BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
AB 1985 (Silva)
As Amended June 15, 2012
Hearing Date: June 26, 2012
Fiscal: No
Urgency: No
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SUBJECT
Trusts and Estates: Construction of Instruments
DESCRIPTION
This bill would clarify the rule of construction of a trust to
provide that, when a trustee sells or encumbers property gifted
to a beneficiary under a revocable trust, the gift to the
beneficiary is not adeemed (cancelled). This bill also would
clarify that a beneficiary has the right to a general pecuniary
gift equal to the net sale price of the property unreduced by a
payoff of any encumbrance on the property or the amount of the
unpaid encumbrance on the property as well as the property
itself.
BACKGROUND
The rules of construction of wills, which were modeled after the
Uniform Probate Code, were enacted by the Legislature in 1983
upon recommendation by the California Uniform Law Revision
Commission. The rules of construction provide presumptive
interpretations of property transfer instruments and only apply
when an instrument is otherwise silent or ambiguous.
In 1994, the Legislature enacted AB 3686 (Horcher, Ch. 806,
Stats. 1994), which applied the rules of construction of wills
to nonprobate property transfer instruments, such as trusts. In
2002, the rules of construction were updated by AB 1784 (Harman,
Ch. 138, Stats. 2002) to reflect changes to the Uniform Probate
Code.
The rules of construction provide for an ademption exemption for
(more)
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specific gifts. An ademption of a gift occurs when a gift
becomes extinct or withdrawn due to an act of the testator
equivalent to the revocation of the gift. Under the rules of
construction, if a conservator or agent acting under a durable
power of attorney of an incapacitated person sells or encumbers
property that is a gift pursuant to the terms of a will or
trust, the gift does not become adeemed, and the beneficiary has
the right to a general pecuniary gift equal to the net sale
price or the amount of the unpaid loan on the property. (Prob.
Code Sec. 21134.) However, case law has demonstrated confusion
with this rule of construction because it does not specify that,
when a trustor sells or encumbers the trust gift, the
beneficiary has these same protections. (See Brown v. LaBow
(2007) 157 Cal.App.4th 795.)
This bill, sponsored by the Conference of California Bar
Associations, would clarify that the sale or encumbrance of a
trust gift by a trustor does not adeem the gift to the
beneficiary.
CHANGES TO EXISTING LAW
Existing law provides that, unless the provision or context
otherwise requires, the rules for interpretation of an
instrument apply to a will, trust, deed, and any other
instrument. (Prob. Code Sec. 21101.)
Existing law provides that the intention of the transferor as
expressed in the transfer instrument controls the legal effect
of the dispositions made in the instrument, and the rules of
construction apply where the intention of the transferor is not
indicated by the transfer instrument. (Prob. Code Sec. 21102.)
Existing law provides that, if after the execution of the
instrument, a specifically gifted property is sold or mortgaged
by a conservator or by an agent acting within the authority of a
durable power of attorney for an incapacitated principal, the
transferee of the specific gift has the right to a general
pecuniary gift equal to the net sale price of, or the amount of
the unpaid loan on, the property. (Prob. Code Sec. 21134(a).)
Existing law provides that, if an eminent domain award for the
taking of specifically gifted property is paid to a conservator
or to an agent acting within the authority of a durable power of
attorney for an incapacitated principal, or if the proceeds on
fire or casualty insurance on, or recovery for injury to,
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specifically gifted property are paid to a conservator or to an
agent acting within the authority of a durable power of attorney
for an incapacitated principal, the recipient of the specific
gift has the right to a general pecuniary gift equal to the
eminent domain award or the insurance proceeds or recovery.
(Prob. Code Sec. 21134(b).)
Existing law provides that, for the purpose of the references to
an agent acting with the authority of a durable power of
attorney for an incapacitated principal, (1) "incapacitated
principal" means a principal who is an incapacitated person, (2)
no adjudication of incapacity before death is necessary, and (3)
the acts of an agent within the authority of a durable power of
attorney are presumed to be for an incapacitated principal.
(Prob. Code Sec. 21134(d).)
This bill would provide ademption protection for a beneficiary
when a trustee sells or encumbers, on behalf of the
incapacitated settlor of a revocable trust, the gift to the
beneficiary.
