BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
SB 1158 (Anderson)
Version: April 25, 2016
Hearing Date: May 3, 2016
Fiscal: No
Urgency: No
TMW
SUBJECT
Trusts: modification or termination
DESCRIPTION
This bill would clarify the ability of all beneficiaries of an
irrevocable trust to petition the court for a modification or
termination of the trust. This bill would also require the
court to consider, in making a determination with respect to a
proposed termination of an irrevocable trust, whether the trust
is subject to a valid restraint on the transfer of a
beneficiary's interest. This bill, if the irrevocable trust
provides for the disposition of principal to a class of persons
described only as "heirs" or "next of kin" of the settlor, or
using other words that describe the class of all persons who
would take under the rules of intestacy, would authorize the
court to limit the class of beneficiaries whose consent is
needed to compel the modification or termination of the trust to
the beneficiaries who are reasonably likely to take under the
circumstances.
This bill would clarify that an irrevocable trust may be
modified or terminated by the written consent of the settlor and
all beneficiaries without court approval of the modification or
termination. This bill would also make other clarifying changes
related to a petition by consenting beneficiaries, with the
consent of the settlor, for modification or partial termination
of an irrevocable trust.
BACKGROUND
As part of a person's estate planning, he or she may create a
trust into which the person transfers specified property.
Trusts are commonly used to avoid probate of the person's estate
upon the person's death and may provide certain tax advantages
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relative to the property. There are two types of trust estate
plans; a testamentary trust, which is written into a will and
becomes effective upon death, and a living or inter vivos trust,
which is created by a separate document. There are two types of
inter vivos trusts, revocable and irrevocable. Unlike a
revocable trust, an irrevocable trust does not permit the person
creating the trust, referred to as the settlor, to revoke,
alter, and amend the trust without the consent of the
beneficiaries of the trust.
Existing law provides procedures for modification or termination
of an irrevocable trust when the settlor and beneficiaries
consent to the trust. If the settlor is not available to
consent to modification or termination of the trust, the consent
of all of the beneficiaries is required, and the beneficiaries
must follow separate procedures to modify or terminate the
trust. This bill would revise these procedures.
A prior version of this bill would have changed the presumption
in favor of maintaining the settlor's ability to direct his or
her money as he or she pleased through testamentary documents to
instead create a presumption that the court's determination,
based upon the beneficiaries' assertions, was more favorable
than maintaining the settlor's intent. Recent amendments remove
those provisions from the bill.
CHANGES TO EXISTING LAW
Existing law provides that, unless a trust is expressly made
irrevocable by the trust instrument, the trust is revocable by
the settlor. (Prob. Code Sec. 15400.)
Existing law provides that if all beneficiaries of an
irrevocable trust consent, they may compel modification or
termination of the trust upon petition to the court. (Prob.
Code Sec. 15403(a).) However, if the continuance of the trust
is necessary to carry out a material purpose of the trust, the
trust cannot be modified or terminated unless the court, in its
discretion, determines that the reason for doing so under the
circumstances outweighs the interest in accomplishing a material
purpose of the trust. (Prob. Code Sec. 15403(b).)
Existing law prohibits the court from permitting termination of
the trust that is subject to a valid restraint on transfer of
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the beneficiary's interest, as specified. (Prob. Code Sec.
15403(c).)
Existing law , except as otherwise provided, prohibits transfer
of a beneficiary's interest in income under the trust if the
trust instrument provides that a beneficiary's interest income
is not subject to voluntary or involuntary transfer, and
provides that the beneficiary's interest in income is not
subject to enforcement of a money judgment until paid to the
beneficiary. (Prob. Code Sec. 15300.)
Existing law , if the settlor and all beneficiaries of an
irrevocable trust consent, authorizes them to compel the
modification or termination of the trust. (Prob. Code Sec.
