BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 1158|
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|(916) 651-1520 Fax: (916) | |
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CONSENT
Bill No: SB 1158
Author: Anderson (R)
Amended: 4/25/16
Vote: 21
SENATE JUDICIARY COMMITTEE: 6-0, 5/3/16
AYES: Jackson, Moorlach, Anderson, Leno, Monning, Wieckowski
NO VOTE RECORDED: Hertzberg
SUBJECT: Trusts: modification or termination
SOURCE: Author
DIGEST: This bill establishes 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 also clarifies that in making a
determination with respect to a proposed termination of an
irrevocable trust pursuant to a beneficiary's petition, the
court must consider whether the trust is subject to a
spendthrift provision. This bill also makes other clarifying
changes.
ANALYSIS:
Existing law:
1)Provides that, unless a trust is expressly made irrevocable by
the trust instrument, the trust is revocable by the settlor.
2)Provides that if all beneficiaries of an irrevocable trust
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consent, they may compel modification or termination of the
trust upon petition to the court. 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.
3)Prohibits the court from permitting termination of the trust
that is subject to a valid restraint on transfer of the
beneficiary's interest, as specified.
4)Prohibits, except as otherwise provided, 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.
5)Authorizes the settlor and all beneficiaries of an irrevocable
trust to compel the modification or termination of an
irrevocable trust if the settlor and all beneficiaries of an
irrevocable trust consent. 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.
6)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 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
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under the rules of intestacy.
7)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, with
respect to beneficiary consent to those petitions to compel
modification or termination of the trust. 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.
8)Provides that the presumption of fertility is rebuttable in
determining the class of beneficiaries whose consent is
necessary to modify or terminate the trust.
This bill:
1)Clarifies that if all beneficiaries of an irrevocable trust
consent, they may petition the court for modification or
termination of the trust.
2)Strikes 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.
3)Clarifies 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.
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4)Clarifies 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.
5)Clarifies 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.
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
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 revises these procedures.
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Comments
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
"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
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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.
A spendthrift provision in a trust may be used by the settlor to
control how much a beneficiary will receive and when. A
spendthrift provision also makes the beneficiary's inheritance
in the trust unreachable by the beneficiary's creditors until
the money or assets are distributed to the beneficiary.
Existing law provides that the court does not have discretion to
permit termination of a trust that is subject to a spendthrift
provision. 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.
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,
maintains the presumption in favor of the settlor's intent in
creating the spendthrift provision.
Related/Prior Legislation
AB 1855 (Bonta, 2016) enacts 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 second 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.
AB 1683 (Hagman, Chapter 55, Statutes of 2012) provided that the
power of a person other than the settlor to revoke a trust
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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, Chapter 79, Statutes of 1990) revised and
recast the Probate Code and, among other things, continued the
trust modification and termination provisions under prior law.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified5/5/16)
Executive Committee of the Trusts and Estates Section of the
State Bar of California
OPPOSITION: (Verified5/5/16)
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None received
Prepared by:Margie Estrada / JUD. / (916) 651-4113
5/6/16 14:26:29
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