trust becomes attractive. If the full basis step-up tax consequences withstand scrutiny, this benefit is obtained no matter which spouse dies first. If this tax result is successfully challenged, the clients at least receive a basis step-up for one-half the property. This is as good as an averaging result for a 50-50 guess, and the same as the hedge approach.

¹This new 1998 legislation is analyzed in Shaftel, "Newest Developments in Alaska Law Encourage Use of Alaska Trusts," 26 ETPL 51 (Feb 1998).

²Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

³1939 Okla. Sess. Laws Ch. 62, art.2, §2 (repealed 1945); 1943 Or. Laws ch. 440, §2 (repealed 1945).

⁴Que. Cov. Code art. 1964 (Reynaud and Baudonin eds., 1974). Quebec's default system is the "legal regime of partnership of acquests," which is closer to its community property system than to its separate property system.

⁵As recalled by William Cantwell, Reporter, Uniform Marital Property Act Committee of the National Conference of Commissioners on Uniform State Law. For a thorough analysis of the history of the optional community property system, and the policy arguments in favor of state's adopting this system, see Bartke, "Marital Sharing--Why Not Do It By Contract?," 67 Geo. L.J. 1131 (1979). ⁶Code Section 1014(b)(1). Income in respect of a decedent (IRD) is excepted from this basis adjustment. (Section 1014(c).)

⁷Sponsor Statement for H.B. 199, 1998 Alaska Legislature.

⁸New Chapter 75 of Title 34 of the Alaska Statutes.

⁹9A U.L.A. 21 (1983).

¹⁰A.S. 34.75.030(a).

¹¹Id.

¹²A.S. 34.75.060, 34.75.090, and 34.75.100.

¹³A.S. 34.75.060(b).

¹⁴A.S. 34.75.090(d) and 34.75.100(d).

¹⁵A.S. 34.75.090(d)(4) and 34.75.090(d)(5).

¹⁶A.S. 34.75.020.

¹⁷A.S. 34.75.070 and 34.75.080.

¹⁸A.S. 34.75.090(g), 34.75.090(h), and 34.75.100(f).

¹⁹A.S. 34.75.010.

²⁰Some reviewers of the Act have asked whether the community property character of the trust's property would change if the Alaska trustee subsequently resigns or is replaced, with the result that no Alaska trustee is in office.

²¹A.S. 34.75.100(a).

²²A.S. 34.75.030(c).

²³The "determination date" is the later of the date of marriage, or the effective date of a community property agreement or trust. A.S. 34.75.900(7).

²⁴A.S. 34.75.030(b).

²⁵A.S. 34.75.030(d). "Income," however, does not include wages and earnings unless specifically so defined in a community property agreement.

²⁶A.S. 34.75.030(f) and 34.75.030(g).

²⁷A.S. 34.75.120. Careful funding of life insurance trusts holding policies on one spouse's life is necessary under the new Act. Section 2036(a) could apply if the surviving spouse has a beneficial interest and if community property was contributed to the trust. To avoid this consequence, the settlor-insured should contribute separate property to the trust. If such property is not available, the couple should convert community property to the separate property of the settlor-insured. (Marital Property Law in Wisconsin, §10.35, State Bar of Wisconsin CLE Books (Apr 1995).)

²⁸A.S. 25.24.160(d).

²⁹A.S. 34.75.110(e).

³⁰A.S. 34.75.040(a).

³¹A.S. 34.75.040(b).

³²A.S. 34.75.040(c).

³³A.S. 34.75.040(e) and 34.75.050.

³⁴A.S. 34.75.050(c).

³⁵See Poe v. Seaborn, 282 U.S. 101, 9 AFTR 576 (S.Ct., 1930), where the Court held the community property laws of Washington gave each spouse a present vested interest in the other's earnings and thus income splitting was permitted; Hopkins v. Bacon, 282 U.S. 122, 9 AFTR 580 (S.Ct., 1930); Bender v. Pfaff, 282 U.S. 127, 9 AFTR 582 (S.Ct., 1930); Westerdahl, 82 TC 83 (1984) Rosenkranz, 65 TC 993 (1976) Zaffaroni, 65 TC 982 (1976); Angerhofer, 87 TC 51 (1986); see and compare Robbins, 269 U.S. 315, 5 AFTR 5679 (S.Ct., 1926), where the Court held the community property laws of California at the time gave the wife a mere expectancy in the community property and this was insufficient to permit a splitting of income for federal income tax purposes.

³⁶Rev. Rul. 87-13, 1987-1 CB 20.

³⁷323 U.S. 44, 32 AFTR 1411 (S.Ct., 1944).

