BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 997 (Wagner)
As Amended May 9, 2011
Hearing Date: June 14, 2011
Fiscal: Yes
Urgency: No
TW
SUBJECT
Professional Fiduciaries
DESCRIPTION
This bill would exempt a nonprofit corporation or charitable
trust from the requirements of the Professional Fiduciaries Act
(PFA), provided that the corporation or trust meets specified
requirements.
BACKGROUND
In 2006, the Legislature enacted a package of bills to reform
California's conservatorship system. Major features of the
reforms, embodied in the Omnibus Conservatorship and
Guardianship Reform Act of 2006 (SB 1116 (Scott, Chapter 490),
SB 1550 (Figueroa, Chapter 491), SB 1716 (Bowen, Chapter 492)
and AB 1363 (Jones, Chapter 493)) include: (1) increased
frequency of review of conservatorships; (2) broadened scope of
court investigators' reports; (3) special procedure for the sale
of a conservatee's primary residence; and (4) the regulation and
licensing of private professional fiduciaries including private
professional conservators. The measures were compelled by a
series of articles in the media revealing widespread abuse of
vulnerable elders and dependent adults by conservators and
deficiencies in the courts' oversight of conservatorships.
SB 1550 established the PFA 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
(more)
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other, as specified. Public agency fiduciaries (public
guardians and public conservators) and those employed by banks
and trust companies are exempt from this regulatory scheme.
SB 1550 also prohibited a court from appointing a person as a
private professional conservator, guardian, or trustee, or
permitting a person to continue to serve as such, unless he or
she is licensed as a professional fiduciary and has filed
evidence of the license with the clerk of the court in each
county where a petition for appointment has been filed.
SB 1550 exempted from its professional fiduciary designation
public guardians, public conservators, and other public agencies
that act as conservators, guardians or trustees, banks, and
trust companies. The PFA also exempts attorneys and accountants
from the professional fiduciary licensing requirements.
SB 1466 (Cox, 2010) was similar to this bill but was held in
this committee pending stakeholder negotiations of the method
and language by which charities acting as fiduciaries would be
exempt from the PFA.
Although the PFA exempts banks, trust companies, and public
agencies acting as fiduciaries, it provides no exemption for
long-established charities acting as fiduciaries. This
author-sponsored bill seeks an exemption for these charitable
fiduciaries from the requirements of the PFA.
CHANGES TO EXISTING LAW
Existing law provides licensing requirements and oversight of
professional fiduciaries. (Bus. & Prof. Code Sec. 6500 et seq.)
Existing law defines "professional fiduciary" to mean a person
who acts as a conservator of the person, the estate, or person
and estate, or guardian of the estate, or person and estate, for
two or more individuals at the same time who are not related to
the professional fiduciary or to each other, or a person who
acts as a trustee, agent under a durable power of attorney for
health care, or agent under a durable power of attorney for
finances, for more than three individuals, as defined, at the
same time. (Bus. & Prof. Code Sec. 6501(f)(1)-(2).)
Existing law exempts from the PFA a trust company, as defined,
an FDIC-insured institution, or its holding companies,
subsidiaries, or affiliates, as defined, any public agency,
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including the public guardian, public conservator, or other
agency of the State of California or of a county of California
or any regional center for persons with developmental
disabilities, as defined, and any person whose sole activity as
a professional fiduciary is as a broker-dealer, broker-dealer
agent, investment adviser, or investment adviser representative,
as specified. (Bus. & Prof. Code Sec. 6501(f)(4).)
Existing law requires professional fiduciaries to satisfy
licensing requirements. (Bus. & Prof. Code Sec. 6530.) Exempt
from these licensing requirements are attorneys, certified
public accountants, and enrolled agents, as defined. (Id.)
Existing federal law exempts from federal tax certain private
foundations, including a corporation or foundation, organized
and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, or educational purposes, or
to foster national or international amateur sports competition,
or for the prevention of cruelty to children or animals, no part
of the net earnings of which inures to the benefit of any
private shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation, and which does not
participate in, or intervene in, any political campaign on
behalf of (or in opposition to) any candidate for public office.
(I.R.C. Sec. 501(c)(3).)
