BILL ANALYSIS                                                                                                                                                                                                    






                           SENATE JUDICIARY COMMITTEE
                            Martha M. Escutia, Chair
                           2001-2002 Regular Session


          SB 1575                                                S
          Senator Sher                                           B
          As Amended April 1, 2002
          Hearing Date:  April 2, 2002                           1
          Probate Code                                           5
          GMO:cjt                                                7
                                                                 5
          .
                                     SUBJECT
                                         
                   Wills and Trusts:  Prohibited Transferees


                                   DESCRIPTION  


          This bill would make some clarifying changes to the rule  
          that voids transfers made through an instrument or will to  
          specified persons who are disqualified due to a fiduciary  
          relationship with the transferor.  The bill would add  
          domestic persons and persons who lived with the transferor  
          for six months to those exempt from the rule, as well as  
          exempt transfers of up to $3,000 and transfers made by a  
          nonresident through an instrument signed outside the state.


                                    BACKGROUND  

          This bill is sponsored by the Estate Planning, Trust and  
          Probate Law Section of the State Bar.

          AB 21 (Umberg), Chapter 293, Statutes of 1993, was enacted  
          to stem major abuses perpetrated by an attorney who drafted  
          wills that made himself and his children major  
          beneficiaries of his clients.  AB 21 thus disqualified  
          specified persons from receiving a transfer under an  
          instrument, such as the person who drafted the instrument,  
          or his or her employee, relative, cohabitant, or law  
          partner or law firm shareholder; and generally persons in a  
          fiduciary capacity relative to the donor or the transferor.  
                                                                 
          (more)



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           Certain persons were exempted from the group of  
          disqualified individuals, if their relationship to the  
          transferor would make it unlikely that the transfer was the  
          result of undue influence, fraud or duress (such as the  
          transferor's spouse or relative.  The statute (Probate Code  
          Section 21350) was amended several times to further expand  
          the class of disqualified persons and to refine the  
          exceptions to the rule.

          This bill is a further refinement of the statute, to  
          accommodate recent enactments of the Legislature regarding  
          domestic partners and ambiguities perceived by attorneys  
          practicing probate law.
          

                             CHANGES TO EXISTING LAW
           
           Existing law  voids any provision or provisions in any  
          instrument that makes a donative transfer to the following  
          persons:

          1) the person who drafted the instrument, or his or her  
             relative by blood or marriage, cohabitant, or employee;
          2) any partner or shareholder of a law firm or corporation  
            in which the person who drafted the instrument holds an  
            interest, or an employee of that law firm or law  
            corporation;
          3) any person who is in a fiduciary relationship with the  
            transferor, such as conservator or trustee, who  
            transcribes the instrument or causes the instrument to be  
            transcribed, or that person's relative or cohabitant;
          4) a care custodian of a dependent adult, as defined.

          Existing law  exempts from the prohibited transferee rule,  
          transfers made under the following circumstances:

          1) if the transferor is related by blood or marriage (as  
            defined) to the person who drafted the instrument; or
          2) if the instrument was reviewed by an independent  
            attorney who counsels the transferor about the nature of  
            the intended transfer and who signs and delivers to the  
            transferor and to the drafter a certificate of  
            independent review stating his or her conclusion that the  
            transfer was not the product of fraud, duress, menace, or  
            undue influence;
                                                                       




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          3) if the court approves the instrument and orders the  
            transfer after full disclosure of the relationships of  
            the persons involved;
          4)  as to specified instruments, if the court determines,  
            upon clear and convincing evidence, excluding the  
            testimony of the prohibited transferee, that the transfer  
            was not the product of fraud, menace, duress or undue  
            influence (if it was, disqualified person is required to  
            pay all costs of the proceeding, including attorney's  
            fees);
          5)  if the transferee is a federal, state, or local entity,  
            a tax-exempt 501(c)(3) or 501(c)(19) entity or a trust  
            holding an interest in the tax-exempt entity or its  
            trustee.

