BILL ANALYSIS Ó
AB 997
Page 1
Date of Hearing: April 5, 2011
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 997 (Wagner) - As Amended: March 31, 2011
PROPOSED CONSENT
SUBJECT : PROFESSIONAL FIDUCIARIES: EXEMPTION FOR NONPROFITs
KEY ISSUE : SHOULD NONPROFITS AND CHARITABLE TRUSTS BE EXEMPT
FROM THE LICENSING REQUIREMENTS OF THE PROFESSIONAL FIDUCIARIES
BUREAU?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
In 2006, in response to shocking reports of fiduciary abuse, AB
1550 (Figueroa), Chap. 491, Stats. 2006, established the
Professional Fiduciaries Act (PFA) for the purpose of licensing
and regulating professional conservators, guardians, trustees,
and others, as specified. The Act provides for a number of
exemptions, including for licensed attorneys, certified public
accountants, agents enrolled before the Internal Revenue Service
and financial institutions, but does not provide an exemption
for charities. This bill seeks to exempt, from the requirements
of the PFA, larger charitable institutions, when acting as
trustees for specified charitable trusts. The bill is supported
by various nonprofits, including the Bakersfield Memorial
Hospital Foundation, the Episcopal Diocese of California and
Stanford University. There is no known opposition.
SUMMARY : Exempts specified nonprofits corporations and
charitable trusts from the definition of professional
fiduciaries under the PFA. Specifically, this bill exempts from
the definition of a professional fiduciary under the PFA any
nonprofit corporation or charitable trust, organized under
Section 501(c)(3) of the Internal Revenue Code, including any
person acting as an agent on behalf of that entity who is acting
within the course and scope of employment, that satisfies all of
the following requirements:
1)Is a public charity, as provided by the specified provisions
of the Internal Revenue Code;
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2)Has been in existence for at least five years;
3)Has total institutional funds of at least $2 million, as
provided; and
4)Is acting as a trustee incidental to the purposes for which it
is was organized that meets at least one of the following
conditions:
a) A trust from which annual distributions are limited to a
sum certain or a fixed percentage of the net fair market
value of the trust assets, as specified.
b) A trust from which annual distributions are limited to a
guaranteed annuity or a fixed percentage of the fair market
value of the property, as specified.
c) A trust from which annual distributions are limited to
income, including a pooled income fund from which annual
distributions are limited to income, as specified.
d) A trust as to which the value of the charitable interest
was presently ascertainable upon creation of the trust and
deductible for tax purposes under the Internal Revenue Code
enactment of the federal Tax Reform Act of 1969.
EXISTING LAW :
1)Provides for the licensing and regulation of professional
fiduciaries by the Professional Fiduciaries Bureau (PFB)
within the Department of Consumer Affairs. (Business &
Professions Code Section 6500 et seq. Unless stated
otherwise, all further references are to that code.)
2)Defines "professional fiduciary" as a person who acts as a
conservator, guardian, trustee, personal representative, agent
under a durable power of attorney for health care, or agent
under a durable power of attorney for finances, for two or
more persons at the same time who are not related to the
professional fiduciary by blood, adoption, marriage, or
registered domestic partnership. (Section 6501.)
3)Exempts from the definition of professional fiduciary banks or
other entities authorized to conduct the business of a trust
company, as well as public conservators, public guardians and
other state agencies. Includes a person or public officer
employed by one of these entities or agencies acting within
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the course and scope of that employment. Also excludes
certain broker-dealers and investment advisors, as provided.
(Id.)
4)Provides that no person may hold himself or herself out to the
public as a professional fiduciary unless that person is
licensed as a professional fiduciary in accordance with the
provisions of the PFA. Exempts licensed attorneys, certified
public accountants and agents enrolled to practice before the
Internal Revenue Service. (Section 6350.)
