BILL ANALYSIS Ó SENATE JUDICIARY COMMITTEE Senator Noreen Evans, Chair 2011-2012 Regular Session AB 997 (Wagner) As Amended May 9, 2011 Hearing Date: June 14, 2011 Fiscal: Yes Urgency: No TW SUBJECT Professional Fiduciaries DESCRIPTION This bill would exempt a nonprofit corporation or charitable trust from the requirements of the Professional Fiduciaries Act (PFA), provided that the corporation or trust meets specified requirements. BACKGROUND In 2006, the Legislature enacted a package of bills to reform California's conservatorship system. Major features of the reforms, embodied in the Omnibus Conservatorship and Guardianship Reform Act of 2006 (SB 1116 (Scott, Chapter 490), SB 1550 (Figueroa, Chapter 491), SB 1716 (Bowen, Chapter 492) and AB 1363 (Jones, Chapter 493)) include: (1) increased frequency of review of conservatorships; (2) broadened scope of court investigators' reports; (3) special procedure for the sale of a conservatee's primary residence; and (4) the regulation and licensing of private professional fiduciaries including private professional conservators. The measures were compelled by a series of articles in the media revealing widespread abuse of vulnerable elders and dependent adults by conservators and deficiencies in the courts' oversight of conservatorships. SB 1550 established the PFA 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 (more) SB 997 (Wagner) Page 2 of ? other, as specified. Public agency fiduciaries (public guardians and public conservators) and those employed by banks and trust companies are exempt from this regulatory scheme. SB 1550 also prohibited a court from appointing a person as a private professional conservator, guardian, or trustee, or permitting a person to continue to serve as such, unless he or she is licensed as a professional fiduciary and has filed evidence of the license with the clerk of the court in each county where a petition for appointment has been filed. SB 1550 exempted from its professional fiduciary designation public guardians, public conservators, and other public agencies that act as conservators, guardians or trustees, banks, and trust companies. The PFA also exempts attorneys and accountants from the professional fiduciary licensing requirements. SB 1466 (Cox, 2010) was similar to this bill but was held in this committee pending stakeholder negotiations of the method and language by which charities acting as fiduciaries would be exempt from the PFA. Although the PFA exempts banks, trust companies, and public agencies acting as fiduciaries, it provides no exemption for long-established charities acting as fiduciaries. This author-sponsored bill seeks an exemption for these charitable fiduciaries from the requirements of the PFA. CHANGES TO EXISTING LAW Existing law provides licensing requirements and oversight of professional fiduciaries. (Bus. & Prof. Code Sec. 6500 et seq.) Existing law defines "professional fiduciary" to mean a person who acts as a conservator of the person, the estate, or person and estate, or guardian of the estate, or person and estate, for two or more individuals at the same time who are not related to the professional fiduciary or to each other, or a person who acts as a trustee, agent under a durable power of attorney for health care, or agent under a durable power of attorney for finances, for more than three individuals, as defined, at the same time. (Bus. & Prof. Code Sec. 6501(f)(1)-(2).) Existing law exempts from the PFA a trust company, as defined, an FDIC-insured institution, or its holding companies, subsidiaries, or affiliates, as defined, any public agency, SB 997 (Wagner) Page 3 of ? including the public guardian, public conservator, or other agency of the State of California or of a county of California or any regional center for persons with developmental disabilities, as defined, and any person whose sole activity as a professional fiduciary is as a broker-dealer, broker-dealer agent, investment adviser, or investment adviser representative, as specified. (Bus. & Prof. Code Sec. 6501(f)(4).) Existing law requires professional fiduciaries to satisfy licensing requirements. (Bus. & Prof. Code Sec. 6530.) Exempt from these licensing requirements are attorneys, certified public accountants, and enrolled agents, as defined. (Id.) Existing federal law exempts from federal tax certain private foundations, including a corporation or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public office. (I.R.C. Sec. 501(c)(3).) Existing federal law exempts from federal tax certain public charities, including: churches, schools, hospitals, and other organizations that receive their public support primarily from gifts, grants, and contributions from a broad group of people; organizations that receive their support from a combination