BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 1700| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- CONSENT Bill No: AB 1700 Author: Maienschein (R) Amended: 3/14/16 in Assembly Vote: 21 SENATE JUDICIARY COMMITTEE: 7-0, 6/21/16 AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski ASSEMBLY FLOOR: 65-0, 3/17/16 (Consent) - See last page for vote SUBJECT: Trusts: Notice of proposed action by trustee SOURCE: The Executive Committee of the Trusts & Estates Section of the State Bar DIGEST: This bill eliminates the statutory provision that prevents a trustee from using a notice of proposed action (an out of court procedure) for a preliminary and final distribution of trust assets, effectively allowing the notice of proposed action to be used for a preliminary and final distribution of trust assets. This bill clarifies that the notice of proposed action process cannot be used by a trustee to discharge himself or herself and avoid any liability related to the discharge. ANALYSIS: Existing law: 1) Provides that, a trustee may give a notice of proposed action (NOPA) regarding a matter governed by the Uniform Principal and Income Act and to exercise the trustee's general trust powers. For the purpose of NOPA, a proposed AB 1700 Page 2 action includes a course of action or a decision not to take action. 2) Provides that the trustee who elects to provide the NOPA shall mail notice of the proposed action to each of the following: a beneficiary who is receiving, or is entitled to receive, income under the trust, including a beneficiary who is entitled to receive income at the discretion of the trustee; and a beneficiary who would receive a distribution of principal if the trust were terminated at the time the notice is given. 1) Provides that NOPA is not required to be given to a person who consents in writing to the proposed action. The consent may be executed at any time before or after the proposed action is taken. 2) Provides that a trustee is not required to provide a copy of the NOPA to a beneficiary who is known to the trustee but who cannot be located by the trustee after reasonable diligence or who is unknown to the trustee. 3) Provides that the trustee may not use a NOPA in any of the following actions: allowance of the trustee's compensation; allowance of compensation of the attorney for the trustee; settlement of accounts; preliminary and final distributions and discharge; sale of property of the trust to the trustee or to the attorney for the trustee; exchange of property of the trust for property of the trustee or for property of the attorney for the trustee; grant of an option to purchase property of the trust to the trustee or to the attorney for the trustee; allowance, payment, or compromise of a claim of the trustee, or the attorney for the trustee, against the trust; AB 1700 Page 3 compromise or settlement of a claim, action, or proceeding by the trust against the trustee or against the attorney for the trust; or extension, renewal, or modification of the terms of a debt or other obligation of the trustee, or the attorney for the trustee, owing to or in favor of the trust. 1) Provides that the NOPA shall state that it is given pursuant to this section and shall include all of the following: the name and mailing address of the trustee; the name and telephone number of a person who may be contacted for additional information; a description of the action proposed to be taken and an explanation of the reasons for the action; the time within which objections to the proposed action can be made, which shall be at least 45 days from the mailing of the NOPA; or the date on or after which the proposed action may be taken or is effective. 1) Provides that a beneficiary may object to the proposed action by mailing a written objection to the trustee at the address stated in the NOPA within the time period specified in the NOPA. 2) Provides that a trustee is not liable to a beneficiary for an action, as specified, if the trustee does not receive a written objection to the proposed action from a beneficiary within the applicable period and the other NOPA requirements are satisfied. If no beneficiary entitled to notice objects, the trustee is not liable to any current or future beneficiary with respect to the proposed action. 3) Provides that if the trustee receives a written objection within the applicable period, either the trustee or a beneficiary may petition the court to have the proposed action taken as proposed, taken with modifications, or denied. In the proceeding, a beneficiary objecting to the proposed action has the burden of proving that the trustee's proposed action should not be taken. A beneficiary who has not objected is not estopped from opposing the proposed AB 1700 Page 4 action in the proceeding. 4) Provides that if the trustee decides not to implement the proposed action, the trustee shall notify the beneficiaries of the decision not to take the action and the reasons for the decision, and the trustee's decision not to implement the proposed action does not itself give rise to liability to any current or future beneficiary. A beneficiary may petition the court to have the action taken, and has the burden of proving that it should be taken. 5) Provides that the NOPA provisions do not require a trustee to use these procedures prior to taking any action. This bill: 1) Eliminates the provision that the trustee could not use a NOPA for a preliminary and final distribution of trust assets, effectively allowing the NOPA to be used for a preliminary and final distribution of trust assets. 