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 
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          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, 
                                                                      



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          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 
                                                                      



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          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  
          
                                                                      



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          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 
                                                                      



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               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.
                                                                      



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              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 
                                                                      



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               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.

                                                                      



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          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 
                                                                      



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          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)

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