BILL ANALYSIS Ó
AB 1700
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Date of Hearing: March 8, 2016
ASSEMBLY COMMITTEE ON JUDICIARY
Mark Stone, Chair
AB 1700
(Maienschein) - As Introduced January 25, 2016
PROPOSED CONSENT (As Proposed to be Amended)
SUBJECT: TRUSTEE Notice of proposed action: DISTRIBUTIONS
KEY ISSUE: SHOULD A TRUSTEE BE PERMITTED TO USE THE
OUT-OF-COURT NOTICE OF PROPOSED ACTION PROCESS TO DISTRIBUTE
TRUST FUNDS without risk of liability?
SYNOPSIS
This non-controversial bill, sponsored by the Trusts & Estates
Section of the State Bar, expands the use of an out-of-court
procedure to allow trustees to take various actions without risk
of liability for taking those actions. Under the out-of-court
notice of proposed action process, a trustee may voluntarily
choose to provide a simplified notice of a proposed action or
non-action to the trust beneficiaries and allow them to object.
If the beneficiaries do not object within the provided
timeframe, the trustee may take the action without risk of
liability. If a beneficiary objects, the trustee may seek court
approval to take the proposed action.
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The notice of proposed action process was originally limited to
trustee actions under the Uniform Principal and Income Act. In
2004, the Legislature expanded that to allow a trustee to use
the notice of proposed action for the trustee's general trust
powers, whether derived from statute or the trust instrument
itself, subject to specific exemptions. (SB 1021 (Poochigian),
Chap. 54, Stats. 2004.) That bill also extended the timeframe
for beneficiaries to object from 30 days to 45 days.
This bill, as proposed to be amended, makes two changes to the
trustee notice of proposed action to, according to the author,
promote the efficiency of trust administration. First, the bill
deletes the current exemption that prevents use of the notice of
proposed action process for a preliminary and final distribution
of trust assets. Second, it clarifies that the notice of
proposed action process cannot be used by a trustee to discharge
himself or herself and avoid any liability. The Trusts &
Estates Section believes that these changes will "dramatically
increase" the usefulness of the notice of action procedure and
will "enhance the ability of trustees to efficiently administer
trusts in California." There is no reported opposition to these
proposed changes.
SUMMARY: Allows a trustee to use the notice of proposed action
process to make trust distributions. Specifically, this bill:
1)Eliminates an exemption to allow a trustee to use the notice
of proposed action to make a preliminary or final trust
distribution.
2)Clarifies that a trustee may not use the notice of proposed
action process to discharge himself or herself.
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EXISTING LAW:
1)Grants a trustee broad powers to administer an estate under a
trust instrument, including, among others, the power to hold,
sell or exchange trust property, receive and distribute
income, and compromise or settle claims against the estate.
Specifically vests the trustee with fiduciary duties related
to management of the estate, and makes the trustee liable to
the beneficiary for losses resulting from a breach of those
duties. (Probate Code Section 16200 et seq. Unless stated
otherwise, all further statutory references are to the Probate
Code.)
2)Provides a trustee, under the Uniform Principal and Income
Act, default rules for distributing to trust beneficiaries the
net income and principal receipts acquired by a trust so that
distributions under a trust generally conform to distributions
under a will. These default rules do not apply if the trust
contains different provisions. (Section 16320 et seq.)
3)Permits a trustee, acting under general trustee powers,
whether from statute or the trust itself, or the Uniform
Principal and Income Act, to give notice of a proposed action,
including a decision not to take action, to adult
beneficiaries who are entitled to receive income under the
trust or to receive distribution of principal, and specifies
the contents of the notice to be given. Requires that the
notice state the time within which objections to the proposed
action can be made, which cannot be less than 45 days from the
mailing of the notice of proposed action. (Section 16500 et
seq.)
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4)Specifies the procedure for a trust beneficiary to object to
the proposed action, and allows the trustee to petition the
court for authority to proceed, if objection is received as
specified, and for a beneficiary to petition the court to
order the trustee to take such action, if the trustee's
proposal is not to take the action. Places the burden on the
beneficiary to prove to the court that the action should not
be taken, or should be taken, as the case may be. (Section
16503.)