COMMENTS : In 2006, in response to shocking reports of abuse,
the Legislature passed the Omnibus Conservatorship and
Guardianship Reform Act of 2006, a landmark package of bills to
overhaul California's troubled conservatorship system. That
legislation was designed to remedy alarming deficiencies in
California's conservatorship system that had led to the abuses
of California's elderly and most vulnerable. One piece of the
reform package was AB 1550 (Figueroa), Chap. 491, Stats. 2006,
which established the Professional Fiduciaries Act for the
purpose of licensing and regulating professional conservators,
guardians, trustees, and others, as specified. Public agency
fiduciaries (public guardians and public conservators) and those
employed by banks and trust companies are exempt from this
regulatory scheme, as are attorneys and certified public
accountants. (The other bills in the package were 1363 (Jones),
Chap. 493, Stats. 2006; SB 1116 (Scott), Chap. 490, Stats. 2006;
and SB 1716 (Bowen), Chap. 492, Stats. 2006.) This bill seeks
to exempt specified charities from the PFA.
According to the author:
The PFA provides blanket statutory exemptions for
attorneys, accountants, and enrolled agents before the IRS
- without imposing any requirements on such parties to
report to any authority on their administration of
fiduciary assets. . . . The PFA also exempts trust
companies, FDIC-insured institutions, broker-dealers, and
investment advisers, presumably because they are all
monitored by federal regulatory authorities. . . .
However, the PFA does not address charities, which are
similarly regulated. The proposed limited exemption for
charities would not diminish the protections of the PFA.
Charities are subject to reporting, compliance, and public
disclosure requirements under multiple state and federal
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authorities that meet - and in most cases, exceed - those
applicable to the parties already exempt from the PFA.
These federal and state authorities monitor charities for
proper administration and subject charities to judicial
prosecution, sanctions and tax penalties, and termination
as exempt organizations for violations. These federal and
state authorities also require charities to disclose, for
public inspection, financial and tax information describing
their annual expenditures.
The proposed exemption for limited types of charities
administering limited types of trusts is necessary because
the PFA would (i) violate donors' expectations of privacy,
(ii) be unduly burdensome because the PFA states all of its
requirements based on individuals acting as fiduciaries,
and (iii) divert resources that otherwise could support the
charities' tax-exempt purposes, without providing any
additional benefit to the public given the existing
oversight of charities. The proposed limited exemption
also promotes the prevailing public policy to encourage
donations to charities through their planned giving
programs. The California legislature has repeatedly
affirmed the primary responsibility and jurisdiction of the
California Attorney General over charities. The California
Attorney General's office maintains an active Legal and
Audits Unit that investigates and prosecutes charities
accused of breaching their fiduciary duties to properly
administer charitable funds. The Legal and Audits Unit of
the AG's Charitable Trusts Section takes its
responsibilities seriously; it regularly files actions to
prosecute charities accused of breaching their fiduciary
duties.
Significant problems in California's conservatorship system had
been identified in an in-depth Los Angeles Times series and a
subsequent hearing by the Assembly and Senate Judiciary
Committees . The Omnibus Conservatorship and Guardianship Reform
Act of 2006 arose out of an in-depth investigatory series in the
Los Angeles Times and a joint hearing held by the Assembly and
Senate Judiciary Committees on the issue. "Guardians for
Profit," as that series was called, dramatically exposed the
failings of California's conservatorship system for elderly and
dependent adults. (Robin Fields, Evelyn Larrubia, and Jack
Leonard, Guardians for Profit series, Los Angeles Times, Nov.
13-17, 2005.) The Times' articles included stories of private
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conservators who misused the system and got themselves appointed
inappropriately and then either stole or mismanaged the money
their conservatees had spent a lifetime earning; public
guardians who did not have the resources to help truly needy
individuals, leaving them - poor, alone and at risk of severe
harm - to try and fend for themselves; probate courts which did
not have sufficient resources to provide adequate oversight to
catch the abuses; and a system that provided no place for those
in need to turn to for help. The Times editorial which ran at
the end of the series, called on both the courts and elected
officials to "turn this abusive system into the honest
guardianship it was meant to be." (Deserving of Care, Los
Angeles Times, Nov. 17, 2005.)
