BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                           Senator Ellen M. Corbett, Chair
                              2009-2010 Regular Session


          SB 202 (Harman)
          As Amended August 12, 2010
          Hearing Date: August 23, 2010
          Fiscal: No
          Urgency: No
          TW:jd

                            PURSUANT TO SENATE RULE 29.10
          
                                        SUBJECT
                                           
                                  Trustees:  Duties

                                      DESCRIPTION  

          This bill would raise the amount from $20,000 to $40,000 at  
          which a trustee could terminate a trust without a court order.   
          This bill would clarify trustee reporting requirements,  
          beneficiary waivers to an account, and the effect of late  
          service of the notification by trustee.  This bill also would  
          clarify net taxable income payments to a unitrust.  This bill  
          would update the court's ability to move for an order to show  
          cause to remove a trustee for failing to register with the  
          Statewide Registry.

                                      BACKGROUND 

          Last year, SB 367 (Negrete McLeod, Chapter 641, Statutes of  
          2009) was heard by this committee and initially contained  
          provisions substantially similar to those in this bill.  This  
          committee passed SB 367 with these provisions by a vote of 5-0.   
          SB 367 was later gutted and amended to contain revisions to the  
          Unruh Civil Rights Act.  This bill contains provisions similar  
          to SB 367, with a few new provisions as described below.  

          In 1985, the California Law Revision Commission (Commission)  
          issued a report recommending that, among other things, a trustee  
          be authorized to terminate a trust valued at $20,000 or less  
          without obtaining a court order in order to terminate an  
          uneconomical trust that could not achieve its purpose.   
          (Recommendation proposing The Trust Law (Dec. 1985) 18 Cal. Law  
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          Revision Com. Rep. (1986) pgs. 573-574.)  The Commission  
          recommended this non-judicial procedure because "[t]he problem  
          with requiring trustees of such trusts to apply to the court is  
          that such applications involve additional expense and there is a  
          risk that the court may not grant approval of the termination."   
          (Id. at pg. 574.)  

          Accordingly, the Legislature enacted AB 2652 (McAlister, Chapter  
          820, Statutes of 1986) which, among other things, added Section  
          15408 to the Probate Code and authorized trustees to terminate  
          trusts valued at $20,000 or less without court approval.  AB  
          2652 also reorganized and consolidated numerous provisions of  
          the Probate Code regarding trustee account, reporting, and  
          notice duties to beneficiaries.

          In 1999, the Legislature recognized a need to protect California  
          conservatees and wards from fraud and financial mismanagement  
          perpetrated by private professional conservators and guardians.   
          The Legislature enacted AB 925 (Hertzberg, Chapter 409, Statutes  
          of 1999), which required conservators and guardians to register  
          in a Statewide Registry maintained by the Health and Welfare  
          Agency Data Center in order to provide a statewide tracking  
          mechanism that would help the county clerk determine whether a  
          person petitioning for appointment as a conservator has violated  
          duties in other parts of the state.  Under AB 925, trustees were  
          authorized to register in the Statewide Registry but were not  
          required to do so.  In 2003, the Legislature enacted SB 294  
          (Soto, Chapter 629, Statutes of 2003), which extended the  
          registration requirement to trustees.  

          In 2006, a series of news articles revealed widespread abuse of  
          vulnerable elders and dependent adults by conservators and  
          deficiencies in the courts' oversight of conservatorships.   
          Accordingly, the Legislature enacted a package of bills to  
          reform the conservatorship system in the State of California.    
          Included in these bills was SB 1550 (Figueroa, Chapter 491,  
          Statutes of 2006), which established the Professional  
          Fiduciaries Act (the Act) for the purpose of licensing and  
          regulating individuals who act as conservators, guardians,  
          trustees, personal representatives, and agents under a durable  
          power of attorney for health care or for finances, for two or  
          more persons unrelated to the professional fiduciary or to each  
          other, as specified.  

          This bill, sponsored by the Executive Committee of the Trusts  
          and Estates Section of the State Bar of California, would  
                                                                      



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          increase the amount from $20,000 to $40,000 at which a trustee  
          could terminate at trust without a court order.  This bill would  
          clarify beneficiary waivers to accounts and trustee reporting  
          requirements.  This bill would clarify the effect of late  
          service of a notification by trustee on the statute of  
          limitations for a beneficiary trust contest.  This bill also  
          would clarify net taxable income payments to unitrusts.  This  
          bill would update existing law regarding the removal of a  
          trustee for failing to register in the Statewide Registry.

