BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 202 (Harman)
As Amended August 12, 2010
Hearing Date: August 23, 2010
Fiscal: No
Urgency: No
TW:jd
PURSUANT TO SENATE RULE 29.10
SUBJECT
Trustees: Duties
DESCRIPTION
This bill would raise the amount from $20,000 to $40,000 at
which a trustee could terminate a trust without a court order.
This bill would clarify trustee reporting requirements,
beneficiary waivers to an account, and the effect of late
service of the notification by trustee. This bill also would
clarify net taxable income payments to a unitrust. This bill
would update the court's ability to move for an order to show
cause to remove a trustee for failing to register with the
Statewide Registry.
BACKGROUND
Last year, SB 367 (Negrete McLeod, Chapter 641, Statutes of
2009) was heard by this committee and initially contained
provisions substantially similar to those in this bill. This
committee passed SB 367 with these provisions by a vote of 5-0.
SB 367 was later gutted and amended to contain revisions to the
Unruh Civil Rights Act. This bill contains provisions similar
to SB 367, with a few new provisions as described below.
In 1985, the California Law Revision Commission (Commission)
issued a report recommending that, among other things, a trustee
be authorized to terminate a trust valued at $20,000 or less
without obtaining a court order in order to terminate an
uneconomical trust that could not achieve its purpose.
(Recommendation proposing The Trust Law (Dec. 1985) 18 Cal. Law
(more)
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Revision Com. Rep. (1986) pgs. 573-574.) The Commission
recommended this non-judicial procedure because "[t]he problem
with requiring trustees of such trusts to apply to the court is
that such applications involve additional expense and there is a
risk that the court may not grant approval of the termination."
(Id. at pg. 574.)
Accordingly, the Legislature enacted AB 2652 (McAlister, Chapter
820, Statutes of 1986) which, among other things, added Section
15408 to the Probate Code and 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.
In 1999, the Legislature recognized a need to protect California
conservatees and wards from fraud and financial mismanagement
perpetrated by private professional conservators and guardians.
The Legislature enacted AB 925 (Hertzberg, Chapter 409, Statutes
of 1999), which required conservators and guardians to register
in a Statewide Registry maintained by the Health and Welfare
Agency Data Center in order to provide a statewide tracking
mechanism that would help the county clerk determine whether a
person petitioning for appointment as a conservator has violated
duties in other parts of the state. Under AB 925, trustees were
authorized to register in the Statewide Registry but were not
required to do so. In 2003, the Legislature enacted SB 294
(Soto, Chapter 629, Statutes of 2003), which extended the
registration requirement to trustees.
In 2006, a series of news articles revealed widespread abuse of
vulnerable elders and dependent adults by conservators and
deficiencies in the courts' oversight of conservatorships.
Accordingly, the Legislature enacted a package of bills to
reform the conservatorship system in the State of California.
Included in these bills was SB 1550 (Figueroa, Chapter 491,
Statutes of 2006), which established the Professional
Fiduciaries Act (the Act) for the purpose of licensing and
regulating individuals who act as conservators, guardians,
trustees, personal representatives, and agents under a durable
power of attorney for health care or for finances, for two or
more persons unrelated to the professional fiduciary or to each
other, as specified.
This bill, sponsored by the Executive Committee of the Trusts
and Estates Section of the State Bar of California, would
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increase the amount from $20,000 to $40,000 at which a trustee
could terminate at trust without a court order. This bill would
clarify beneficiary waivers to accounts and trustee reporting
requirements. This bill would clarify the effect of late
service of a notification by trustee on the statute of
limitations for a beneficiary trust contest. This bill also
would clarify net taxable income payments to unitrusts. This
bill would update existing law regarding the removal of a
trustee for failing to register in the Statewide Registry.
CHANGES TO EXISTING LAW
1. Existing law authorizes a trustee to terminate without a
court order a trust having a value of $20,000 or less. (Prob.
Code Sec. 15408(b).)
This bill would authorize a trustee to terminate without a
court order a trust having a value of $40,000 or less.
2. Existing law requires a trustee, on reasonable request by a
beneficiary, to provide the beneficiary with the terms of the
trust, a report of information about the assets, liabilities,
receipts, and disbursements of the trust, the acts of the
trustee, and the particulars relating to the administration of
the trust relevant to the beneficiary's interest, including
the terms of the trust. (Prob. Code Sec. 16061.)
Existing law requires a trustee to provide a beneficiary with
the terms of a trust when the trust becomes irrevocable.
(Prob. Code Sec. 16061.5(a).)
This bill would clarify that a trustee must provide the terms
of the trust to a requesting beneficiary unless the trustee is
not required to do so per statute.
This bill would clarify that a trustee must provide a
beneficiary with requested information relevant to the
beneficiary's interest.