2) Clarifies that the NOPA process cannot be used by a trustee to discharge himself or herself and avoid any liability. Background The NOPA process allows a trustee to take certain action without court approval and then limits the trustee's potential liability with respect to that action if the NOPA process was followed. The NOPA process can be used for trustee actions under the Uniform Principal and Income Act (UPIA). A trustee can also use the NOPA to exercise the trustee's general trust powers. To effectively use the NOPA, the trustee must give notice of the proposed action (or nonaction) 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 also 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 NOPA. A beneficiary AB 1700 Page 5 may object to the action by sending a written objection to the trustee within the specified time period. The trustee may take the action and will not be liable to a beneficiary for that action if no written objection is received by the trustee. 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 NOPA 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 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 eliminates the statutory provision that prevents a trustee from using a NOPA for a preliminary and final distribution of trust assets, effectively allowing the NOPA to be used for a preliminary and final distribution of trust assets. This bill also clarifies that the NOPA process cannot be used by a trustee to discharge himself or herself and avoid any liability related to the discharge. Comments The author writes: California Probate Code section 16500 et seq. permits a trustee, in specified situations, to notify the beneficiaries of a trust of a proposed course of action and obtain their prior consent, either directly by a beneficiary's written consent or implicitly as a result of a beneficiary's failure to timely object. Such a "Notice of Proposed Action" (NOPA) procedure is intended to promote efficient administration of trusts, encourage open communication between trustees and beneficiaries, and to provide trustees with a mechanism for obtaining the beneficiaries' consent (directly or by implication) prior to undertaking a course of action. Utilization of the procedure allows a trustee to AB 1700 Page 6 confidently undertake a course of action without having to incur the expense and possible delay associated with a court hearing on the matter. The current NOPA procedure for trust administrations requires a notice period of 45 days, during which a beneficiary may object to the proposed course of action, and prohibits the use of the procedure to obtain approval of a proposed action that involves a distribution to the trust beneficiaries. AB 1700 would modify the NOPA 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. AB 1700 would allow the use of the NOPA procedure with respect to proposed distributions by a trustee by removing the current restriction for such transactions. As all trust administrations involve distributions, such a change would enhance the usefulness of the procedure and improve efficiency in administration as protective court hearings could be avoided in most situations, and also facilitate more frequent distributions. AB 1700 also clarifies that discharge means the discharge of a trustee. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified6/24/16) The Executive Committee of the Trusts & Estates Section of the State Bar (source) AB 1700 Page 7 Professional Fiduciary Association of California Judicial Council of California OPPOSITION: (Verified6/24/16) None received ARGUMENTS IN SUPPORT: According to the Executive Committee of the Trusts & Estates Section of the State Bar of California, Sponsors: Under current law, the trust NOPA procedure may not be used to obtain approval of a proposed action that involves a distribution to the trust beneficiaries. TEXCOM believes that an amendment to Probate Code section 16501 that removes the current prohibition pertaining to distributions would further achieve the original purpose of the statute without diminishing a beneficiary's rights to object or diluting a trustee's fiduciary duties. 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 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 AB 1700 Page 8 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. [?] In summary, by expanding the scope of the statute to allow the NOPA procedure to be used for trust distribution matters, the proposed amendment to the statute would increase the efficiency of trust administrations, enhance communication between trustees and beneficiaries, and reduce the burden on our courts, without diminishing any rights or protections currently afforded beneficiaries. ASSEMBLY FLOOR: 65-0, 3/17/16 AYES: Achadjian, Alejo, Travis Allen, Baker, Bonilla, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chu, Cooley, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Maienschein, Mathis, Mayes, McCarty, Melendez, Mullin, Nazarian, Obernolte, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Rendon NO VOTE RECORDED: Atkins, Bigelow, Bloom, Bonta, Chiu, Cooper, Dababneh, Gomez, Holden, Low, Medina, O'Donnell, Salas, Wood Prepared by:Margie Estrada / JUD. / (916) 651-4113, Tara Welch / JUD. / (916) 651-4113 6/24/16 15:36:50 **** END ****