BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 202
                                                                  Page  1

          Date of Hearing:   June 22, 2010

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     SB 202 (Harman) - As Amended:  June 17, 2010

                                  PROPOSED CONSENT

           SENATE VOTE  :  Not Relevant
           
           SUBJECT:  TRUST ADMINISTRATION: TRUSTEE DUTIES

           KEY ISSUE :  IN ORDER TO HELP CLARIFY VARIOUS ASPECTS OF TRUST  
          LAW AND help ensure that the interests of beneficiaries are  
          properly protected, SHOULD SEVERAL RELATIVELY MINOR CHANGES BY  
          MADE IN THE AREA OF TRUST ADMINISTRATION?

           FISCAL EFFECT  :  As currently in print this bill is keyed  
          non-fiscal.

                                      SYNOPSIS
          
          This non-controversial bill, sponsored by the Trusts and Estate  
          Section of the State Bar (Section), seeks to reduce disputes by  
          bringing clarity and certainty to the law describing the  
          parties' rights and obligations in the area of trustee  
          accountability.  This bill makes a number of relatively minor  
          changes to trust administration to make the law of trusts more  
          workable for trustees and to help ensure that the interests of  
          beneficiaries are properly protected, including closing a  
          loophole that may permit evasion of the required notice of trust  
          administration, providing that late service of notice is  
          nonetheless effective to trigger the 120-day statute of  
          limitations to file a trust contest, and increasing the amount  
          of a trust that a trustee may terminate without court permission  
          from $20,000 to $40,000.  Finally, this bill declares that it is  
          against public policy for a trust instrument to waive the  
          beneficiary's right to information and access to records.  There  
          is no known opposition to this bill.

           SUMMARY  :  Clarifies several aspects of trust administration.   
          Specifically,  this bill  :    

          1)Allows a trustee to terminate a trust, without court approval,  
            if the value of the trust does not exceed $40,000.








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          2)Requires a trustee, on request, to provide a beneficiary with  
            the terms of the trust, unless the trustee is specifically not  
            required to do so.

          3)Clarifies that a trustee, upon reasonable request by a  
            beneficiary, must provide the beneficiary with specific  
            information relating to the administration of the trust  
            relevant to the beneficiary's interest.

          4)Requires a trustee to provide a copy of an irrevocable trust,  
            or the irrevocable portions of the trust to:

             a)   The beneficiary of the trust, as specified, including  
               upon the death of a settlor who established an irrevocable  
               trust with power of appointment;
             b)   A beneficiary when there is a change of trustee; or
             c)   The Attorney General, for a charitable trust, if either  
               (a) or (b), above, is satisfied.

          5)Requires the trustee to serve notice on beneficiaries and  
            heirs when the settlor has retained a power of appointment to  
            appoint beneficiaries and that power, upon the death of the  
            settlor, is effective or lapses.

          6)Clarifies that service of required trust notification, even if  
            late, will commence the 120-day period for contesting a trust.

          7)Distinguishes those situations in which a trustee is obligated  
            to provide a formal accounting from those where the trustee is  
            required to report only information requested by a  
            beneficiary.

          8)Prevents a settlor from waiving the trustee's duty to report  
            trust information to beneficiaries.

          9)If a beneficiary has waived the right to a trust accounting,  
            allows the waiver to be withdrawn for transactions occurring  
            after the date of the written withdrawal of the waiver.   
            Regardless of whether the beneficiary has waived accountings,  
            allows a court, upon a showing that it is reasonably likely  
            that a material breach of trust has occurred, to compel the  
            trustee to account.

          10)   Clarifies that a beneficiary may petition the court to  








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            require a trustee to provide the beneficiary with the terms of  
            the trust.

          11)   Clarifies that any waiver by a settlor of the trustee's  
            obligation to provide the terms of the trust or specified  
            information to a beneficiary is void as against public policy.

          12)   Clarifies that, in determining priority for payment of the  
            unitrust amount (the amount of annual distribution paid out  
            under a unitrust), capital gains are not included in net  
            taxable income.

          13)   Makes other clarifying and conforming changes.

           EXISTING LAW  : 

          1)Governs the creation, validation, modification, termination,  
            and administration of trusts, and provides for the  
            adjudication of disputes relating to the trust.  Provides for  
            the rights and responsibilities of all parties to a trust,  
            i.e., the settlor (i.e., the creator of the trust), trustee,  
            beneficiary, heir, and a third party, such as a creditor.   
            (Probate Code Section 15000 et seq. All further statutory  
            references are to that code unless stated otherwise.)