                                CHANGES TO EXISTING LAW
           
          1.  Existing law  authorizes a trustee to terminate without a  
            court order a trust having a value of $20,000 or less.  (Prob.  
            Code Sec. 15408(b).)

             This bill  would authorize a trustee to terminate without a  
            court order a trust having a value of $40,000 or less.

          2.  Existing law  requires a trustee, on reasonable request by a  
            beneficiary, to provide the beneficiary with the terms of the  
            trust, a report of information about the assets, liabilities,  
            receipts, and disbursements of the trust, the acts of the  
            trustee, and the particulars relating to the administration of  
            the trust relevant to the beneficiary's interest, including  
            the terms of the trust.  (Prob. Code Sec. 16061.)
           
            Existing law  requires a trustee to provide a beneficiary with  
            the terms of a trust when the trust becomes irrevocable.   
            (Prob. Code Sec. 16061.5(a).)

             This bill  would clarify that a trustee must provide the terms  
            of the trust to a requesting beneficiary unless the trustee is  
            not required to do so per statute.  
             
            This bill  would clarify that a trustee must provide a  
            beneficiary with requested information relevant to the  
            beneficiary's interest.

             This bill  also would clarify that a trustee must provide a  
            beneficiary or heir with the terms of the trust when a trust  
            becomes irrevocable, as specified, when a power of appointment  
            is effective or lapses upon the death of a settlor, as  
            specified, and when there is a change of trustee of an  
            irrevocable trust, as specified.  For charitable trusts, the  
            Attorney General, if requested, must also be provided with the  
                                                                      



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            terms of the charitable trust in any of these events. 

          3.  Existing law  requires a trustee to serve a notification by  
            trustee, as specified, when a revocable trust becomes  
            irrevocable or when there is a change of trustee of an  
            irrevocable trust.  (Prob. Code Sec. 16061.7(a).)

             This bill  also would require a trustee to serve a notification  
            by trustee whenever a power of appointment is effective or  
            lapses upon the death of the settlor, as specified.  This  
            requirement would not pertain to charitable remainder trusts.

          4.  Existing law  restricts a person upon whom a notification of  
            trustee is served from bringing a trust contest action more  
            than 120 days from the date the notification by trustee is  
            served upon him or her, or 60 days from the day on which a  
            copy of the terms of the trust is mailed or personally  
            delivered to him or her during that 120-day period, whichever  
            is later.  (Prob. Code Sec. 16061.8.)

             This bill  would clarify that a person upon whom a notification  
            of trustee is served is restricted from bringing a trust  
            contest action, as specified, regardless of whether the notice  
            is served upon him or her within or after the time specified  
            by statute.

          5.  Existing law  specifies the circumstances under which a  
            trustee is not required to report information or provide an  
            account to a beneficiary.  A beneficiary who has waived in  
            writing the right to an account can withdraw the waiver at any  
            time as to the most recent account and future accounts.  A  
            waiver has no effect on the beneficiary's right to petition a  
            report or account pursuant to statute.  (Prob. Code Sec.  
            16064.)

             This bill  would clarify that a beneficiary may waive the right  
            to an account for transactions occurring after the date of the  
            written withdrawal; however, regardless of a waiver by a  
            beneficiary of an account, the court may compel the trustee to  
            account, as specified.

             This bill  would specify that a waiver by a settlor of the  
            obligation of a trustee to provide terms of the trust per  
            statute or provide requested information per statute is  
            against public policy and shall be void.

                                                                      



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             This bill  would specify that a trustee is not required to  
            account to a beneficiary, provide terms of the trust to a  
            beneficiary, or provide requested information to the  
            beneficiary if the trust is revocable per statute or if the  
            beneficiary and the trustee are the same person. 

          6.  Existing law  authorizes a trustee to convert a trust into a  
            unitrust, as specified.  (Prob. Code Sec. 16336.4.)

             Existing law  provides that a unitrust shall be considered paid  
            in the following order from the following sources:  (a) from  
            the net taxable income determined as if the trust were other  
            than a unitrust; (b) from net realized short-term capital  
            gains; (c) from net realized long-term capital gains; (d) from  
            tax-exempt and other income; and (e) from principal of the  
            trust.  (Prob. Code Sec. 16336.4(e)(7).)