Existing federal law exempts from federal tax certain public
charities, including:
churches, schools, hospitals, and other organizations
that receive their public support primarily from gifts,
grants, and contributions from a broad group of people;
organizations that receive their support from a
combination of gifts, grants, and contributions and fees
for their exempt services; and
organizations that support other public charities,
governmental units and certain other exempt organizations.
They receive public charity status because of the
relationship, without regard to the source of their income.
(I.R.C. Sec. 509(a).)
Existing federal law provides restrictions on tax exemption
status for private foundations and public charities, including,
among other things, prohibitions on transactions in which the
organization provides loans or compensation in excess of
reasonable salaries for personal services actually rendered to
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the creator, family member of the creator, or persons making
substantial contributions to the organization. (I.R.C. Sec.
503.)
Existing state law provides for the regulation of charitable
trustees. (Prob. Code Sec. 15604; Gov. Code Sec. 12580 et seq.)
This bill would exempt from the PFA any nonprofit corporation or
charitable trust that is described in Internal Revenue Code
Section 501(c)(3) and that satisfies all of the following
requirements:
is an organization described in Internal Revenue Code Sections
509(a)(1)-(3);
has been in existence for at least five years;
has total institutional funds, as specified, according to its
most recent audited financial statement with a value of at
least two million dollars ($2,000,000) net of encumbrances;
and
is acting as a trustee, incidental to the purposes for which
it was organized, of a trust that meets at least one of the
following conditions:
o it is a charitable remainder trust, as defined;
o it is a trust from which annual distributions are
limited to a guaranteed annuity or a fixed percentage of
the fair market value of the property, as defined;
o it is a pooled income fund trust from which annual
distributions are limited to income, including a pooled
income fund, as defined; or
o it is a trust as to which the value of the charitable
interest was presently ascertainable upon creation of the
trust and deductible for federal gift, estate, or income
tax purposes, as defined.
This bill also would make technical corrections to the PFA.
COMMENT
1. Stated need for the bill
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The author writes:
The proposed exemption for limited types of charities
administering limited types of trusts is necessary because the
PFA would (i) violate donors' expectations of privacy, (ii) be
unduly burdensome because the PFA states all of its
requirements based on individuals acting as fiduciaries, and
(iii) divert resources that otherwise could support the
charities' tax-exempt purposes, without providing any
additional benefit to the public given the existing oversight
of charities. The proposed limited exemption also promotes
the prevailing public policy to encourage donations to
charities through their planned giving programs. The
California legislature has repeatedly affirmed the primary
responsibility and jurisdiction of the California Attorney
General over charities. The California Attorney General's
office maintains an active Legal and Audits Unit that
investigates and prosecutes charities accused of breaching
their fiduciary duties to properly administer charitable
funds. The Legal and Audits Unit of the AG's Charitable
Trusts Section takes its responsibilities seriously; it
regularly files actions to prosecute charities accused of
breaching their fiduciary duties.
2. Whether allowing an exemption from the PFA for certain
nonprofit organizations and charitable trusts raises consumer
protection concerns
This bill would exempt from requirements of the PFA certain
nonprofit organizations and charitable trusts. The PFA was
created to protect vulnerable elders and dependent adults from
abuse. As introduced, SB 1550 did not contain any exemptions.
While the bill was in the Senate, an exemption provision for
trust companies, banks, and public agencies was added because
these entities are already extensively regulated and routinely
examined by government authorities and internal auditors.
The Professional Fiduciary Association of California, an
opponent of this bill, argues that there is no compelling
evidence that would necessitate exempting another group of
individuals from the PFA, and this bill would diminish the
intent and consequence of the PFA. As described below, however,
exempting nonprofit organizations and charitable trusts from the
PFA would not diminish the protections provided under the PFA.
a. This bill would provide a narrow exemption for
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organizations regulated by other governmental authorities
Although this bill would exempt certain charitable
organizations from the PFA, this exemption does not raise the
same oversight problem that the PFA was attempting to fix. At
that time, the sponsors of SB 1550 argued that a professional
fiduciary must make a broad range of complex decisions that
affect a conservatee, including where he or she lives, home
care arrangements, major medical decisions, and control of all
of the conservatee's financial matters from bank accounts to
investment and tax decisions. The conservatee or his or her
family or friends may be unable to evaluate the competency or
honesty of the professional fiduciary, the quality of the care
received, or articulate concerns regarding his or her care.