This bill also would clarify that a trustee must provide a
beneficiary or heir with the terms of the trust when a trust
becomes irrevocable, as specified, when a power of appointment
is effective or lapses upon the death of a settlor, as
specified, and when there is a change of trustee of an
irrevocable trust, as specified. For charitable trusts, the
Attorney General, if requested, must also be provided with the
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terms of the charitable trust in any of these events.
3. Existing law requires a trustee to serve a notification by
trustee, as specified, when a revocable trust becomes
irrevocable or when there is a change of trustee of an
irrevocable trust. (Prob. Code Sec. 16061.7(a).)
This bill also would require a trustee to serve a notification
by trustee whenever a power of appointment is effective or
lapses upon the death of the settlor, as specified. This
requirement would not pertain to charitable remainder trusts.
4. Existing law restricts a person upon whom a notification of
trustee is served from bringing a trust contest action more
than 120 days from the date the notification by trustee is
served upon him or her, or 60 days from the day on which a
copy of the terms of the trust is mailed or personally
delivered to him or her during that 120-day period, whichever
is later. (Prob. Code Sec. 16061.8.)
This bill would clarify that a person upon whom a notification
of trustee is served is restricted from bringing a trust
contest action, as specified, regardless of whether the notice
is served upon him or her within or after the time specified
by statute.
5. Existing law specifies the circumstances under which a
trustee is not required to report information or provide an
account to a beneficiary. A beneficiary who has waived in
writing the right to an account can withdraw the waiver at any
time as to the most recent account and future accounts. A
waiver has no effect on the beneficiary's right to petition a
report or account pursuant to statute. (Prob. Code Sec.
16064.)
This bill would clarify that a beneficiary may waive the right
to an account for transactions occurring after the date of the
written withdrawal; however, regardless of a waiver by a
beneficiary of an account, the court may compel the trustee to
account, as specified.
This bill would specify that a waiver by a settlor of the
obligation of a trustee to provide terms of the trust per
statute or provide requested information per statute is
against public policy and shall be void.
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This bill would specify that a trustee is not required to
account to a beneficiary, provide terms of the trust to a
beneficiary, or provide requested information to the
beneficiary if the trust is revocable per statute or if the
beneficiary and the trustee are the same person.
6. Existing law authorizes a trustee to convert a trust into a
unitrust, as specified. (Prob. Code Sec. 16336.4.)
Existing law provides that a unitrust shall be considered paid
in the following order from the following sources: (a) from
the net taxable income determined as if the trust were other
than a unitrust; (b) from net realized short-term capital
gains; (c) from net realized long-term capital gains; (d) from
tax-exempt and other income; and (e) from principal of the
trust. (Prob. Code Sec. 16336.4(e)(7).)
This bill would clarify provision (a) of this statute that a
unitrust shall be considered paid from the net taxable income,
other than capital gains.
7. Existing law authorizes a trustee or beneficiary to petition
the court concerning the internal affairs of a trust, which
includes compelling the trustee to report information about
the trust or account to the beneficiary, as specified. (Prob.
Code Sec. 17200(b)(7).)
This bill would clarify that a petition could be brought to
compel the trustee to: (a) provide a copy of the terms of the
trust; (b) report information about the trust, as specified;
and (c) account to the beneficiary, as specified.
This bill would remove the provision that a court, on its own
motion, may set and give notice of an order to show cause why
a trustee should not be removed for failing to register in the
Statewide Registry per statute.
8. Existing law authorizes the court to set a motion on an order
to show cause why a trustee should not be removed for failing
to register in the Statewide Registry under statute. (Prob.
Code Sec. 17200(c).)
Existing law requires trustees, as defined, to be licensed
pursuant to the Professional Fiduciaries Act. (Bus. & Prof.
Code Sec. 6500 et seq.)
This bill would comport the court's authority regarding
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trustee removal with the provisions of the Professional
Fiduciaries Act.
COMMENT
1. Stated need for the bill
The author writes:
SB 202 amends certain Probate Code sections to clarify when
trustees must give "trustee notification" to the
beneficiaries, the settlor's heirs and the Attorney General.
The trustee notification advises recipients of their right to
obtain the terms of the trust and in some instances, creates a
short period of time during which beneficiaries and heirs may
contest the trust. SB 202 also clarifies the trustee's
obligation to provide beneficiaries with requested information
regarding the trust administration, and provides that this
obligation to report information cannot be waived by the
settlor . . . .
Existing law allows the discretion to terminate a small trust
with principal that does not exceed $20,000. This proposal
would modify the limit by increasing it to $40,000 to account
for rises in the cost of living occurring since existing
[Probate Code] Section 15408 was enacted.