of gifts, grants, and contributions and fees for their exempt services; and organizations that support other public charities, governmental units and certain other exempt organizations. They receive public charity status because of the relationship, without regard to the source of their income. (I.R.C. Sec. 509(a).) Existing federal law provides restrictions on tax exemption status for private foundations and public charities, including, among other things, prohibitions on transactions in which the organization provides loans or compensation in excess of reasonable salaries for personal services actually rendered to SB 997 (Wagner) Page 4 of ? the creator, family member of the creator, or persons making substantial contributions to the organization. (I.R.C. Sec. 503.) Existing state law provides for the regulation of charitable trustees. (Prob. Code Sec. 15604; Gov. Code Sec. 12580 et seq.) This bill would exempt from the PFA any nonprofit corporation or charitable trust that is described in Internal Revenue Code Section 501(c)(3) and that satisfies all of the following requirements: is an organization described in Internal Revenue Code Sections 509(a)(1)-(3); has been in existence for at least five years; has total institutional funds, as specified, according to its most recent audited financial statement with a value of at least two million dollars ($2,000,000) net of encumbrances; and is acting as a trustee, incidental to the purposes for which it was organized, of a trust that meets at least one of the following conditions: o it is a charitable remainder trust, as defined; o it is 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 defined; o it is a pooled income fund trust from which annual distributions are limited to income, including a pooled income fund, as defined; or o it is a trust as to which the value of the charitable interest was presently ascertainable upon creation of the trust and deductible for federal gift, estate, or income tax purposes, as defined. This bill also would make technical corrections to the PFA. COMMENT 1. Stated need for the bill SB 997 (Wagner) Page 5 of ? The author writes: 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. 2. Whether allowing an exemption from the PFA for certain nonprofit organizations and charitable trusts raises consumer protection concerns This bill would exempt from requirements of the PFA certain nonprofit organizations and charitable trusts. The PFA was created to protect vulnerable elders and dependent adults from abuse. As introduced, SB 1550 did not contain any exemptions. While the bill was in the Senate, an exemption provision for trust companies, banks, and public agencies was added because these entities are already extensively regulated and routinely examined by government authorities and internal auditors. The Professional Fiduciary Association of California, an opponent of this bill, argues that there is no compelling evidence that would necessitate exempting another group of individuals from the PFA, and this bill would diminish the intent and consequence of the PFA. As described below, however, exempting nonprofit organizations and charitable trusts from the PFA would not diminish the protections provided under the PFA. a. This bill would provide a narrow exemption for SB 997 (Wagner) Page 6 of ? organizations regulated by other governmental authorities Although this bill would exempt certain charitable organizations from the PFA, this exemption does not raise the same oversight problem that the PFA was attempting to fix. At that time, the sponsors of SB 1550 argued that a professional fiduciary must make a broad range of complex decisions that affect a conservatee, including where he or she lives, home care arrangements, major medical decisions, and control of all of the conservatee's financial matters from bank accounts to investment and tax decisions. The conservatee or his or her family or friends may be unable to evaluate the competency or honesty of the professional fiduciary, the quality of the care received, or articulate concerns regarding his or her care. Further, probate courts face enormous backlogs of cases and are hard-pressed to resolve the caseload issues. This, coupled with the shortage of trained staff to carry out oversight and investigative requirements, could lead to inadequate review by judges and input from the individual who is about to lose control of his or her life. The PFA provided a way to oversee conservators, guardians, and trustees by creating licensing requirements and establishing the Professional Fiduciary Bureau. Trust companies, banks, and public entities are exempt from the PFA. This exemption was created because these entities are already heavily regulated and monitored by government entities. Similarly, this