5)Provides that a trustee is not liable to a beneficiary for an
action taken under the notice of proposed action process if
the trustee properly notifies the beneficiary and does not
receive a written objection from the beneficiary within the
required timeframe. (Id.)
FISCAL EFFECT: As currently in print this bill is keyed
non-fiscal.
COMMENTS: The Probate Code empowers the administrator or
personal representative of a decedent's estate to notice a
proposed action to beneficiaries and other affected parties,
before taking or not taking an action, in order to provide the
noticed parties the opportunity to consent or to object.
(Section 10500 et seq.) Administration of a decedent's estate
occurs largely under court supervision. Trustees, on the other
hand, are vested by statute with broad powers to administer
assets in a trust, with little supervision by the court.
Trustees have a very similar notice of proposed action procedure
that allows trustees, should they so choose, to notify trust
beneficiaries of a proposed action and to allow the
beneficiaries to object in a simplified process. If the
beneficiaries do not oppose within the provided timeframe, the
trustee may take the action, without risk of liability. If the
beneficiary objects, the trustee may go to court to seek
approval in order to take the proposed action without risk of
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liability.
The notice of proposed action process was originally limited to
trustee actions under the Uniform Principal and Income Act. In
2004, the Legislature expanded that to allow a trustee to use
the notice of proposed action for the trustee's general trust
powers, whether derived from statute or the trust instrument
itself, subject to specific exemptions. (SB 1021 (Poochigian),
Chap. 54, Stats. 2004.) That bill also extended the timeframe
for beneficiaries to object from 30 days to 45 days.
This bill, sponsored by the Trusts & Estates Section of the Bar,
makes two changes to the trustee notice of proposed action to,
according to the author and the sponsor, promote the efficiency
of trust administration. First, the bill deletes the current
exemption that prevents use of the notice of proposed action
process for a preliminary and final distribution of trust
assets. Second, clarifies that the notice of action process
cannot be used to discharge a trustee. In support of the bill
the author writes:
AB 1700 would modify the [notice of proposed action]
procedure so as to dramatically increase its usefulness and
enhance the ability of trustees to efficiently administer
trusts in California in a timely and streamlined manner.
The proposed changes in no way diminish the rights and
protections currently afforded beneficiaries. And no
changes are being made to the ability of a beneficiary to
easily object to the proposed action.
Notice of Proposed Action Process: The notice of proposed
action process allows a trustee to take certain action without
court approval and then limits the trustee's potential liability
with respect to that action. A trustee may elect to use the
voluntary notice of action process to take action -- or not take
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action, as the case may be -- under the general trustee powers,
whether provided by statute or the trust itself, or the Uniform
Principal and Income Act. To do so, the trustee must give
notice of the proposed action, or the decision not to take
action, to beneficiaries who are entitled to receive income
under the trust or to receive distribution of principal, unless
the beneficiary has already consented in writing or cannot be
located. The notice must state a description of the actions to
be taken and the reasons for the action.
The notice must state the time within which objections to the
proposed action can be made, which cannot be less than 45 days
from the mailing of the notice of proposed action. A
beneficiary may object to the action by sending a written
objection to the trustee within the time period specified in the
notice of proposed action. If no objection is received by the
deadline, the trustee may take the action and is not liable to a
beneficiary for that action. If a beneficiary objects, either
the trustee or the beneficiary can seek court approval for the
action or a different action.
Certain actions are specifically exempted from the notice of
proposed action process. These actions include allowance for
the trustee's or the trustee's attorney's compensation, sale of
trust property to the trustee or the trustee's attorney, and
settlement of a claim against the trustee. These exemptions all
seek to avoid providing immunity from liability to a trustee who
may be self-dealing. Also exempted are preliminary and final
trust distributions and discharges.
This Bill Will Expand Use of the Notice of Proposed Action
Process: This bill changes the notice of proposed action
process by eliminating a current exemption from the process and
allowing trustees to use the process for preliminary and final
distributions of trust assets. The Trust & Estates Section
writes that change will "dramatically increase" the use of the
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notice of proposed action:
Every trust administration involves making distributions.