15404(a).) However, if any beneficiary does not consent to the
modification or termination of the trust, existing law
authorizes the other beneficiaries, with the consent of the
settlor, to petition the court to compel a modification or a
partial termination of the trust if the interests of the
beneficiaries who do not consent are not substantially impaired.
(Prob. Code Sec. 15404(b).)
Existing law , if the trust provides for the disposition of
principal to a class of persons described only as "heirs" or
"next of kin" of the settlor, or using other words that describe
the class of all persons who would take under the rules of
intestacy, authorizes the court to limit the class of
beneficiaries whose consent is needed to compel the modification
or termination of the trust to the beneficiaries who are
reasonably likely to take under the circumstances. (Prob. Code
Sec. 15404(c).)
Existing law , with respect to beneficiary consent to those
petitions to compel modification or termination of the trust,
provides that the consent of a beneficiary who lacks legal
capacity, including a minor, or who is an unascertained or
unborn person may be given in proceedings before the court by a
guardian ad litem, if it would be appropriate to do so. (Prob.
Code Sec. 15404.) In determining whether to give consent,
existing law authorizes the guardian ad litem of the minor to
rely on general family benefit accruing to living members of the
beneficiary's family as a basis for approving a modification or
termination of the trust. (Prob. Code Sec. 15404.)
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Existing law provides that the presumption of fertility is
rebuttable in determining the class of beneficiaries whose
consent is necessary to modify or terminate the trust. (Prob.
Code Sec. 15406.)
This bill would clarify that if all beneficiaries of an
irrevocable trust consent, they may petition the court for
modification or termination of the trust.
This bill would strike the prohibition of the court's discretion
to permit termination of a trust subject to a valid restraint on
the transfer of a beneficiary's interest, and, instead, require
a court, in making a determination with respect to a proposed
termination of an irrevocable trust, to consider whether the
trust is subject to a valid restraint on the transfer of a
beneficiary's interest, as specified.
This bill would clarify that an irrevocable trust may be
modified or terminated by the written consent of the settlor and
all beneficiaries without court approval of the modification or
termination.
This bill would clarify that if any beneficiary does not consent
to the modification or termination of an irrevocable trust, with
the consent of the settlor, the court may modify or partially
terminate the trust if the interests of the beneficiaries who do
not consent are not substantially impaired.
This bill would clarify that a court may limit the class of
beneficiaries whose consent is necessary to modify or terminate
a trust to the beneficiaries who are reasonably likely to take
under the circumstances.
COMMENT
1. Stated need for the bill
The author writes:
Certain flaws in the existing statutes governing modification
and termination of trusts ([Probate Code S]ection 15400 et
seq.) may be summarized as follows:
[Probate Code] Section[s] 15403 and 15404 both use the word
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"compel," which results in a lack of clarity in those
sections. While the word "compel" typically connotes someone
or something being forced or required to do something, that is
not what is occurring under either section 15403 or 15404. . .
. The statutes should be clarified with respect to their
confusing use of the term "compel."
Under current law, a court is precluded from terminating a
trust under section 15403 (where all beneficiaries of an
irrevocable trust consent) if the trust is subject to a valid
restraint on transfer of the beneficiary's interest as
provided in Chapter 2 of the Probate Code, i.e., a
"spendthrift provision." In modern trust drafting, spendthrift
provisions are ubiquitous and, as a result, section 15403
largely precludes their termination. Courts should not be
precluded from terminating a trust containing a spendthrift
provision; rather, courts should be given the discretion,
after giving due consideration to the spendthrift provision,
to terminate a trust containing a spendthrift provision under
appropriate circumstances. [Emphasis in original.]
With respect to modification or termination under section
15403 (with the consent of all beneficiaries), there is no
provision allowing the court to limit the class of
beneficiaries whose consent is required. With respect to
modification or termination under section 15404 (with the
consent of the settlor and all beneficiaries), section
15404(c) authorizes the court to limit the class of
beneficiaries whose consent is required to the beneficiaries
who are reasonably likely to take under the circumstances.
