BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 997
                                                                  Page  1

          CONCURRENCE IN SENATE AMENDMENTS
          AB 997 (Wagner)
          As Amended June 28, 2011
          Majority vote
           
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          |ASSEMBLY:  |70-0 |(May 12, 2011)  |SENATE: |37-0 |(August 22,    |
          |           |     |                |        |     |2011)          |
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           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 








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               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, 








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          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 








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          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 








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               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