          2)Allows a trustee to terminate a trust, without court approval,  
            if the value of the trust does not exceed $20,000.  (Probate  
            Code Section 15408.)

          3)Requires the trustee, when a revocable trust becomes  
            irrevocable, to provide a copy of the terms of the trust to  
            any heir or beneficiary upon request.  (Section 16061.5.)

          4)Requires a trustee to provide notification to beneficiaries  
            and heirs as specified.  (Section 16061.7.)

          5)Provides that an action to contest a trust may not be brought  
            more than 120 days from the date that the trustee serves  
            notification or 60 days from the date a copy of the trust is  
            mailed or delivered, whichever is longer.  (Section 16061.8)

          6)Provides that either a beneficiary or a settlor may waive the  
            right to a trust accounting, except as specified.  (Section  
            16064.)  









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          7)Provides that the unitrust amount is to be paid first from net  
            taxable income, then from short-term capital gains, then  
            long-term capital gains, then other income and finally from  
            the principal of the trust.  (Section 16336.4.)

           COMMENTS  :  Increasingly, revocable trusts are replacing wills as  
          the primary vehicle by which people transfer property at death.   
          The principal advantage of the revocable trust, made irrevocable  
          by the death of the settlor or upon the happening of an event  
          specified in the trust, is that it can be drafted in such a way  
          as to avoid probate court altogether when the time comes to  
          distribute the estate of a decedent.  This non-controversial  
          bill, sponsored by the Trusts and Estates Section of the State  
          Bar, seeks to make a number of relatively minor changes to trust  
          administration to make the law of trusts more workable for  
          trustees and to help ensure that the interests of beneficiaries  
          and heirs are properly protected. 

          According to the Trusts and Estates Section, the purpose of the  
          bill is to reduce disputes by bringing clarity and certainty to  
          the law describing the parties' rights and obligations in the  
          area of trustee accountability.  The Section believes that this  
          bill will reduce the expense of trust administration by  
          encouraging informal, targeted and responsive replies to  
          requests from beneficiaries rather than superfluous or  
          burdensome formal reporting requirements.  The bill, which  
          requires greater accountability from trustees, should, the  
          Section believes, instill greater confidence in beneficiaries,  
          discourage actual breaches of trust by trustees, and reduce  
          needless litigation engendered by a lack of communication and  
          information.  

           Increases the Size of a Trust That a Trustee May Terminate  
          Without Court Approval  :  Current law allows a trustee to  
          terminate a trust, without court approval, if the principal of  
          the trust does not exceed $20,000.  The purpose of this  
          provision is that at some point it is not cost-effective to  
          continue a trust, and, allowing a trustee to terminate without  
          seeking court permission, prevents the trustee, when the trust  
          principal falls too low, from using up the last remains of a  
          trust by going to court.  The $20,000 limit was set in 1986 and  
          has not been adjusted since.  Since that time, the consumer  
          price index has doubled.  By increasing the trust principal from  
          $20,000 to $40,000, this bill simply seeks to keep pace with  
          inflation.








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           Trustee's Duty to Provide Copy of "Terms of the Trust" When  
          Requested  :  Revocable trusts (inter vivos trusts, or "living  
          trusts", as they are commonly called) generally remain revocable  
          until the death of the settlor of the trust.  Current law  
          requires a trustee to serve a notice of trust administration on  
          beneficiaries, heirs, and the Attorney General (AG) (if the  
          trust is a charitable trust subject to the supervision of the  
          AG), upon the occurrence of specified events.  Among other  
          things, the notice must state that the recipient is entitled to  
          receive a copy of the terms of the trust, upon reasonable  
          request to the trustee.  The trustee is also required to provide  
          a copy of the "terms of the trust" to any trust beneficiary and  
          to any heir of a deceased settlor who requests it, upon  
          occurrence of certain specified events.  "Terms of the trust" is  
          defined to include the trust and all amendments to the trust.   
          If the trust has been "restated," the trustee need only provide  
          a copy of the restated trust and any subsequent amendments.

          This bill requires the trustee to provide a copy of the terms of  
          the trust to any trust beneficiary who requests it on the death  
          of a settlor of an irrevocable trust with power of appointment  
          or whenever there is change of trustee of an irrevocable trust.   
          It also includes, for charitable trusts, the AG in that list of  
          persons who may request a copy of the terms of trust whenever  
          one of these events occurs.