The rationale for this inconsistency is unclear, as the court
seemingly should have the ability to limit the class of
beneficiaries whose consent is required under both
circumstances.
2. Spendthrift provisions
A spendthrift provision in a trust may be used by the settlor to
control how much a beneficiary will receive and when. Common
reasons to use a spendthrift provision include that the
beneficiary is a poor money manager, has a gambling or substance
addiction, or is an easy target for individuals who may use the
beneficiary for his or her money. A spendthrift provision also
makes the beneficiary's inheritance in the trust unreachable by
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the beneficiary's creditors until the money or assets are
distributed to the beneficiary. As such, the spendthrift
provision is a restraint on the transfer of the inheritance to
the beneficiary.
Existing law provides that the court does not have discretion to
permit termination of a trust that is subject to a valid
restraint on the transfer of the beneficiary's interest
(spendthrift provision). (Prob. Code Sec. 15403(b).) This bill
would strike that provision and, instead, require the court, in
making a determination with respect to a proposed termination of
an irrevocable trust pursuant to a beneficiary's petition, to
consider whether the trust is subject to a spendthrift
provision.
TEXCOM asserts that there is limited availability of the
procedure afforded by Probate Code Section 15403 because of the
prohibition on termination by a court of a trust that is subject
to a valid restraint on transfer of the beneficiary's interest.
According to TEXCOM, "[u]nder current law, a court is precluded
from terminating a trust under [S]ection 15403 (where all
beneficiaries of an irrevocable trust consent) if the trust is
subject to a valid restraint on transfer of the beneficiary's
interest as provided in Chapter 2 of the Probate Code, i.e., a
'spendthrift provision.' In modern trust drafting, spendthrift
provisions are ubiquitous and, as a result, [S]ection 15403
largely precludes their termination. Courts should not be
precluded from terminating a trust containing a spendthrift
provision; rather, courts should be given the discretion, after
giving due consideration to the spendthrift provision, to
terminate a trust containing a spendthrift provision under
appropriate circumstances."
According to the California Law Revision Commission, Probate
Code Section 15403(b) "gives the court some discretion in
applying the material purposes doctrine, except in situations
where transfer of the beneficiary's interest is restrained, such
as by a spendthrift provision. See Section 15300 (restraint on
transfer of beneficiary's interest). Section 15403 permits
termination of an irrevocable trust with the consent of all
beneficiaries where the trust provides for successive
beneficiaries or postpones enjoyment of a beneficiary's
interest. The discretionary power provided in subdivision (b)
also represents a change in the prior California case-law rule.
[Citation.] Section 15403 is intended to provide some degree of
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flexibility in applying the material purposes doctrine in
situations where transfer of the beneficiary's interest is not
restrained." (Recommendation Proposing New Probate Code, 20
Cal. L. Revision Comm'n Reports (1990) 1001, 1876.) Under this
statute, a court must determine the purpose or purposes of a
trust and which purposes are material. This provision, while
allowing the court some latitude on modifying or terminating the
trust, reiterates the preference to continue the settlor's
purpose for creating the trust.
With respect to spendthrift provisions, the doctrine that
property may be made inalienable by such declaration of a
spendthrift provision rests upon the theory that a donor has the
right to give his property to another upon any conditions which
he sees fit to impose, and that, inasmuch as such a gift takes
nothing from the prior or subsequent creditors of the
beneficiary to which they previously had the right to look for
payment, they cannot complain that the donor has provided that
the property or income shall go or be paid personally to the
beneficiary and shall not be subject to the claims of creditors.
(Parscal v. Parscal (1983) 148 Cal.App.3d 1098, 1102-1103.)
The validity of a spendthrift provision in a trust is predicated
upon the consideration that a person is free to make any desired
disposition of his property. (Ibid.)