This bill would provide for encumbrance of a gift by deed of
trust, mortgage, or other instrument.
This bill would clarify that a beneficiary has the right to a
general pecuniary gift equal to the net sale price of the
property unreduced by a payoff of the encumbrance or the amount
of the unpaid encumbrance on the property as well as the
property itself.
This bill would provide that, regarding eminent domain awards,
proceeds on fire or casualty insurance, or recovery for injury
paid to a conservator, agent, or trustee, the recipient of the
specific gift has the right to a general pecuniary gift equal to
the eminent domain award or the insurance proceeds or recovery,
unreduced by the payoff of any encumbrance placed on the
property by such a conservator, agent, or trustee, after the
execution of the instrument of gift.
This bill would provide that there shall be no presumption of a
settlor's incapacity concerning the acts of a trustee.
COMMENT
1. Stated need for the bill
The author writes:
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Existing law (Probate Code �Section] 21134) provides that
designated beneficiaries of real property under a will are
entitled to receive either the property or its value, free of
any encumbrances imposed by a conservator or attorney-in-fact
following the incapacity of the testator. While this statute
does not make specific mention of trusts, at least one court,
Brown v. LaBow (2007), 157 Cal.App.4th 795, . . . has held
that Probate Code �Section] 21134 applies to trusts as well.
To avoid any inconsistency in the application of Probate Code
�21134, the statute should be amended to specifically include
trusts established as revocable trusts.
The sponsor of this bill, the Conference of California Bar
Associations (CCBA), writes:
AB 1985 would amend Probate Code �Section] 21134 to make the
law of trusts consistent with the law of wills regarding
specifically gifted property. Specifically, it would provide
that if a trustor makes a specific gift of real property to a
beneficiary, then becomes incapacitated and his or her
successor trustee sells or encumbers the property, the
designated beneficiary is entitled to receive either the
unencumbered property or its value prior to the encumbrance by
the conservator or agent.
Existing law specifically provides for such an outcome when a
testator makes a specific gift of real property to a
beneficiary in a will, then becomes incapacitated and his or
her conservator or agent sells or encumbers the property.
However the statute is silent with regards to trusts. One
court faced with the question of whether this section - which
�is] a section of the codes relating to "Construction of
Trusts and Other Instruments" - has held that �Section] 21134
also applies to trusts, but it had to rely heavily on
inference to do so (Brown v. LaBow (2007), 157 Cal.App.4th
795). AB 1985 would make this application specific,
eliminating the need for courts to imply what appears to be
the Legislature's clear intent.
AB 1985 would also clarify the concept of "mortgage," as used
in the statute, consistent with other uses of the concept in
the Probate Code, and would make specific that, absent
evidence of contrary intent by the donor, the designated
transferee is entitled to either the gifted property or, if
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the property is not available, the full value thereof, not
reduced by amount of any intervening encumbrance imposed by a
conservator, agent, or trustee. Both of these changes are
intended to clarify existing law.
2. Providing for trustee actions relating to specific gifts
Existing law provides that, under the rules of construction of
instruments, a specific gift to a beneficiary provided for in a
will or trust is not subject to ademption due to the sale or
mortgage by a conservator or agent acting under durable power of
attorney on behalf of an incapacitated principal. (Prob. Code
Sec. 21134(a).) Existing law, under the rules of construction,
also provides that the recipient of a specific gift, which is
the subject of eminent domain or insurance proceeds, as
specified, or recovery for injury and proceeds were paid to the
conservator or agent relating to gift, has the right to a
general pecuniary gift equal to the eminent domain award or the
insurance proceeds or recovery. This bill would provide that
these rules of construction also apply to acts taken by a
trustee on behalf of a settlor of a revocable trust.
The author and sponsor argue that this bill is necessary to
conform the law of trusts to the law of wills for specifically
gifted property. It should be noted that existing law provides
that the rules of construction that apply to wills also apply to
trusts. (Prob. Code Sec. 21101.) This section was added by AB
3686 (Horcher, Ch. 806, Stats. 1994) to harmonize the rules of
construction and reduce confusion and drafting errors to ensure
that the testator's/trustor's intent was carried out. (Sen.
Com. on Judiciary, Analysis of Assem. Bill 3686 (1993-1994 Reg.
