BILL ANALYSIS
SB 202
Page 1
Date of Hearing: June 22, 2010
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 202 (Harman) - As Amended: June 17, 2010
PROPOSED CONSENT
SENATE VOTE : Not Relevant
SUBJECT: TRUST ADMINISTRATION: TRUSTEE DUTIES
KEY ISSUE : IN ORDER TO HELP CLARIFY VARIOUS ASPECTS OF TRUST
LAW AND help ensure that the interests of beneficiaries are
properly protected, SHOULD SEVERAL RELATIVELY MINOR CHANGES BY
MADE IN THE AREA OF TRUST ADMINISTRATION?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This non-controversial bill, sponsored by the Trusts and Estate
Section of the State Bar (Section), seeks to reduce disputes by
bringing clarity and certainty to the law describing the
parties' rights and obligations in the area of trustee
accountability. This bill makes a number of relatively minor
changes to trust administration to make the law of trusts more
workable for trustees and to help ensure that the interests of
beneficiaries are properly protected, including closing a
loophole that may permit evasion of the required notice of trust
administration, providing that late service of notice is
nonetheless effective to trigger the 120-day statute of
limitations to file a trust contest, and increasing the amount
of a trust that a trustee may terminate without court permission
from $20,000 to $40,000. Finally, this bill declares that it is
against public policy for a trust instrument to waive the
beneficiary's right to information and access to records. There
is no known opposition to this bill.
SUMMARY : Clarifies several aspects of trust administration.
Specifically, this bill :
1)Allows a trustee to terminate a trust, without court approval,
if the value of the trust does not exceed $40,000.
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2)Requires a trustee, on request, to provide a beneficiary with
the terms of the trust, unless the trustee is specifically not
required to do so.
3)Clarifies that a trustee, upon reasonable request by a
beneficiary, must provide the beneficiary with specific
information relating to the administration of the trust
relevant to the beneficiary's interest.
4)Requires a trustee to provide a copy of an irrevocable trust,
or the irrevocable portions of the trust to:
a) The beneficiary of the trust, as specified, including
upon the death of a settlor who established an irrevocable
trust with power of appointment;
b) A beneficiary when there is a change of trustee; or
c) The Attorney General, for a charitable trust, if either
(a) or (b), above, is satisfied.
5)Requires the trustee to serve notice on beneficiaries and
heirs when the settlor has retained a power of appointment to
appoint beneficiaries and that power, upon the death of the
settlor, is effective or lapses.
6)Clarifies that service of required trust notification, even if
late, will commence the 120-day period for contesting a trust.
7)Distinguishes those situations in which a trustee is obligated
to provide a formal accounting from those where the trustee is
required to report only information requested by a
beneficiary.
8)Prevents a settlor from waiving the trustee's duty to report
trust information to beneficiaries.
9)If a beneficiary has waived the right to a trust accounting,
allows the waiver to be withdrawn for transactions occurring
after the date of the written withdrawal of the waiver.
Regardless of whether the beneficiary has waived accountings,
allows a court, upon a showing that it is reasonably likely
that a material breach of trust has occurred, to compel the
trustee to account.
10) Clarifies that a beneficiary may petition the court to
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require a trustee to provide the beneficiary with the terms of
the trust.
11) Clarifies that any waiver by a settlor of the trustee's
obligation to provide the terms of the trust or specified
information to a beneficiary is void as against public policy.
12) Clarifies that, in determining priority for payment of the
unitrust amount (the amount of annual distribution paid out
under a unitrust), capital gains are not included in net
taxable income.
13) Makes other clarifying and conforming changes.
EXISTING LAW :
1)Governs the creation, validation, modification, termination,
and administration of trusts, and provides for the
adjudication of disputes relating to the trust. Provides for
the rights and responsibilities of all parties to a trust,
i.e., the settlor (i.e., the creator of the trust), trustee,
beneficiary, heir, and a third party, such as a creditor.