If the settlor includes a spendthrift provision in the trust
because he or she believes the beneficiaries do not manage money
well, the settlor's purpose should not be disregarded in favor
of the beneficiaries' wants or pursuant to the court's opinion.
If the settlor wanted the beneficiaries to have the money
sooner, there would not be a spendthrift provision. On the
other hand, if circumstances change and the settlor's purpose
for establishing the trust cannot be effectuated, the court has
the ability to modify the trust after determining that the
reason for doing so under the circumstances outweighs the
interest in accomplishing a material purpose of the trust. This
bill, by providing that the court has to consider whether the
trust contains a spendthrift provision when making a
determination on a proposed termination of an irrevocable trust,
would maintain the presumption in favor of the settlor's intent
in creating the spendthrift provision.
3. Doctrine of worthier title
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Existing law, when modifying or terminating an irrevocable trust
with the consent of the settlor and beneficiaries, provides a
path to modification or partial termination of a trust if the
interests of the beneficiaries who do not consent are not
substantially impaired. (Prob. Code Sec. 15404(b).) Existing
law allows the court to limit the class of beneficiaries whose
consent is needed to compel the modification or termination to
the beneficiaries who are reasonably likely to take under the
circumstances. (Prob. Code Sec. 15404(c).) Similarly, this
bill would authorize the court to limit the class of
beneficiaries whose consent is necessary to modify or terminate
a trust when the consent of the settlor is unavailable.
TEXCOM contends that Probate Code Sections 15403 and 15404
should be harmonized and remove the current inconsistency
regarding the class of beneficiaries. Further, TEXCOM argues
that there is a lack of discretion afforded to the court to
limit, where appropriate, the class of beneficiaries whose
consent is necessary to modify or terminate a trust. TEXCOM
notes that relative to trusts, the Probate Code defines
"beneficiary" to mean a person to whom a donative transfer of
property is made or that person's successor in interest,
including a person who has any present or future interest,
vested or contingent. (Prob. Code Section 86.) TEXCOM contends
that the result of this definition is that the class of persons
required to consent to a modification or termination of a trust
is very broad, and frequently includes beneficiaries who are
unborn or unascertainable. Further, TEXCOM notes that included
within this definition of "beneficiary" are persons whose
interests in the trust are extremely remote, e.g., where the
likelihood of their actually taking under the instrument is very
low. TEXCOM asserts that "[c]urrent law is somewhat
inconsistent regarding the ability of the court to limit the
class of beneficiaries whose consent is needed to modify or
terminate a trust:
a. With respect to modification or termination under
[S]ection 15403 (with the consent of all beneficiaries),
there is no provision allowing the court to limit the class
of beneficiaries whose consent is required.
b. With respect to modification or termination under
[S]ection 15404 (with the consent of the settlor and all
beneficiaries), [S]ection 15404(c) authorizes the court to
limit the class of beneficiaries whose consent is required
to the beneficiaries who are reasonably likely to take
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under the circumstances.
TEXCOM asserts that the rationale for this inconsistency is
unclear, as the court seemingly should have the ability to limit
the class of beneficiaries whose consent is required under both
circumstances.
According to the California Law Revision Commission, Probate
Code Section 15404(c) reinstates a limited form of the doctrine
of worthier title, which was abolished in California in 1959.
(See 1959 Cal. Stat. ch. 122; see also Recommendation and Study
Relating to The Doctrine of Worthier Title, 2 Cal. L. Revision
Comm'n Reports D-1 (1959). "Under subdivision (c), the need to
obtain the consent of persons constituting the class of heirs or
next of kin of the settlor may be excused by the court as to
beneficiaries (typically unborn or remote beneficiaries) who are
not reasonably likely to take principal under the trust. This
limitation protects the interests of beneficiaries who are
likely to take while permitting the settlor to modify or
terminate an otherwise irrevocable trust in line with the
probable intent of the settlor." (Recommendation Proposing New
Probate Code, 20 Cal. L. Revision Comm'n Reports (1990) 1001,
1877.)