           This bill  would add to the list of persons exempted from  
          the prohibited transferee rule, a domestic partner (as  
          defined in the Family Code) and a person who is not a  
          prohibited transferee and lived with the transferor for at  
          least six months.

           This bill  would exempt transfers of up to $3,000 from the  
          rule, as well as transfers made by a nonresident through an  
          instrument signed outside the state.

           This bill  would require the attorney conducting the  
          independent review to determine whether fraud, duress,  
          menace or undue influence was involved in the transfer and  
          to provide an original certificate to each of the  
          transferors and the drafter of the instrument.  

           Lastly, the bill  would clarify that the attorney conducting  
          the independent review shall not be considered to otherwise  
          represent the client.

                                         
                                    COMMENT
           
          1.    Need for the bill

             The bill is needed, the sponsor says, to update the  
            prohibited transferee rule, clarify its provisions, and  
            make it more effective in its operation.

          2.    Domestic partner is not a prohibited transferee 
                                                                       




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            In 2000 the Legislature enacted the Domestic Partnership  
            Act, which recognized same-sex partners and heterosexual  
            partners 65 or over as domestic partners if they meet  
            specified conditions and register with the state.  The  
            Act established certain rights of domestic partners, and  
            in certain instances, domestic partners are accorded the  
            same status as spouses.

            This bill would update the prohibited transferee rule by  
            exempting domestic partners, as recognized under the  
            Domestic Partnership Act, from the list of prohibited  
            transferees.  Therefore, under this bill, a domestic  
            partner who drafts his or her partner's will that makes  
            him or her the major beneficiary of the will would be  
            exempt from the prohibited transferee rule, in the same  
            manner as the spouse of the transferor is exempt under  
            current law.

          3.    Definition of exempt "cohabitant" may need refinement 

             SB 1575 would delete a "cohabitant" of the transferor  
            from the list of exempted transferees, but would add a  
            provision exempting a person "who lived with the  
            transferor for at least six months" and who is not a  
            person described as a prohibited transferee under the  
            rule.

            This definition may cause confusion.  If a person is not  
            a prohibited transferee under the rule, then a donative  
            transfer to that person is not invalid per se, and any  
            challenge to the validity of the transfer is subject to  
            all other rules regarding the validity of any donative  
            transfer made by an instrument to anyone.   This rule  
            would apply whether the transferee is a "cohabitant" or  
            not.  Therefore this qualifying phrase "who is not a  
            person described in Section 21350(a)"  to a "person who  
            lived with the transferor at least for six months" to  
            describe who is exempt from the rule is superfluous.  

            Additionally, Section 21350.5 already defines a  
            "disqualified person" as someone who is on the list of  
            prohibited transferees (Section 21350) and who is not  
            exempt under Section 21351.

                                                                       




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            SHOULD THIS SUPERFLUOUS PHRASE BE REMOVED?

            Also, the definition of a person as having "lived with  
            the transferor for at least six months" begs the question  
            of when the cohabitation had to occur for the person to  
            be exempt from the prohibited transfer rule.  Should the  
            six months be immediately prior to the date the  
            instrument was executed?  Or could the six months be at  
            any given time during the life of the transferor?  Should  
            the six months be a continuous period of time or could it  
            be a cumulative period?

            SHOULD THIS BE CLARIFIED?

          4.    Independent attorney review and certification

             When the original legislation enacting Probate Code  
            Sections 21350 and 21351 was passed, provision was made  
            for the validation of a transfer made to an otherwise  
            disqualified person by allowing an independent attorney  
            hired for the purpose of reviewing the instrument and  
            advising the transferor of the nature and consequences of  
            the intended transfer.  The exact language of the  
            certification required to be signed and delivered by the  
            independent attorney is in the statute, and states the  
            attorney's conclusion that the transfer or transfers are  
            valid because they are not the product of fraud, duress,  
            menace, or undue influence.