(Probate Code Section 15000 et seq. All further statutory
references are to that code unless stated otherwise.)
2)Allows a trustee to terminate a trust, without court approval,
if the value of the trust does not exceed $20,000. (Probate
Code Section 15408.)
3)Requires the trustee, when a revocable trust becomes
irrevocable, to provide a copy of the terms of the trust to
any heir or beneficiary upon request. (Section 16061.5.)
4)Requires a trustee to provide notification to beneficiaries
and heirs as specified. (Section 16061.7.)
5)Provides that an action to contest a trust may not be brought
more than 120 days from the date that the trustee serves
notification or 60 days from the date a copy of the trust is
mailed or delivered, whichever is longer. (Section 16061.8)
6)Provides that either a beneficiary or a settlor may waive the
right to a trust accounting, except as specified. (Section
16064.)
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7)Provides that the unitrust amount is to be paid first from net
taxable income, then from short-term capital gains, then
long-term capital gains, then other income and finally from
the principal of the trust. (Section 16336.4.)
COMMENTS : Increasingly, revocable trusts are replacing wills as
the primary vehicle by which people transfer property at death.
The principal advantage of the revocable trust, made irrevocable
by the death of the settlor or upon the happening of an event
specified in the trust, is that it can be drafted in such a way
as to avoid probate court altogether when the time comes to
distribute the estate of a decedent. This non-controversial
bill, sponsored by the Trusts and Estates Section of the State
Bar, seeks to make a number of relatively minor changes to trust
administration to make the law of trusts more workable for
trustees and to help ensure that the interests of beneficiaries
and heirs are properly protected.
According to the Trusts and Estates Section, the purpose of the
bill is to reduce disputes by bringing clarity and certainty to
the law describing the parties' rights and obligations in the
area of trustee accountability. The Section believes that this
bill will reduce the expense of trust administration by
encouraging informal, targeted and responsive replies to
requests from beneficiaries rather than superfluous or
burdensome formal reporting requirements. The bill, which
requires greater accountability from trustees, should, the
Section believes, instill greater confidence in beneficiaries,
discourage actual breaches of trust by trustees, and reduce
needless litigation engendered by a lack of communication and
information.
Increases the Size of a Trust That a Trustee May Terminate
Without Court Approval : Current law allows a trustee to
terminate a trust, without court approval, if the principal of
the trust does not exceed $20,000. The purpose of this
provision is that at some point it is not cost-effective to
continue a trust, and, allowing a trustee to terminate without
seeking court permission, prevents the trustee, when the trust
principal falls too low, from using up the last remains of a
trust by going to court. The $20,000 limit was set in 1986 and
has not been adjusted since. Since that time, the consumer
price index has doubled. By increasing the trust principal from
$20,000 to $40,000, this bill simply seeks to keep pace with
inflation.
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Trustee's Duty to Provide Copy of "Terms of the Trust" When
Requested : Revocable trusts (inter vivos trusts, or "living
trusts", as they are commonly called) generally remain revocable
until the death of the settlor of the trust. Current law
requires a trustee to serve a notice of trust administration on
beneficiaries, heirs, and the Attorney General (AG) (if the
trust is a charitable trust subject to the supervision of the
AG), upon the occurrence of specified events. Among other
things, the notice must state that the recipient is entitled to
receive a copy of the terms of the trust, upon reasonable
request to the trustee. The trustee is also required to provide
a copy of the "terms of the trust" to any trust beneficiary and
to any heir of a deceased settlor who requests it, upon
occurrence of certain specified events. "Terms of the trust" is
defined to include the trust and all amendments to the trust.
If the trust has been "restated," the trustee need only provide
a copy of the restated trust and any subsequent amendments.
This bill requires the trustee to provide a copy of the terms of
the trust to any trust beneficiary who requests it on the death
of a settlor of an irrevocable trust with power of appointment
or whenever there is change of trustee of an irrevocable trust.