In keeping with this limited form of the doctrine of worthier
title, this bill would harmonize the two situations where the
beneficiaries may ask the court to modify or terminate the trust
by adding the class limitation authorization currently under
Probate Code Section 15404 to Probate Code Section 15403.
4. Clarifying method for requesting modification or termination
of irrevocable trust
Existing law requires that if all beneficiaries consent to a
modification or termination of the trust, they can compel
modification or termination upon petition to the court. (Prob.
Code Sec. 15403(a).) This bill would clarify that if all the
beneficiaries of an irrevocable trust consent, they may petition
the court for modification or termination of the trust. This
bill would also make other conforming revisions.
The Executive Committee of the Trusts & Estates Section of the
State Bar of California (TEXCOM), sponsor, argues that existing
Probate Code Section 15403 provides that, if all beneficiaries
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of an irrevocable trust consent, "they may compel modification
or termination of the trust upon petition to the court." TEXCOM
asserts that it is not clear who or what is being compelled in
this context. According to TEXCOM, what is actually occurring
under this provision is that the beneficiaries are requesting
that the court modify or terminate a trust." TEXCOM asserts
that this same problem exists for situations where the settlor
and beneficiaries are modifying or terminating a trust by their
mutual agreement. Accordingly, TEXCOM contends that the
statutes should be clarified with respect to their confusing use
of the term "compel." Staff notes that these statutes were
modeled after Sections 337 and 338 of the Restatement (Second)
of Trusts (1957).
5. Clarifying modification or termination of trust pursuant to
consent of settlor and beneficiaries
Existing law provides that if the settlor and all beneficiaries
of a trust consent, they may compel the modification or
termination of the trust. (Prob. Code Sec. 15404.) This bill
would authorize the settlor and beneficiaries to modify or
terminate the trust without a court order.
According to the California Law Revision Commission, a trust may
be modified or terminated pursuant to Probate Code Section 15404
without court approval. (Recommendation Proposing New Probate
Code, 20 Cal. L. Revision Comm'n Reports (1990) 1001, 1877.)
Since the reasoning behind the ability of the settlor and
beneficiaries to compel modification or termination of the trust
does not contemplate the necessity for judicial review, this
provision of the bill is arguably an appropriate clarification
of the law.
Support : None Known
Opposition : None Known
HISTORY
Source : Executive Committee of the Trusts and Estates Section
of the State Bar of California
Related Pending Legislation : AB 1855 (Bonta, 2016) would enact
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the Uniform Trust Decanting Act, under which a fiduciary of an
irrevocable trust may distribute the property of a first trust
to one or more 2nd trust or modify the terms of the first trust
without the consent of the beneficiaries or approval of the
court, subject to certain exceptions. AB 1855 is in the
Assembly Judiciary Committee.
Prior Legislation :
Ab 1683 (Hagman, Chapter 55, Statutes of 2012) provided that the
power of a person other than the settlor to revoke a trust
applies to all or a portion of the trust contributed by the
settlor, regardless of whether the settlor's portion was
separate or community property, and regardless of whether the
power to revoke is exercisable during the lifetime of the
settlor or continues after the settlor's death, or both.
SB 202 (Harman, Chapter 621, Statutes of 2010), among other
things, raised the amount from $20,000 to $40,000 at which a
trustee could terminate a trust without a court order, and
clarified trustee reporting requirements, beneficiary waivers to
an account, and the effect of late service of the notification
by trustee.
AB 2652 (McAlister, Chapter 820, Statutes of 1986), among other
things, authorized trustees to terminate trusts valued at
$20,000 or less without court approval. AB 2652 also
reorganized and consolidated numerous provisions of the Probate
Code regarding trustee account, reporting, and notice duties to
beneficiaries.
AB 759 (Friedman, Ch. 79, Stats. 1990) revised and recast the
Probate Code and, among other things, continued the trust
modification and termination provisions under prior law.
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