³⁸281 U.S. 111, 8 AFTR 10287 (S.Ct., 1930).

³⁹Harmon, 323 U.S. at 54.

⁴⁰Justice Douglas was referring to Washington and California. It appears, though, that all state's with a community property system allow conversion between community property and separate property (except for Texas, which allows only an opt-out) (802 Tax Mgmt. (BNA) at A-3 to A-4, and A-13 (1995)).

⁴¹Massaglia, 286 F.2d 258, 7 AFTR2d 517 (CA-10, 1961), involved a New Mexico couple who entered into an agreement converting community property to separate property. The Tenth Circuit upheld the IRS's denial of a full step-up in basis to the surviving spouse. Crosby, TCM 1961-272, held similarly in regard to a Washington agreement. Fleming, TCM 1984-130, held that a New Mexico agreement validly reclassified the husband's community property income into his separate income for tax purposes. Rev. Rul. 73-390, 1973-2 CB 12, and Rev. Rul. 73-391, 1973-2 CB 13, held that California couple's may by agreement reclassify earned income and investment income, respectively, from community property to separate property.

⁴²1977-2 CB 24.

⁴³Proponents of the Alaska Community Property Act have asserted other arguments for not applying Harmon to the estate tax value basis adjustment. (See Blattmachr, in "The New Alaska Community Property Act and Other Important Changes That Affect Our Clients," Alaska CLE entitled "Tax Planning With Consensual Community, Alaska's New Community Property Law," Anchorage, AK (8/4/98), p. 29.)

⁴⁴There is one case in which a U.S. district court in Oklahoma allowed a full estate tax value adjustment in basis for a period that overlapped both Oklahoma's opt-in and opt-out community property systems. In 1943, the couple acquired property as joint tenants and elected into Oklahoma's consensual system. In 1948, after Oklahoma had changed to a mandatory community property system, the husband died. The court evidently relied on the couple's 1943 election to characterize their joint tenancy property as community property under the mandatory system. (McCollum, 2 AFTR2d 6170 (DC Okla., 1958).)

⁴⁵de Funiak and Vaughn, Principles of Community Property, §1 (2d ed., 1971) (hereinafter "de Funiak").

⁴⁶Id., §62.

⁴⁷McClanahan, Community Property Law in the United state's, §6.1 (1982).

⁴⁸de Funiak, supra note 45, at §66.

⁴⁹Compare A.S. 34.75.900 (12) with UMPA §1 (10). By purpose or coincidence, by excluding earnings from the definition of income, the Alaska legislature effectively removed the Alaska Act from the principal holding of Harmon; i.e., the elective nature of the Oklahoma system equates to a transfer of rights constituting an "assignment of income" governed by Lucas v. Earl.

⁵⁰Harmon, 323 U.S. at 56.

⁵¹106 F.2d 420, 23 AFTR 379 (CA-10, 1939).

⁵²Rev. Rul. 87-13, 1987-1 CB 20.

⁵³de Funiak, supra note 45.

⁵⁴It might be wise to transfer real estate to an LLC or limited partnership, in order to have the trust property characterized as a movable. Otherwise, the law of the situs usually determines the classification of real estate. (Restatement (Second) Conflict of Laws §278 (1971).)

⁵⁵Restatement (Second) Conflict of Laws, §258 (2); Zaffaroni, 65 TC 982, 987 (1976); Seizer v. Sessions, 915 P.2d 553 (Wash. App. Div. 2, 1996).

⁵⁶Restatement (Second) Conflict of Laws, §6.

⁵⁷Id. Because the trust is in the nature of a postnuptial agreement, an initial inquiry must be whether the domiciliary state recognizes postnuptial agreements. Most state's do, but provide that a duty of disclosure is owed to the other party, the agreement must be signed voluntarily, and each party must have the opportunity to consult with counsel. (Lindey and Parley, Lindey on Separation Agreements and Antenuptial Contracts, '91.02.) The protections afforded each spouse under the Alaska Act most likely satisfy these standards. (A.S. 34.75.100(b) and 34.75.100(f).)

⁵⁸Restatement (Second) Conflict of Laws, §187, comment g.

⁵⁹TCM 1994-421.