Further, probate courts face enormous backlogs of cases and
are hard-pressed to resolve the caseload issues. This,
coupled with the shortage of trained staff to carry out
oversight and investigative requirements, could lead to
inadequate review by judges and input from the individual who
is about to lose control of his or her life. The PFA provided
a way to oversee conservators, guardians, and trustees by
creating licensing requirements and establishing the
Professional Fiduciary Bureau.
Trust companies, banks, and public entities are exempt from
the PFA. This exemption was created because these entities
are already heavily regulated and monitored by government
entities. Similarly, this bill would apply only to
fiduciaries that are already regulated by the Internal Revenue
Code and the Supervision of Trustees and Fundraisers for
Charitable Purposes Act (Gov. Code Sec. 12580 et seq.) (the
Charities Supervision Act). The Charities Supervision Act
provides that charities must register with the Attorney
General, file their articles of incorporation, and be subject
to inspection and investigation by the Attorney General. The
Charities Supervision Act was further strengthened by the
California Nonprofit Integrity Act of 2004 (the Integrity
Act), which provides that charities receiving more than $2
million in donations per year are subject to additional
scrutiny and restrictions. (Gov. Code Sec. 12586.) In
addition, the Integrity Act provides restrictions on
charitable fund raising. (Gov. Code Sec. 12599.) Since trust
companies and public agencies are regulated by similar means
and are exempt from the requirements under the PFA, this bill
provides the same exemption for a limited group of charitable
fiduciaries.
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b. The exemption contained in this bill would apply in
limited circumstances of trusts administered by charitable
organizations
The consumer/trustor chooses which type of charitable trust he
or she wants to create. While choosing which charities will
be involved with the trustor's estate planning, the trustor
considers various options of personal import. In essence, the
trustor will have vetted the charity and approved of its
involvement with the trustor's estate plan. This bill would
only apply to charities that were specifically chosen by the
trustor, well in advance of infirmity or death. As such, the
intent of the PFA in protecting unsuspecting conservatees from
abuse is not superseded, but rather particularly avoided by
the trustor.
Notably, this bill does not exempt all nonprofit organizations
from the PFA. Under Probate Code Section 15604, a nonprofit
charitable organization may be appointed as a trustee if all
of the following are true: (1) the corporation is
incorporated in California; (2) the articles of incorporation
specifically authorize the corporation to accept appointments
as trustee; (3) the corporation has been recognized as a
nonprofit pursuant to the Internal Revenue Code for at least
three years; (4) the settlor or existing trustee consents to
the appointment of the nonprofit corporation as trustee; and
(5) the court determines the appointment of the nonprofit
corporation as trustee to be in the best interest of the
settlor. Under this bill, in order for the nonprofit
corporation to be exempt from the PFA, the nonprofit
corporation must oversee a limited type of trust on behalf of
the settlor. As discussed in Comment 2c, these types of
trusts are carefully crafted and heavily regulated, such that
the licensing requirements of the PFA are arguably
unnecessary.
c. This bill would limit the types of trusts that would
qualify for the exemption
There are only a few types of trusts administered by a
charitable fiduciary that would qualify for the exemption
under this bill:
a charitable remainder annuity trust or unitrust, which
provides income to individuals for their lifetimes and the
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remaining assets are distributed to qualifying charities;
a charitable lead annuity trust or unitrust, which
provides annual payments to one or more charities during
the lifetime of the settlor with the remaining assets
distributed to designated beneficiaries;
a pooled income fund, which is a trust maintained by
charities that have many individual donors and
beneficiaries; and
a trust as to which the value of the charitable interest
was presently ascertainable upon creation of the trust and
deductible for tax purposes.
These types of trusts are established in writing by the
trustor and are heavily regulated by the Internal Revenue Code
because of the favorable tax treatment they receive. Because
a trustor knowingly sets up these types of trusts by choice
and must follow extensive tax guidelines, the ability for a
charity or charity employee to prey on the vulnerable elder or
dependent adult during this type of trust administration is
scarce, if non-existent.
3. Burdensome dual licensing requirements
Without the exemption provision provided by SB 1550, the PFA
would have imposed a burdensome dual licensing arrangement on
trust companies and public agencies that would have created
significant conflict between state and federal regulatory
agencies. The exemption was specifically crafted so that
entities falling under other regulatory bodies, which require
their own licensing fees, were not required to perform dual
licensing requirements under the PFA.