           Closing a Loophole to Ensure Notice of Trust Administration  
          Where Trust Was Irrevocable Upon Creation  .  The death of the  
          settlor makes a trust irrevocable, and triggers the duty of a  
          trustee to provide notice of trust administration to the  
          beneficiaries, heirs, and the AG if appropriate.  However,  
          proponents state that the literal terms of the statute may not  
          require notice upon the death of a settlor who created an  
          ostensibly irrevocable trust but retained a power of  
          appointment.  Even though the settlor retained the right to  
          amend the plan of distribution until death in the same manner as  
          a revocable trust, the notice requirement arguably, according to  
          proponents, is not triggered because such a trust technically  
          was irrevocable upon creation, not upon the death of the  
          settlor.  This loophole, they state, could be used to conceal  
          elder abuse by preventing interested persons from receiving  
          notice, which would give them the opportunity to challenge the  
          trust.









                                                                  SB 202
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          SB 202 closes that loophole by providing that notification is  
          required whenever a power of appointment retained by a settlor  
          is effective or lapses upon the death of the settlor with  
          respect to an inter vivos trust that was, or purported to be,  
          irrevocable upon its creation.  The bill also devolves this duty  
          of notification by the trustee to the successor trustee.

           Contesting a Trust Within 120 Days:  Late Service of Notice Will  
          Start the Statute of Limitations  :  Probate Code Section 16061.8  
          provides that service of notice starts the running of certain  
          deadlines to file a trust contest, which must be filed within  
          120 days of service of notice.  Section 16061.7(f) however  
          requires that notice must be served within 60 days following the  
          occurrence of the event requiring the notice (or discovery of  
          the person requiring notice).  Consequently, proponents state,  
          notice that is served late technically may not constitute notice  
          "pursuant to this chapter," and the 120-day statute of  
          limitations may never begin to run.

          This bill clarifies that providing that the 120-day statute of  
          limitations for filing a contest would be triggered by service  
          of the required notice within or after the time period specified  
          in Section 16061.7.   

           Improved Communications From Trustee  :  While a trustee has a  
          duty to respond to a beneficiary's reasonable request for  
          information, some trustees are taking the letter of the law in  
          Section 16061 by providing "a report of information about the  
          assets, liabilities, receipts, and disbursements of the trust,  
          the acts of the trustee, and particulars relating to the  
          administration of the trust relevant to the beneficiary's  
          interest, including the terms of the trust" - essentially a  
          formal report that is filed in court, even though the contents  
          of the report may be entirely nonresponsive to the beneficiary's  
          request.  
           
          This bill allows a trustee to respond to a beneficiary's  
          reasonable request by providing requested information and any  
          records relevant to the beneficiary's interest.  The language is  
          broad enough to allow the trustee to respond in any form that is  
          reasonable and answers the questions posed by the beneficiary.

           Settlor May Not Waive Beneficiary's Right to Receive Copy of  
          Terms of the Trust  :  Current Section 16064 provides that a  
          beneficiary is not entitled to either reporting of information  








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          or to accountings under the following circumstances: while the  
          trust is revocable by the settlor or another person, where the  
          settlor has waived the trustee's duty in the trust instrument,  
          and where the trustee and beneficiary are the same person.   
          Current law also provides that the trustee's obligation to send  
          the beneficiaries a notification of their entitlement to receive  
          a copy of the terms of the trust may not be waived by the  
          settlor.

          This bill prohibits a settlor from waiving the beneficiary's  
          right to request the terms of the trust and from waiving the  
          beneficiary's right to inspect the trust's books and records, as  
          against public policy.

           When a Trustee Need Not Report or Provide Accountings to  
          Beneficiary  :  SB 202 clarifies that a trustee is not required to  
          account to a beneficiary, provide the terms of the trust to a  
          beneficiary, or to provide requested information and records to  
          the beneficiary in any of the following circumstances:  In the  
          case of a beneficiary of a revocable trust, for the period when  
          the trust may be revoked, and where the beneficiary and the  
          trustee are the same person.
           
           REGISTERED SUPPORT / OPPOSITION :

           Support 
           
          Trusts and Estate Section of the State Bar (sponsor)

           Opposition 
           
          None on file
           
          Analysis Prepared by  :    Leora Gershenzon / JUD. / (916)  
          319-2334