⁶⁰For other decisions in which courts have engaged in a conflict of laws analysis for tax issues, see: Hammonds, 106 F.2d 420, 23 AFTR 379 (CA-10, 1939), real estate acquired in Texas in exchange for personal services rendered by nonresident is community property; Porter, 148 F.2d 566, 33 AFTR 1118 (CA-5, 1945), income received by Texas resident from New York trust was held to be community property unless trust language clearly indicates intent that New York law apply to issue; Estate of Lepoutre, 62 TC 84 (1974), character of property acquired in France and transferred to Connecticut was determined by French law; thus, community property characteristics were retained and only half was included in decedent's estate under Code Section 2033; Zaffaroni, 65 TC 982 (1976), U.S.-source income earned by Uruguayan citizens residing in Mexico was community property. A thorough discussion of this subject is provided in the materials for "A Short Course on the Transitory Community," presented by M. Read Moore and Malcolm A. Moore at the 1998 Annual Fall Estate Planning Practice Update, ALI-ABA Video Law Review.

⁶¹This gift results from the fact that the community property will be owned equally between the two spouse's. (A.S. 34.75.030(c).) See Rev. Rul. 77-359, 1977-2 CB 24.

⁶²Code Sections 2523(b) and 2523(i). See also Code Sections 2056(b) and 2056(d)(1).

⁶³Reg. 25.2523(b)-1(a)(3). See Estate of Boydstun, TCM 1984-312, which held that a marital trust was a nondeductible terminable interest in the estate tax context (involving a pre-1981 fact situation). In Estate of Hedrick, 74 AFTR2d 94-7468 (CA-9, 1994), the Ninth Circuit strained to find a right to revoke, so as to qualify the trust assets for the estate tax marital deduction.

⁶⁴The trust may be structured as a QTIP trust. (Code Section 2523(f).) However, for every calendar year when property is contributed to the trust, a federal gift tax return must be filed and a QTIP election must be made. (Section 2523(f)(4).) If the clients forget to do this in the year of formation or in a future year, they will be faced with a taxable gift. Alternatively, the trust may be designed as a general power of appointment marital trust. This type of marital trust does not require the filing of a gift tax return or making of an election. (Section 2523(e).) Therefore, such a trust avoids the risk of an inadvertent taxable gift. This may well be the preferable way to structure the marital deduction. (See Blattmachr, supra note 43.) The spouse must be entitled to all the income, payable annually. (Section 2523(e).) The Regulations provide that the income does not, in fact, have to be distributed to the spouse. Rather, it is enough if the spouse has the right exercisable annually to require distribution to herself of the trust income. Otherwise, the trust income may be accumulated and added to corpus. (Reg. 25.2523(e)-1(f)(8).) Equally important, the donee spouse must have the power to appoint the property--whether during life or by will--in favor of the donee spouse or such spouse's estate. (Section 2523(e).)

⁶⁵Wis. Stat. §766.58(3)(f), based on UMPA §10(c)(6).

⁶⁶A.S. 34.75.090(d)(5).

⁶⁷A.S. 34.75.100(d)(3).

⁶⁸766 F.2d 1141, 56 AFTR2d 85-6521 (CA-7, 1985).

⁶⁹This issue is discussed in Marital Property Law in Wisconsin, §10.48, State Bar of Wisconsin CLE Books (Apr 1995).

⁷⁰See A.S. 34.75.090(e) and 34.75.100(e).

⁷¹Id.

⁷²A.S. 34.75.900(13).

⁷³A.S. 34.75.040(e) and 34.75.050(a).

⁷⁴A.S. 34.75.090(d)(2), 34.75.040(c), and 34.75.100(d)(2). Community property purchased by a bona fide purchaser from a spouse having the right to manage and control the property is acquired free of any claim of the other spouse. (A.S. 34.75.080(b).)

⁷⁵For example, A.S. 13.12.201 et seq., which provides for an elective share of one-third of the augmented estate.

⁷⁶A.S. 34.75.030(c).

⁷⁷A.S. 13.12.208(d).

⁷⁸For example, A.S. 25.15.010.

⁷⁹A.S. 25.15.050.

⁸⁰A.S. 34.75.070(a).

⁸¹A.S. 34.75.070(c).

⁸²A.S. 25.24.160(a).

⁸³A.S. 25.24.160(d).

⁸⁴A.S. 34.75.090(d)(3) and 34.75.100(d)(3).

⁸⁵The court in Angerhofer, 87 TC 51 (1986), footnote 4, stated that the government in its brief conceded that the optional elect-in German marital regime, known as gutergemeinschaft, was a community propety regime. It is uncertain whether the Harmon issue was discussed or the extent of recognition given for tax purposes.

⁸⁶Section 1014(e) may apply, however, if one spouse converts separate property to community property, and the donee-spouse dies within one year.

⁸⁷See generally 7 Powell and Rohan, Powell on Real Property ¶¶601-609 (tenancy in common), and ¶¶620-624 (tenancy by the entirety); Code Sections 2033 and 2040(b) (for joint interests created after 12/31/76).