BILL ANALYSIS Ó AB 997 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 997 (Wagner) As Amended June 28, 2011 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |70-0 |(May 12, 2011) |SENATE: |37-0 |(August 22, | | | | | | |2011) | ----------------------------------------------------------------- Original Committee Reference: JUD. SUMMARY : Exempts specified nonprofits corporations and charitable trusts from the definition of professional fiduciaries under the Professional Fiduciaries Act (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 or agency, that satisfies all of the following requirements: 1)Is a public charity, as provided by the specified provisions of the Internal Revenue Code. 2)Has been in existence for at least five years. 3)Has total institutional funds of at least $2 million, as provided. 4)Is acting as a trustee of a trust 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 income, 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 AB 997 Page 2 distributions are limited to income, as specified; or, 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. The Senate amendments were technical. EXISTING LAW : 1)Provides for the licensing and regulation of professional fiduciaries by the Professional Fiduciaries Bureau (PFB) within the Department of Consumer Affairs. 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. 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 the course and scope of that employment. Also excludes certain broker-dealers and investment advisors, as provided. 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. AS PASSED BY THE ASSEMBLY , this bill was substantially similar to the version approved by the Senate. FISCAL EFFECT : According to the Senate Appropriations Committee, pursuant to Senate Rule 28.8, negligible state costs. COMMENTS : In 2006, in response to shocking reports of abuse, AB 997 Page 3 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), Chapter 491, Statutes of 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. 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. 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: 1) identified the person and his or her business location; 2) provided educational background and professional experience (including verification of any college or graduate degree claimed); 3) identified the conservatees or wards or trusts administered; 4) provided the aggregate value of the estate(s) managed; and, 5) disclosed any action removing or cause for resignation of the 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 AB 997 Page 4 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. 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. 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, Stanford 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 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 AB 997 Page 5 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. Analysis Prepared by : Leora Gershenzon / JUD. / (916) 319-2334 FN: 0001446