BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1158| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 SB 1158 Page 2 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 SB 1158 Page 3 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. SB 1158 Page 4 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. SB 1158 Page 5 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 SB 1158 Page 6 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 SB 1158 Page 7 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) SB 1158 Page 8 None received Prepared by:Margie Estrada / JUD. / (916) 651-4113 5/6/16 14:26:29 **** END ****