             This bill  would clarify provision (a) of this statute that a  
            unitrust shall be considered paid from the net taxable income,  
            other than capital gains.

          7.  Existing law  authorizes a trustee or beneficiary to petition  
            the court concerning the internal affairs of a trust, which  
            includes compelling the trustee to report information about  
            the trust or account to the beneficiary, as specified.  (Prob.  
            Code Sec. 17200(b)(7).)

             This bill  would clarify that a petition could be brought to  
            compel the trustee to: (a) provide a copy of the terms of the  
            trust; (b) report information about the trust, as specified;  
            and (c) account to the beneficiary, as specified.

             This bill  would remove the provision that a court, on its own  
            motion, may set and give notice of an order to show cause why  
            a trustee should not be removed for failing to register in the  
            Statewide Registry per statute.

          8.  Existing law  authorizes the court to set a motion on an order  
            to show cause why a trustee should not be removed for failing  
            to register in the Statewide Registry under statute.  (Prob.  
            Code Sec. 17200(c).)
             Existing law  requires trustees, as defined, to be licensed  
            pursuant to the Professional Fiduciaries Act.  (Bus. & Prof.  
            Code Sec. 6500 et seq.) 

             This bill  would comport the court's authority regarding  
                                                                      



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            trustee removal with the provisions of the Professional  
            Fiduciaries Act.

                                        COMMENT
           
          1.  Stated need for the bill  
          
          The author writes:
          
            SB 202 amends certain Probate Code sections to clarify when  
            trustees must give "trustee notification" to the  
            beneficiaries, the settlor's heirs and the Attorney General.   
            The trustee notification advises recipients of their right to  
            obtain the terms of the trust and in some instances, creates a  
            short period of time during which beneficiaries and heirs may  
            contest the trust.  SB 202 also clarifies the trustee's  
            obligation to provide beneficiaries with requested information  
            regarding the trust administration, and provides that this  
            obligation to report information cannot be waived by the  
            settlor . . . .  

            Existing law allows the discretion to terminate a small trust  
            with principal that does not exceed $20,000.  This proposal  
            would modify the limit by increasing it to $40,000 to account  
            for rises in the cost of living occurring since existing  
            [Probate Code] Section 15408 was enacted.  
          
          2.  This bill contains provisions previously heard by this  
            committee
           
          Last year, SB 367 (Negrete McLeod, Chapter 641, Statutes of  
          2009) was heard by this committee and initially contained  
          provisions substantially similar to those in this bill.  This  
          committee passed SB 367 with these provisions by a vote of 5-0.   
          SB 367 was later gutted and amended to contain revisions to the  
          Unruh Civil Rights Act.  This bill contains most of the  
          provisions of SB 367 with three additional provisions, discussed  
          in Comments 3, 8, and 9 below.  

          3.  Termination of Uneconomic Trust  

          This bill would authorize a trustee to terminate without a court  
          order a trust valued at $40,000 or less.  As discussed above, in  
          1985, the Legislature determined that a trustee should be able  
          to terminate a trust prior to the termination event described in  
          the governing instrument.  (See Background.)  In this instance,  
                                                                      



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          a trustee could conclude that the value of the trust property is  
          insufficient to justify the cost of administration and is  
          therefore economically unfeasible.  Requiring court  
          participation in terminating an uneconomic trust involves  
          additional expense to the trust.  Existing law provides that a  
          trustee can terminate a trust with a value at or below $20,000  
          without a court order.
          Similarly, the Uniform Trust Code (UTC) proposed in 1995 that  
          $20,000 was an appropriate limit at which a trustee could  
          terminate an uneconomic trust.  (See November 9, 1995 Draft of  
          the UTC, Sec. 2-309.)  However, one year later, the UTC  
          increased the amount from $20,000 to $50,000 at which a trustee  
          could terminate an uneconomic trust.  (See June 6, 1996 Draft of  
          the UTC, Sec. 4-402.)  Currently, states that follow the UTC  
          authorize a trustee of a trust having a value of $50,000 or less  
          to terminate the trust without a court order.  (UTC Sec. 414.)  

          California's existing cap on an uneconomic trust has remained at  
          $20,000 for 25 years, with no adjustments for increases in  
          inflation.  This bill would raise the cap on an uneconomic trust  
          to $40,000, less than that prescribed by the UTC.