            Apparently, some interpret the lack of clarity in the  
            statute to mean that an attorney could make this  
            certification of his or her conclusion without actually  
            attempting to determine whether or not fraud, duress,  
            menace or undue influence was involved in the drafting or  
            execution of the transfer instrument.  Therefore, this  
            bill would list this task in addition to advising the  
            transferor of the nature and consequences of the  
            transfer.

            The bill also would require that the attorney provide an  
            original certificate to each of the transferor and the  
            drafter of the instrument.  The new language is not clear  
            as to whether each recipient would get an original  
            certificate.

                                                                       




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            SHOULD THIS BE CLARIFIED?

          5.    Other transfers exempted from prohibited transferee  
          rule

             a.   Upon court determination of no fraud, duress, menace  
            or undue influence  

               In addition, Probate Code Section 21351 exempts  
               transfers that a court determines, upon clear and  
               convincing evidence, that the transfer was not the  
               product of fraud, duress, menace or undue influence.   
               The statute specifically excludes testimony of the  
               person who is a potential prohibited transferee from  
               consideration in making this determination.

               This bill would remove the flat exclusion of that  
               testimony, and allow it to be a basis, but not the  
               sole basis, for the court's determination that the  
               transfer was not the product of fraud, duress, menace  
               or undue influence.

               The change would acknowledge that the potential  
               prohibited transferee's testimony may have some value  
               in assisting the court to make that determination, and  
               that the court is able to weigh competing testimony in  
               any case to make the correct decision.  Requiring  
               extrinsic evidence to be considered in addition to the  
               prohibited transferee's testimony however, would  
               ensure that the court's decision is not bootstrapped  
               to that person's testimony alone.  According to the  
               sponsor of the bill, this would also resolve equal  
               protection and due process challenges that may be  
               brought if a person's testimony is excluded because he  
               or she is a potential disqualified person.

            b.    Where the donative transfer does not exceed $3,000  

               This bill would add transfers not exceeding $3,000 to  
               those exempt from the prohibited transferee rule.   
               According to the sponsor, this exemption would allow  
               transferors to make nominal gifts or bequests to  
               caretakers who have provided good service, without  
               fear of the small gift being attacked under Section  
               21350.  The sponsor also asserts that since the amount  
                                                                       




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               is nominal, they do not believe that a transferor's  
               estate plan is likely to be greatly affected by the  
               gift or bequest, and the cost of defending such a  
               bequest is likely to discourage a recipient (the  
               potential prohibited transferee) from exerting any  
               undue influence, fraud, duress or menace simply to  
               obtain the bequest.  

               Still, the choice of $3,000 as the "small gift"  
               exemption from the prohibited transferee rule is  
               totally arbitrary.  To some people $3,000 is still a  
               lot of money, especially if the estate is only ten  
               times that in size ($30,000).  Tying the amount to the  
               size of the estate (say, a minimum of $60,000, which  
               would make the $3,000 bequest 5% of the total) may  
               alleviate the appearance of the arbitrariness of the  
               exemption.

               SHOULD THE EXEMPTION BE TIED TO AN ESTATE OF A MINIMUM  
               VALUE OF $60,000?

            c.    Transfers made by nonresident by instrument signed  
            outside the state  

               Under current law, a transfer to a prohibited  
               transferee made by a person who was not a resident of  
               the state at the time the instrument was executed  
               would be exempt from the rule if a court determined  
               that the transfer was made without fraud, duress,  
               menace or undue influence.

               This bill would delete this exemption and create a new  
               provision that would exempt from the rule a transfer  
               made by an instrument executed by a nonresident of the  
               state and that was not signed in California,  
               eliminating in this process a court determination that  
               no fraud, duress, menace or undue influence was  
               involved.

               In other words, whereas under current law, a court  
               determination that the transfer made under an  
               instrument signed by a nonresident is not invalid due  
               to fraud or duress would have to be made, under this  
               bill, the nonresident will need only to have executed  
               the instrument outside the state for the transfer to  
                                                                       




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               be exempt from the rule.