It is a routine aspect of a trust administration.
Expanding the scope of the statute to allow a trustee to
use a notice of proposed action] procedure in conjunction
with distribution matters would increase the efficiency of
a trust administration without diminishing any rights or
protections currently afforded beneficiaries. Such a
procedure would allow trustees to easily communicate
proposed distribution plans to beneficiaries and seek their
consent, whether expressed directly by written consent, or
indirectly by failure to object, without having to resort
to the more costly and time consuming option of seeking
court approval of the proposed distribution plan.
This bill also clarifies the exemption of discharges from the
notice of proposed action process. The Trusts & Estates Section
writes that discharge prohibition "was included in the initial
legislation [creating the notice of proposed action process for
trustees], which mirrored probate statutes." The discharge is
generally not something that occurs in trust administration;
rather it occurs in probate, where a personal representative can
be discharged. However, in order to clarify the exemption, the
bill, as proposed to be amended, exempts from the notice of
proposed action process a discharge of the trustee. This should
prevent a trustee from trying to insulate themselves from
liability improperly somehow by attempting to discharge
themselves.
Finally, this bill, as originally drafted, would have shortened
the timeframe for when a beneficiary must object to a proposed
action, from 45 days to 30 days. In 2004, the Legislature
specifically extended the time to file written objections from
30 days to 45 days and this bill originally sought to reverse
that extension. This Committee, in 2004, noted that extended
period for objecting "was made to address concerns of the
California Judges Association." While the California Judges
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Association has not, at this point, submitted a letter opposing
the shortening of the time period to object, there is still
concern that shortening the beneficiary's time period to object
to an action, including now a partial or complete distribution
of trust assets, could result in an inequitable or egregious
situation. The 45-day period includes both the mailing of the
notice to the beneficiaries and the beneficiaries' sending of
their objections back to the trustee. While, this could be
accomplished nearly instantaneously through email, each mailing
could also take a week or more through regular mail service. If
the objection is even a day late, a trustee will be protected
against any liability for even an inappropriate action,
including a distribution of all the trust property. Given this,
the author has rightly agreed to leave the time period to object
at 45 days. However, if all beneficiaries consent, the action
can be taken before the 45 days expire.
Prior Legislation: AB 846 (Ackerman), Chap. 145, Stats. 1999,
enacted the Uniform Principal and Income Act, which contained
the notice of proposed action by trustees.
SB 1021 (Poochigian), Chap. 54, Stats. 2004, extended the notice
of proposed action provisions to the trustee's general trust
powers subject to specific exemptions, and extended the
timeframe for beneficiaries to object from 30 days to 45 days.
ARGUMENTS IN SUPPORT: In support of the bill, the Trusts &
Estates Section of the State Bar writes:
The proposed amendment to the statute would dramatically
increase its usefulness and enhance the ability of trustees
to efficiently administer trusts in California. Under
current law, unless the trustee obtains the affirmative
written approval by every beneficiary prior to a proposed
plan of distribution, in order to be ensured that no
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beneficiary can later object to a distribution, a trustee
is required to file a petition with the probate court
seeking approval of a proposed distribution. Presently, no
other method currently exists to reliably ensure that there
are no beneficiary objections prior to such a distribution
absent either obtaining affirmative consent or a court
order. In most cases, no objection to the petition is
received. Thus, such petitions unnecessarily strain the
resources of California's over-burdened court system.
Although in many trust administrations, receiving the
affirmative consent of all interested parties to a proposed
distribution may be possible, there are situations in which
securing such consents is not cost effective or practical,
such as when the trust has numerous beneficiaries, or in
situations where a beneficiary has such a minor interest
that getting him or her to respond is problematic.
REGISTERED SUPPORT / OPPOSITION:
Support
Trusts & Estates Section of the State Bar (sponsor)
Opposition
None on file
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Analysis Prepared by:Leora Gershenzon / JUD. / (916) 319-2334