bill would apply only to fiduciaries that are already regulated by the Internal Revenue Code and the Supervision of Trustees and Fundraisers for Charitable Purposes Act (Gov. Code Sec. 12580 et seq.) (the Charities Supervision Act). The Charities Supervision Act provides that charities must register with the Attorney General, file their articles of incorporation, and be subject to inspection and investigation by the Attorney General. The Charities Supervision Act was further strengthened by the California Nonprofit Integrity Act of 2004 (the Integrity Act), which provides that charities receiving more than $2 million in donations per year are subject to additional scrutiny and restrictions. (Gov. Code Sec. 12586.) In addition, the Integrity Act provides restrictions on charitable fund raising. (Gov. Code Sec. 12599.) Since trust companies and public agencies are regulated by similar means and are exempt from the requirements under the PFA, this bill provides the same exemption for a limited group of charitable fiduciaries. SB 997 (Wagner) Page 7 of ? b. The exemption contained in this bill would apply in limited circumstances of trusts administered by charitable organizations The consumer/trustor chooses which type of charitable trust he or she wants to create. While choosing which charities will be involved with the trustor's estate planning, the trustor considers various options of personal import. In essence, the trustor will have vetted the charity and approved of its involvement with the trustor's estate plan. This bill would only apply to charities that were specifically chosen by the trustor, well in advance of infirmity or death. As such, the intent of the PFA in protecting unsuspecting conservatees from abuse is not superseded, but rather particularly avoided by the trustor. Notably, this bill does not exempt all nonprofit organizations from the PFA. Under Probate Code Section 15604, a nonprofit charitable organization may be appointed as a trustee if all of the following are true: (1) the corporation is incorporated in California; (2) the articles of incorporation specifically authorize the corporation to accept appointments as trustee; (3) the corporation has been recognized as a nonprofit pursuant to the Internal Revenue Code for at least three years; (4) the settlor or existing trustee consents to the appointment of the nonprofit corporation as trustee; and (5) the court determines the appointment of the nonprofit corporation as trustee to be in the best interest of the settlor. Under this bill, in order for the nonprofit corporation to be exempt from the PFA, the nonprofit corporation must oversee a limited type of trust on behalf of the settlor. As discussed in Comment 2c, these types of trusts are carefully crafted and heavily regulated, such that the licensing requirements of the PFA are arguably unnecessary. c. This bill would limit the types of trusts that would qualify for the exemption There are only a few types of trusts administered by a charitable fiduciary that would qualify for the exemption under this bill: a charitable remainder annuity trust or unitrust, which provides income to individuals for their lifetimes and the SB 997 (Wagner) Page 8 of ? remaining assets are distributed to qualifying charities; a charitable lead annuity trust or unitrust, which provides annual payments to one or more charities during the lifetime of the settlor with the remaining assets distributed to designated beneficiaries; a pooled income fund, which is a trust maintained by charities that have many individual donors and beneficiaries; and a trust as to which the value of the charitable interest was presently ascertainable upon creation of the trust and deductible for tax purposes. These types of trusts are established in writing by the trustor and are heavily regulated by the Internal Revenue Code because of the favorable tax treatment they receive. Because a trustor knowingly sets up these types of trusts by choice and must follow extensive tax guidelines, the ability for a charity or charity employee to prey on the vulnerable elder or dependent adult during this type of trust administration is scarce, if non-existent. 