It also includes, for charitable trusts, the AG in that list of
persons who may request a copy of the terms of trust whenever
one of these events occurs.
Closing a Loophole to Ensure Notice of Trust Administration
Where Trust Was Irrevocable Upon Creation . The death of the
settlor makes a trust irrevocable, and triggers the duty of a
trustee to provide notice of trust administration to the
beneficiaries, heirs, and the AG if appropriate. However,
proponents state that the literal terms of the statute may not
require notice upon the death of a settlor who created an
ostensibly irrevocable trust but retained a power of
appointment. Even though the settlor retained the right to
amend the plan of distribution until death in the same manner as
a revocable trust, the notice requirement arguably, according to
proponents, is not triggered because such a trust technically
was irrevocable upon creation, not upon the death of the
settlor. This loophole, they state, could be used to conceal
elder abuse by preventing interested persons from receiving
notice, which would give them the opportunity to challenge the
trust.
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SB 202 closes that loophole by providing that notification is
required whenever a power of appointment retained by a settlor
is effective or lapses upon the death of the settlor with
respect to an inter vivos trust that was, or purported to be,
irrevocable upon its creation. The bill also devolves this duty
of notification by the trustee to the successor trustee.
Contesting a Trust Within 120 Days: Late Service of Notice Will
Start the Statute of Limitations : Probate Code Section 16061.8
provides that service of notice starts the running of certain
deadlines to file a trust contest, which must be filed within
120 days of service of notice. Section 16061.7(f) however
requires that notice must be served within 60 days following the
occurrence of the event requiring the notice (or discovery of
the person requiring notice). Consequently, proponents state,
notice that is served late technically may not constitute notice
"pursuant to this chapter," and the 120-day statute of
limitations may never begin to run.
This bill clarifies that providing that the 120-day statute of
limitations for filing a contest would be triggered by service
of the required notice within or after the time period specified
in Section 16061.7.
Improved Communications From Trustee : While a trustee has a
duty to respond to a beneficiary's reasonable request for
information, some trustees are taking the letter of the law in
Section 16061 by providing "a report of information about the
assets, liabilities, receipts, and disbursements of the trust,
the acts of the trustee, and particulars relating to the
administration of the trust relevant to the beneficiary's
interest, including the terms of the trust" - essentially a
formal report that is filed in court, even though the contents
of the report may be entirely nonresponsive to the beneficiary's
request.
This bill allows a trustee to respond to a beneficiary's
reasonable request by providing requested information and any
records relevant to the beneficiary's interest. The language is
broad enough to allow the trustee to respond in any form that is
reasonable and answers the questions posed by the beneficiary.
Settlor May Not Waive Beneficiary's Right to Receive Copy of
Terms of the Trust : Current Section 16064 provides that a
beneficiary is not entitled to either reporting of information
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or to accountings under the following circumstances: while the
trust is revocable by the settlor or another person, where the
settlor has waived the trustee's duty in the trust instrument,
and where the trustee and beneficiary are the same person.
Current law also provides that the trustee's obligation to send
the beneficiaries a notification of their entitlement to receive
a copy of the terms of the trust may not be waived by the
settlor.
This bill prohibits a settlor from waiving the beneficiary's
right to request the terms of the trust and from waiving the
beneficiary's right to inspect the trust's books and records, as
against public policy.
When a Trustee Need Not Report or Provide Accountings to
Beneficiary : SB 202 clarifies that a trustee is not required to
account to a beneficiary, provide the terms of the trust to a
beneficiary, or to provide requested information and records to
the beneficiary in any of the following circumstances: In the
case of a beneficiary of a revocable trust, for the period when
the trust may be revoked, and where the beneficiary and the
trustee are the same person.
REGISTERED SUPPORT / OPPOSITION :
Support
Trusts and Estate Section of the State Bar (sponsor)
Opposition
None on file
Analysis Prepared by : Leora Gershenzon / JUD. / (916)
319-2334