2. This bill contains provisions previously heard by this
committee
Last year, SB 367 (Negrete McLeod, Chapter 641, Statutes of
2009) was heard by this committee and initially contained
provisions substantially similar to those in this bill. This
committee passed SB 367 with these provisions by a vote of 5-0.
SB 367 was later gutted and amended to contain revisions to the
Unruh Civil Rights Act. This bill contains most of the
provisions of SB 367 with three additional provisions, discussed
in Comments 3, 8, and 9 below.
3. Termination of Uneconomic Trust
This bill would authorize a trustee to terminate without a court
order a trust valued at $40,000 or less. As discussed above, in
1985, the Legislature determined that a trustee should be able
to terminate a trust prior to the termination event described in
the governing instrument. (See Background.) In this instance,
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a trustee could conclude that the value of the trust property is
insufficient to justify the cost of administration and is
therefore economically unfeasible. Requiring court
participation in terminating an uneconomic trust involves
additional expense to the trust. Existing law provides that a
trustee can terminate a trust with a value at or below $20,000
without a court order.
Similarly, the Uniform Trust Code (UTC) proposed in 1995 that
$20,000 was an appropriate limit at which a trustee could
terminate an uneconomic trust. (See November 9, 1995 Draft of
the UTC, Sec. 2-309.) However, one year later, the UTC
increased the amount from $20,000 to $50,000 at which a trustee
could terminate an uneconomic trust. (See June 6, 1996 Draft of
the UTC, Sec. 4-402.) Currently, states that follow the UTC
authorize a trustee of a trust having a value of $50,000 or less
to terminate the trust without a court order. (UTC Sec. 414.)
California's existing cap on an uneconomic trust has remained at
$20,000 for 25 years, with no adjustments for increases in
inflation. This bill would raise the cap on an uneconomic trust
to $40,000, less than that prescribed by the UTC.
4. Trustee reporting requirements
This bill would clarify that a trustee is required to provide to
a beneficiary only the information requested by a beneficiary
that is related to the beneficiary's interest. Existing law
requires a trustee, on reasonable request by a beneficiary, to
provide the beneficiary with a report of information about
assets, liabilities, receipts, and disbursements of the trusts,
acts of the trustee, and administration particulars relating to
the beneficiaries' interest, including the terms of the trust.
(Prob. Code Sec. 16061.)
a. Defining report
The author argues that trustees may read existing law
incorrectly and provide unnecessary information to the
beneficiary because the statute references a report
requirement. This appears to be because trustees mistakenly
believe they must provide the beneficiaries with a trustee's
report (also known as a report and accounting or accounting
report), which is a document filed with the court detailing
the financial particulars of the trust.
Information that is requested by a beneficiary relating to the
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beneficiary's interest in the trust need not be as
comprehensive as the trustee's report. Further, providing the
beneficiary with a standard report may not actually provide
the beneficiary with the information he or she requested.
This bill would clarify that a trustee is required to report
to a beneficiary the information requested by the beneficiary
relevant to the beneficiary's interest.
b. Reasonableness restriction on providing terms of the
trust
The author argues that trustees may provide too little
information to beneficiaries due to the trustee's
interpretation of the reasonableness standard. The
reasonableness restriction contained in existing law could
authorize a trustee to avoid providing the terms of the trust
to the beneficiary based on how the trustee construed the
beneficiary's request. This bill would separate the trustee's
duty to provide the beneficiary with the terms of the trust
from the trustee's duty to report to the beneficiary requested
information. In this way, trustees will have clarity as to
their duty to provide the terms of the trust at the
beneficiary's request, regardless of the reasonableness of the
request.
5. Beneficiary waiver of the account requirement
This bill would clarify the information that must be provided by
a trustee after a beneficiary withdraws a waiver of an account.
Existing law provides that a beneficiary may withdraw a waiver
to the account requirement as to the most recent account and
future accounts. (Prob. Code Sec. 16064.) This bill would
provide a better description of recent and future accounts and
would clarify that a beneficiary can withdraw the waiver to an
account for transactions occurring after the date of the written
withdrawal by the beneficiary. This bill also would authorize
the court to compel the trustee to account, regardless of a
beneficiary's waiver, upon a showing that a material breach of
the trust was reasonably likely.
6. Service of notification by trustee and statute of limitations
This bill would clarify when the statute of limitations on trust
contest petitions would begin to run based on service of the
notification by trustee. Existing law provides a statute of
limitations on trust contest petitions, which cannot be brought
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more than 120 days from the date the notification by trustee is
served on the petitioner or 60 days from the day on which a copy
of the terms of the trust is mailed or personally delivered to
the petitioner during that 120-day period. (Prob. Code Sec.
16061.8.) However, Probate Code Section 16061.7(f) provides
that the trustee must serve the notification by trustee no later
than 60 days following the occurrence of an event requiring
service of the notification by trustee or 60 days after the
trustee became aware of the existence of a person entitled to
receive the notification.