Current law excludes some professional fiduciaries from the
requirements of the PFA . Under existing law, certain
individuals acting as professional conservators, guardians and
trustee are exempted from the PFA. Banks or other entities
authorized to conduct the business of a trust company as well as
public conservators, public guardians and other state agencies
are specifically excluded from the definition of professional
fiduciary. In addition, licensed attorneys, certified public
accountants and agents enrolled to practice before the Internal
Revenue Service are specifically exempted from the requirement
that no person may hold himself or herself out to the public as
a professional fiduciary unless that person is licensed as a
professional fiduciary in accordance with the provisions of the
PFA.
This bill adds specified nonprofit charitable institutions to
the existing list of entities not consider professional
fiduciaries.
Part of reform efforts moved oversight of conservators,
guardians and trustee from the Department of Justice to the PFB .
Originally conservator, guardians and trustees were required to
register with the Statewide Registry maintained by the
Department of Justice. The registration included a declaration
of the conservator, guardian or trustee which: (a) identified
the person and his or her business location; (b) provided
educational background and professional experience (including
verification of any college or graduate degree claimed); (c)
identified the conservatees or wards or trusts administered; (d)
provided the aggregate value of the estate(s) managed; and (e)
disclosed any action removing or cause for resignation of the
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conservator, guardian, or trustee. (Former Probate Code Section
2850 et seq.) If a person required to register with the
Statewide Registry failed to do so, a court could not appoint
that person to serve as a conservator, guardian or trustee.
(Former Probate Code Section 2851.)
Certain individuals were exempted from registration with the
Statewide Registry. These included conservators, guardians or
trustees who were related to the conservatee, ward or trustor by
blood, marriage or adoption; trustees who served for the
benefits of not more than three individuals or families; public
employees in the course and scope of their employment; and
financial institutions. Most of these exemptions carried over
to the PFA. However, the Statewide Registry did not include
exemptions for licensed attorneys, certified public accountants
and agents enrolled to practice before the Internal Revenue
Service, groups now exempted from the PFA. Additionally, there
was no historic exemption for charitable institutions.
Charitable Exemption Narrowly Tailored : In order to help ensure
that any charitable exemption cannot result in financial abuse,
the exemption in the bill is narrowly tailored. The charity
must have been in existence for at least five years and have
assets of at least $2 million. In addition, even if the charity
meets the requirements of the statute, only specified trusts
with clear distributions rules are included in the exemption.
This should help ensure that trustors' interests are protected,
even in the absence of application of the PFA.
ARGUMENTS IN SUPPORT : Supporters, all charitable institutions,
write that there is no need for the PFA to cover them since they
are already subject to very stringent requirements by the
Internal Revenue Service and the Department of Justice.
Moreover, they argue the requirements of the PFA are
sufficiently burdensome to make compliance with the requirements
come at the detriment of both donors and those to be benefitted
by the charitable institution. Writes Stanford University:
For many, many years, Sanford University has operated a
planned giving program in which it encourages major donors
to use split interest trusts defined in the Internal
Revenue Code to allow for major gifts to the University
while retaining income for the donor of the assets. The
University is the trustee of the trusts and utilizes
financial institutions to manage the investments. The
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payments from the trusts are carefully defined to comply
with IRS requirements, so there is virtually no discretion
in the trustee, which is also subject to supervision by the
Charitable Trusts division of the California Department of
Justice.
This is a case of a well intentioned statute designed to
crack down on unscrupulous fiduciaries having the
unintended consequence of adding to the administrative
burden of responsible charitable institutions that are
otherwise supervised and regulated. AB 997 simply seeks to
correct this oversight.
Previous Legislation : SB 1466 (Cox), a substantially similar,
was introduced in 2010. It was never heard in committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Bakersfield Memorial Hospital Foundation
California State University
California State University, Long Beach Foundation
Episcopal Diocese of California
Jewish Community Foundation of Los Angeles
Northern California Planned Giving Council
Santa Clara University
Stanford University
University of California
Opposition
None on file
Analysis Prepared by : Leora Gershenzon / JUD. / (916) 319-2334