          4.  Trustee reporting requirements  

          This bill would clarify that a trustee is required to provide to  
          a beneficiary only the information requested by a beneficiary  
          that is related to the beneficiary's interest.  Existing law  
          requires a trustee, on reasonable request by a beneficiary, to  
          provide the beneficiary with a report of information about  
          assets, liabilities, receipts, and disbursements of the trusts,  
          acts of the trustee, and administration particulars relating to  
          the beneficiaries' interest, including the terms of the trust.   
          (Prob. Code Sec. 16061.)    

            a.    Defining report  

            The author argues that trustees may read existing law  
            incorrectly and provide unnecessary information to the  
            beneficiary because the statute references a report  
            requirement.  This appears to be because trustees mistakenly  
            believe they must provide the beneficiaries with a trustee's  
            report (also known as a report and accounting or accounting  
            report), which is a document filed with the court detailing  
            the financial particulars of the trust.  

            Information that is requested by a beneficiary relating to the  
                                                                      



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            beneficiary's interest in the trust need not be as  
            comprehensive as the trustee's report.  Further, providing the  
            beneficiary with a standard report may not actually provide  
            the beneficiary with the information he or she requested.   
            This bill would clarify that a trustee is required to report  
            to a beneficiary the information requested by the beneficiary  
            relevant to the beneficiary's interest.

             b.    Reasonableness restriction on providing terms of the  
               trust  

            The author argues that trustees may provide too little  
            information to beneficiaries due to the trustee's  
            interpretation of the reasonableness standard.  The  
            reasonableness restriction contained in existing law could  
            authorize a trustee to avoid providing the terms of the trust  
            to the beneficiary based on how the trustee construed the  
            beneficiary's request.  This bill would separate the trustee's  
            duty to provide the beneficiary with the terms of the trust  
            from the trustee's duty to report to the beneficiary requested  
            information.  In this way, trustees will have clarity as to  
            their duty to provide the terms of the trust at the  
            beneficiary's request, regardless of the reasonableness of the  
            request.  

          5.  Beneficiary waiver of the account requirement  

          This bill would clarify the information that must be provided by  
          a trustee after a beneficiary withdraws a waiver of an account.   
          Existing law provides that a beneficiary may withdraw a waiver  
          to the account requirement as to the most recent account and  
          future accounts.  (Prob. Code Sec. 16064.)  This bill would  
          provide a better description of recent and future accounts and  
          would clarify that a beneficiary can withdraw the waiver to an  
          account for transactions occurring after the date of the written  
          withdrawal by the beneficiary.   This bill also would authorize  
          the court to compel the trustee to account, regardless of a  
          beneficiary's waiver, upon a showing that a material breach of  
          the trust was reasonably likely. 

          6.  Service of notification by trustee and statute of limitations  

          This bill would clarify when the statute of limitations on trust  
          contest petitions would begin to run based on service of the  
          notification by trustee.  Existing law provides a statute of  
          limitations on trust contest petitions, which cannot be brought  
                                                                      



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          more than 120 days from the date the notification by trustee is  
          served on the petitioner or 60 days from the day on which a copy  
          of the terms of the trust is mailed or personally delivered to  
          the petitioner during that 120-day period.  (Prob. Code Sec.  
          16061.8.)  However, Probate Code Section 16061.7(f) provides  
          that the trustee must serve the notification by trustee no later  
          than 60 days following the occurrence of an event requiring  
          service of the notification by trustee or 60 days after the  
          trustee became aware of the existence of a person entitled to  
          receive the notification.  

          Thus, if the notification by trustee is not served on the  
          petitioner within 60 days of the event or awareness of the  
          existence of the person entitled notice, it is unclear when the  
          statute of limitations would begin to run.  This bill would  
          clarify that the statute of limitations would begin to run  
          pursuant to Probate Code Section 16061.8 regardless of whether  
          the trustee served the notification by trustee specified under  
          Probate Code Section 16061.7.  This clarification does not  
          remove liability on the part of the trustee to properly serve  
          the notification by trustee, but merely provides guidance that  
          the statute of limitations based on the service of the  
          notification by trustee is still operative. 