Thus, if the notification by trustee is not served on the
petitioner within 60 days of the event or awareness of the
existence of the person entitled notice, it is unclear when the
statute of limitations would begin to run. This bill would
clarify that the statute of limitations would begin to run
pursuant to Probate Code Section 16061.8 regardless of whether
the trustee served the notification by trustee specified under
Probate Code Section 16061.7. This clarification does not
remove liability on the part of the trustee to properly serve
the notification by trustee, but merely provides guidance that
the statute of limitations based on the service of the
notification by trustee is still operative.
7. Power of appointment
This bill would require a trustee to serve a notice of trust
administration (notification by trustee) and provide the terms
of the trust when requested by a beneficiary or heir after a
power of appointment becomes effective or lapses. A power of
appointment authorizes someone to divide and distribute property
on behalf of the person granting the power of appointment.
Existing law provides that a trustee must serve a notification
of trustee and provide information to a beneficiary or heir in
the event a trust becomes irrevocable or when there is a change
of trustee, but a trustee currently is not required to provide
notification or information when a power of appointment become
effective or lapses. (Prob. Code Secs. 16061.7 and 16061.5.)
The author argues that existing law has created a potential
loophole for trustees to avoid providing the notification by
trustee to beneficiaries because "[e]ven though the settlor
retained the right to amend the plan of distribution until death
in the same manner as in a revocable trust, the current notice
requirement is not triggered because such a trust technically
was irrevocable upon creation, not upon the death of the
settlor. . . . This bill would require notice of a trust
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administration to be provided upon a settlor's death if the
settlor created an irrevocable trust with a retained power of
appointment."
As with a change of trustee, a power of appointment affects from
whom beneficiaries and heirs can seek trust information. For
this reason, beneficiaries and heirs must be kept informed of
changes regarding powers of appointment. This bill would
rectify the potential loophole described by the author by
requiring a trustee to serve the notification by trustee and
provide information to beneficiaries and heirs when a power of
appointment becomes effective or lapses.
This bill would exempt charitable remainder trusts from the
trustee notification requirement regarding changes to a power of
appointment. Charitable remainder trusts (CRTs) are used for
tax reduction purposes. CRTs are irrevocable and do not suffer
the same potential for trustee abuses as other types of trusts.
Further, charitable remainder trusts are subject to Attorney
General and Internal Revenue Service oversight. For these
reasons, this bill would provide a limited exemption from the
trustee notification requirement when a power of appointment
becomes effective or lapses for these types of trusts.
8. Updating existing law to provide for the Professional
Fiduciaries Act
This bill would update the provision that a court may move for
an order to show cause requiring the trustee to appear in court
regarding removal of the trustee for failing to register in the
Statewide Registry as required under Probate Code Section 2850.
On July 2, 2008, as part of the Omnibus Conservatorship and
Guardianship Reform Act of 2006, the Professional Fiduciaries
Act (PFA) was enacted under SB 1550 (Figueroa, Chapter 491,
Statutes of 2006). (See Background.) The PFA regulates
professional fiduciaries, including trustees, under Business and
Professions Code Section 6500 et seq. Accordingly, Probate Code
Section 2850, which required trustees to register with the
Statewide Registry, was repealed on January 1, 2009.
Existing law, Probate Code Section 17200(c), authorizes a court
to move for the removal of a trustee for failing to register in
the Statewide Registry pursuant to repealed Probate Code Section
2850. This bill would bring existing law into line with the
current legislative scheme for regulating professional
fiduciaries by removing the repealed registry provisions and
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instead reference the appropriate provisions regarding trustee's
licensing requirements under the PFA.
9. Unitrust payment
This bill would clarify that net taxable income, other than
capital gains, could be used to pay a unitrust amount. Existing
law authorizes a trustee to convert a trust into a unitrust.
(Prob. Code Sec. 16336.4.) A unitrust is a trust created for
the benefit of one or more persons who receive at least an
annual percentage payment from the net fair market value of the
unitrust. Existing law provides that a unitrust can be paid
from any of the following sources: (1) net taxable income; (2)
net realized from short-term capital gains; (3) net realized
from long-term capital gains; (4) tax-exempt and other income;
or (5) from principal of the trust. (Prob. Code Sec.
16336.4(e)(7).) In order to clarify that the first source of
payment from net taxable income, other than from capital gains
which are utilized as the next sources of payment, this bill
would add the necessary language to make this distinction.
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 : None Known
Prior Legislation : See Background.
Prior Vote :
Assembly Judiciary Committee (Ayes 10, Noes 0)
Assembly Floor (Ayes 74, Noes 0)
Prior votes not relevant
**************
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