               There are several problems with the language of this  
               proposed provision.  First, the current statute is  
               clear that the instrument in question would have to  
               have been signed by the transferor who was not a  
               resident of California at the time it was executed.   
               The transferor could be a resident of California now,  
               and the transferor could have signed the instrument in  
               California while still not qualifying as a resident of  
               California for all general purposes.  If this transfer  
               survives a court challenge due to fraud or duress, it  
               would be valid.

               The proposed language deviates from the current  
               statute by not specifying that the transferor was a  
               nonresident at the time of execution of the instrument  
               and by removing the requirement of a court  
               determination regarding fraud, duress, menace or undue  
               influence.  Thus, a bequest made by a resident of  
               California who visits someone (a potential prohibited  
               transferee) in Colorado and decides to execute his or  
               her will while there would not be exempt under this  
               provision; a bequest made by a nonresident of  
               California under the same circumstances, would be  
               exempt from the rule.

               SHOULD THE PROVISION SPECIFY THAT THE TRANSFEROR WAS A  
               NONRESIDENT AT THE TIME OF EXECUTION OF THE  
               INSTRUMENT?

               While the sponsor's explanation for desiring this  
               change in the law is clear, i.e., that transfers made  
               by persons who were nonresidents at the time of  
               execution of the instrument and who signed the  
               instrument outside of California should be a  
               categorical exemption from the rule, the rationale  
               doesn't make sense when coupled with the removal of  
               the requirement that the court make a determination  
               that no fraud was involved.

               SHOULD THIS TRANSFER BE EXAMINED BY A COURT BEFORE THE  
               TRANSFER IS VALIDATED?  

               After all, the probable reason for the matter to be in  
                                                                       




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               probate court is that the transferor died a California  
               resident and the instrument signed out of state (i.e.,  
               the will) is being administered in probate court.  Why  
               should the potential prohibited transfer be exempt  
               without examination by the court?

          6.    Definition of "relative by blood or marriage"

             Under existing law, a donative transfer to a person who  
            is a relative by blood or marriage of the person who  
            drafted the instrument or who is a relative by blood or  
            marriage of someone in a fiduciary relationship with the  
            transferor (such as a conservator or trustee) is invalid.  
             However, if the transferor were related by blood or  
            marriage to either of the potential prohibited  
            transferee, the rule would not apply.  For example, a  
            transfer made by will to the son of an attorney who  
            drafted the will for his (the attorney's) sister is a  
            transfer exempted from the rule.  

            This bill would clarify the phrase "relative by blood or  
            marriage" as used in the list of exclusions to the  
            prohibited transferee rule, by defining the relationship  
            as being to the fifth degree (rather than the current  
            "seventh degree"), unless they are heirs or next of kin  
            under the Probate Code.  The sponsor states that the  
            exclusion should be narrowed to relatives within the  
            fifth degree (e.g., second cousins, first cousins once  
            removed, great-grand nieces) because "only a tiny  
            proportion of the population is acquainted with relatives  
            within the sixth or seventh degree (e.g.,  
            great-great-great grand nieces and nephews and second  
            cousins twice removed)."  

            According to the sponsor, the reduction in the number of  
            degrees of relationship will eliminate the possibility  
            that a complete stranger who is otherwise disqualified  
            will be exempted from Sec. 21350 because he happens to be  
            the fourth cousin of the spouse of the testator.  And, in  
            the rare instances where the next of kin of a decedent is  
            a relative who is more remote than the fifth degree of  
            relationship, the proposed provision would not disqualify  
            such a person (as it also would exempt heirs or next of  
            kin).

                                                                       




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            It should be noted here that the exemption from the rule,  
            even as revised by this bill, would be broader than the  
            definition of relative by blood or marriage that would  
            disqualify a potential prohibited transferee under  
            Section 21350 (the statute here uses relative by blood or  
            marriage to the third degree and their spouse).

          Support:  None Known

          Opposition:  Campaign for California Families

                                     HISTORY
           
          Source:  Estate Planning, Trust and Probate Section of the  
          State Bar

          Related Pending Legislation:  None Known

          Prior Legislation:  None Known

          
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