BILL ANALYSIS Ó AB 1700 Page 1 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. AB 1700 Page 2 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. AB 1700 Page 3 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.) AB 1700 Page 4 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 AB 1700 Page 5 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 AB 1700 Page 6 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 AB 1700 Page 7 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 AB 1700 Page 8 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 AB 1700 Page 9 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 AB 1700 Page 10 Analysis Prepared by:Leora Gershenzon / JUD. / (916) 319-2334