3. Burdensome dual licensing requirements Without the exemption provision provided by SB 1550, the PFA would have imposed a burdensome dual licensing arrangement on trust companies and public agencies that would have created significant conflict between state and federal regulatory agencies. The exemption was specifically crafted so that entities falling under other regulatory bodies, which require their own licensing fees, were not required to perform dual licensing requirements under the PFA. Similarly, charities acting as fiduciaries are subject to the burdensome dual licensing arrangement under the PFA. The Association of Independent California Colleges and Universities, a supporter of this bill, argues that "Ýw]ithout the AB 997 exemption, costs to charities will rise, returns to donors will diminish, and no increased protection will be afforded California residents." Like banks and public agencies, charitable fiduciaries are supervised by not only the donor, his or her beneficiaries, and the court system, but charitable fiduciaries are regulated by federal and state law. Maintaining licensing requirements, in addition to those required by other federal and state laws, for charities increases costs and reduces resources available for charitable purposes. SB 997 (Wagner) Page 9 of ? 4. The PFA is worded to apply only to individuals rather than companies The language in the PFA is specifically aimed at individuals, and the licensing requirements are tailored for individuals as well. The licensing requirements of the PFA refer to the professional fiduciary's age and citizenship, fingerprints, required education degrees, and yearly examinations and fees to extend the license. (Bus. & Prof. Code Sec. 6533 et seq.) These requirements do not readily lend themselves to conformation on the part of trust companies, banks, charities, and public agencies. One obvious problem is that as an employee of each trust company, charity, and public agency is employed or terminated from their duties as fiduciary, the new individual must comply with the requirements of the PFA, even though the entity as a whole is continually monitored by state and federal agencies. Accordingly, the PFA currently exempts trust companies, banks, and public agencies from these licensing requirements. In support of this bill, the Executive Committee of the Tax Exempt Organizations Standing Committee of the Taxation Section and the Nonprofit & Unincorporated Organizations Committee of the Business Law Section of the State Bar of California argue that "Ýc]ompliance with the PFA is unduly burdensome for charities acting as trustees of these defined types of trusts. The PFA was enacted primarily in response to concerns about abuses by individual trustees. Thus, its requirements are designed for individual fiduciaries." On the other hand, the Charities Supervision Act pertains to "corporations, unincorporated charitable corporations, unincorporated associations, trustees, and other legal entities holding property for charitable purposes, commercial fundraisers for charitable purposes, fundraising counsel for charitable purposes, and commercial coventurers, over which the state or the Attorney General has enforcement or supervisory powers." (Gov. Code Sec. 12581.) The Charities Supervision Act provides registration, reporting, and auditing requirements, as well as civil penalties for violations thereof, as applied to charitable entities. (Gov. Code Secs. 12585, 12586, 12586.1, and 12591.1.) Support : Association of Independent California Colleges and Universities; Aviva Shiff Boedecker Charitable Planning Associates; Bakersfield Memorial Hospital Foundation; Biola University; California Baptist University; California State SB 997 (Wagner) Page 10 of ? Parks Foundation; California State University, Long Beach Foundation; Claremont McKenna College; Episcopal Diocese of California; Executive Committee of the Tax Exempt Organizations Standing Committee of the Taxation Section of the State Bar of California; Executive Committee of the Trusts & Estates Section of the State Bar of California; Holy Names University; Jewish Community Foundation of Los Angeles; Kaspick & Company; KQED; Lucile Packard Foundation for Children's Health; Mount St. Mary's College; Nature Conservancy; Nonprofit & Unincorporated Organizations Committee of the Business Law Section of the State Bar of California; Northern California Planned Giving Council; Pepperdine University; Point Loma Nazarene University; Pomona College; San Francisco Foundation; Santa Clara University; Silicon Valley Community Foundation; Stanford University; University of San Diego; University of San Francisco; University of California; University of Southern California Opposition : Professional Fiduciary Association of California HISTORY Source : Author Related Pending Legislation : SB 542 (Price), among other things, would extend the Professional Fiduciaries Bureau sunset and modify the enrolled agents licensing exemption under the PFA. This bill was not heard in this committee and is in the Assembly pending committee referral. Prior Legislation : See Background. Prior Vote : Assembly Floor (Ayes 70, Noes 0) Assembly Appropriations Committee (Ayes 17, Noes 0) Assembly Business, Professions and Consumer Protection Committee (Ayes 9, Noes 0) Assembly Judiciary Committee (Ayes 10, Noes 0) ************** SB 997 (Wagner) Page 11 of ?