          7.  Power of appointment  
          
          This bill would require a trustee to serve a notice of trust  
          administration (notification by trustee) and provide the terms  
          of the trust when requested by a beneficiary or heir after a  
          power of appointment becomes effective or lapses.  A power of  
          appointment authorizes someone to divide and distribute property  
          on behalf of the person granting the power of appointment.   
          Existing law provides that a trustee must serve a notification  
          of trustee and provide information to a beneficiary or heir in  
          the event a trust becomes irrevocable or when there is a change  
          of trustee, but a trustee currently is not required to provide  
          notification or information when a power of appointment become  
          effective or lapses.  (Prob. Code Secs. 16061.7 and 16061.5.)    
          The author argues that existing law has created a potential  
          loophole for trustees to avoid providing the notification by  
          trustee to beneficiaries because "[e]ven though the settlor  
          retained the right to amend the plan of distribution until death  
          in the same manner as in a revocable trust, the current notice  
          requirement is not triggered because such a trust technically  
          was irrevocable upon creation, not upon the death of the  
          settlor. . . . This bill would require notice of a trust  
                                                                      



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          administration to be provided upon a settlor's death if the  
          settlor created an irrevocable trust with a retained power of  
          appointment."

          As with a change of trustee, a power of appointment affects from  
          whom beneficiaries and heirs can seek trust information.  For  
          this reason, beneficiaries and heirs must be kept informed of  
          changes regarding powers of appointment.  This bill would  
          rectify the potential loophole described by the author by  
          requiring a trustee to serve the notification by trustee and  
          provide information to beneficiaries and heirs when a power of  
          appointment becomes effective or lapses.

          This bill would exempt charitable remainder trusts from the  
          trustee notification requirement regarding changes to a power of  
          appointment.  Charitable remainder trusts (CRTs) are used for  
          tax reduction purposes.  CRTs are irrevocable and do not suffer  
          the same potential for trustee abuses as other types of trusts.   
          Further, charitable remainder trusts are subject to Attorney  
          General and Internal Revenue Service oversight.  For these  
          reasons, this bill would provide a limited exemption from the  
          trustee notification requirement when a power of appointment  
          becomes effective or lapses for these types of trusts.    
          
          8.  Updating existing law to provide for the Professional  
                                                             Fiduciaries Act
           
          This bill would update the provision that a court may move for  
          an order to show cause requiring the trustee to appear in court  
          regarding removal of the trustee for failing to register in the  
          Statewide Registry as required under Probate Code Section 2850.   
          On July 2, 2008, as part of the Omnibus Conservatorship and  
          Guardianship Reform Act of 2006, the Professional Fiduciaries  
          Act (PFA) was enacted under SB 1550 (Figueroa, Chapter 491,  
          Statutes of 2006).  (See Background.)  The PFA regulates  
          professional fiduciaries, including trustees, under Business and  
          Professions Code Section 6500 et seq.  Accordingly, Probate Code  
          Section 2850, which required trustees to register with the  
          Statewide Registry, was repealed on January 1, 2009.  

          Existing law, Probate Code Section 17200(c), authorizes a court  
          to move for the removal of a trustee for failing to register in  
          the Statewide Registry pursuant to repealed Probate Code Section  
          2850.  This bill would bring existing law into line with the  
          current legislative scheme for regulating professional  
          fiduciaries by removing the repealed registry provisions and  
                                                                      



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          instead reference the appropriate provisions regarding trustee's  
          licensing requirements under the PFA. 

          9.  Unitrust payment  
          
          This bill would clarify that net taxable income, other than  
          capital gains, could be used to pay a unitrust amount.  Existing  
          law authorizes a trustee to convert a trust into a unitrust.   
          (Prob. Code Sec. 16336.4.)  A unitrust is a trust created for  
          the benefit of one or more persons who receive at least an  
          annual percentage payment from the net fair market value of the  
          unitrust.  Existing law provides that a unitrust can be paid  
          from any of the following sources:  (1) net taxable income; (2)  
          net realized from short-term capital gains; (3) net realized  
          from long-term capital gains; (4) tax-exempt and other income;  
          or (5) from principal of the trust.  (Prob. Code Sec.  
          16336.4(e)(7).)  In order to clarify that the first source of  
          payment from net taxable income, other than from capital gains  
          which are utilized as the next sources of payment, this bill  
          would add the necessary language to make this distinction.


           Support  :  None Known

           Opposition  :  None Known

                                        HISTORY
           
           Source  :  Executive Committee of the Trusts and Estates Section  
          of the State Bar of California

           Related Pending Legislation  :  None Known

           Prior Legislation  :  See Background.

           Prior Vote  :

          Assembly Judiciary Committee (Ayes 10, Noes 0)
          Assembly Floor (Ayes 74, Noes 0)
          Prior votes not relevant

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