Similarly, charities acting as fiduciaries are subject to the
burdensome dual licensing arrangement under the PFA. The
Association of Independent California Colleges and Universities,
a supporter of this bill, argues that "�w]ithout the AB 997
exemption, costs to charities will rise, returns to donors will
diminish, and no increased protection will be afforded
California residents." Like banks and public agencies,
charitable fiduciaries are supervised by not only the donor, his
or her beneficiaries, and the court system, but charitable
fiduciaries are regulated by federal and state law. Maintaining
licensing requirements, in addition to those required by other
federal and state laws, for charities increases costs and
reduces resources available for charitable purposes.
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4. The PFA is worded to apply only to individuals rather than
companies
The language in the PFA is specifically aimed at individuals,
and the licensing requirements are tailored for individuals as
well. The licensing requirements of the PFA refer to the
professional fiduciary's age and citizenship, fingerprints,
required education degrees, and yearly examinations and fees to
extend the license. (Bus. & Prof. Code Sec. 6533 et seq.)
These requirements do not readily lend themselves to
conformation on the part of trust companies, banks, charities,
and public agencies. One obvious problem is that as an employee
of each trust company, charity, and public agency is employed or
terminated from their duties as fiduciary, the new individual
must comply with the requirements of the PFA, even though the
entity as a whole is continually monitored by state and federal
agencies. Accordingly, the PFA currently exempts trust
companies, banks, and public agencies from these licensing
requirements.
In support of this bill, the Executive Committee of the Tax
Exempt Organizations Standing Committee of the Taxation Section
and the Nonprofit & Unincorporated Organizations Committee of
the Business Law Section of the State Bar of California argue
that "�c]ompliance with the PFA is unduly burdensome for
charities acting as trustees of these defined types of trusts.
The PFA was enacted primarily in response to concerns about
abuses by individual trustees. Thus, its requirements are
designed for individual fiduciaries." On the other hand, the
Charities Supervision Act pertains to "corporations,
unincorporated charitable corporations, unincorporated
associations, trustees, and other legal entities holding
property for charitable purposes, commercial fundraisers for
charitable purposes, fundraising counsel for charitable
purposes, and commercial coventurers, over which the state or
the Attorney General has enforcement or supervisory powers."
(Gov. Code Sec. 12581.) The Charities Supervision Act provides
registration, reporting, and auditing requirements, as well as
civil penalties for violations thereof, as applied to charitable
entities. (Gov. Code Secs. 12585, 12586, 12586.1, and 12591.1.)
Support : Association of Independent California Colleges and
Universities; Aviva Shiff Boedecker Charitable Planning
Associates; Bakersfield Memorial Hospital Foundation; Biola
University; California Baptist University; California State
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Parks Foundation; California State University, Long Beach
Foundation; Claremont McKenna College; Episcopal Diocese of
California; Executive Committee of the Tax Exempt Organizations
Standing Committee of the Taxation Section of the State Bar of
California; Executive Committee of the Trusts & Estates Section
of the State Bar of California; Holy Names University; Jewish
Community Foundation of Los Angeles; Kaspick & Company; KQED;
Lucile Packard Foundation for Children's Health; Mount St.
Mary's College; Nature Conservancy; Nonprofit & Unincorporated
Organizations Committee of the Business Law Section of the State
Bar of California; Northern California Planned Giving Council;
Pepperdine University; Point Loma Nazarene University; Pomona
College; San Francisco Foundation; Santa Clara University;
Silicon Valley Community Foundation; Stanford University;
University of San Diego; University of San Francisco; University
of California; University of Southern California
Opposition : Professional Fiduciary Association of California
HISTORY
Source : Author
Related Pending Legislation : SB 542 (Price), among other
things, would extend the Professional Fiduciaries Bureau sunset
and modify the enrolled agents licensing exemption under the
PFA. This bill was not heard in this committee and is in the
Assembly pending committee referral.
Prior Legislation : See Background.
Prior Vote :
Assembly Floor (Ayes 70, Noes 0)
Assembly Appropriations Committee (Ayes 17, Noes 0)
Assembly Business, Professions and Consumer Protection Committee
(Ayes 9, Noes 0)
Assembly Judiciary Committee (Ayes 10, Noes 0)
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