Sess.) as amended Apr. 28, 1994.) Further, the California Law
Revision Commission, when it proposed additional amendments to
the rules of construction that were subsequently enacted by AB
1784 (Harman, Ch. 138, Stats. 2002), noted that the existing
rules of construction apply to wills, trusts, deeds, and any
other instrument, except for Probate Code Sections 21105, 21109,
21132, 21133, and 21135, which only apply to wills or at-death
transfers. (Recommendation on Rules of Construction for Trusts
and Other Instruments (Nov. 2001) 31 Cal. Law Revisions Com.
Rep. (2001) pp. 172-174.)
The author argues that, although existing law provides ademption
protection regarding the sale or encumbrance by a conservator or
attorney-in-fact acting on behalf of an incapacitated principal,
the law does not specifically provide for acts taken by a
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trustee on behalf of the incapacitated trustor. This issue is
relevant when the trustee sells or mortgages the trustor's home
in order to pay for care of the trustor. Under existing law, a
beneficiary, who is to receive a gift of the trustor's home upon
the trustor's death, is entitled to a general pecuniary gift
equal to the net sale price of, or the amount of the unpaid loan
on, the property. However, existing law does not specifically
provide for the event where the trustee sells or encumbers the
property.
The Executive Committee of the Trusts & Estates Section of the
State Bar of California (TEXCOM), in support of this bill,
argues that "�a]s the use of trusts in estate planning has
become more pervasive, the lack of references in the current
statute to trusts, to specific gifts in trust by settlors, and
to the possible effects on specific gifts of actions by trustees
during a settlor's incapacity are glaring ommissions that
rightly deserve to be corrected."
The author states that case law shows that courts have grappled
with ademption of specific gifts due to acts taken by a trustee.
In Brown v. LaBow (2007) 157 Cal.App.4th 795, the court had to
decide whether an ademption occurred for a beneficiary's gift of
stock under a revocable trust that was sold by an individual,
who was both the conservatee and the trustee of the
incapacitated principal. The defendant conservator/trustee
argued, among other things, that the rules of construction
regarding ademption contained in Probate Code Section 21134 did
not apply because the rules of construction did not apply to
trusts and the defendant had sold the stock as trustee, not as
conservator. (Id. at p. 802.) The underlying probate court did
not hold that Section 21134 did not apply to trusts, but rather
that Section 21134 did not apply because the defendant did not
sell the assets as the conservator but as trustee, and neither
the Uniform Probate Code nor the Uniform Trust Code provided an
ademption exemption caused by a trustee. (Id. at p. 806.) The
Court of Appeal, Second Appellate District, Division Five, also
did not rule that Section 21134 did not apply to trusts, but
held that the gift of stock, under the revocable trust, was part
of the conservatorship estate, and the defendant, as
conservatee, was required to seek the authority from the court
in order to dispose of property belonging to the conservatorship
estate. (Id. at pp. 814-816.)
To avoid additional litigation over whether gifts are adeemed
due to certain acts taken by a trustee, as opposed to a
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conservator or an attorney-in-fact, this bill would clarify that
trustee actions relating to specific gifts share the same
ademption protections as conservator actions.
3. Clarifying protection for beneficiaries relating to
encumbrances of the property
This bill would clarify that an encumbrance of a gift by deed of
trust, mortgage, or other instrument is exempt from ademption.
Existing law provides that, under the rules of construction of
instruments, a specific gift to a beneficiary provided for in a
will or trust is not subject to ademption due to the sale or
mortgage by a conservator or agent acting under durable power of
attorney on behalf of an incapacitated principal. (Prob. Code
Sec. 21134(a).)
Existing law also provides that the intention of the transferor,
as expressed in the transfer instrument, controls the legal
effect of the dispositions made in the instrument, and the rules
of construction apply where the intention of the transferor is
not indicated by the transfer instrument. (Prob. Code Sec.
21102.) Because an incapacitated principal does not have
capacity to revoke a gift to a beneficiary when a conservator or
attorney-in-fact sells or mortgages the property, the rules of
construction exempt the gift from ademption to maintain the
principal's original intent of gifting the property to a
beneficiary.
CCBA argues that this bill is necessary to "clarify the concept
of 'mortgage,' as used in the statute, consistent with other
uses of the concept in the Probate Code, and would make specific
that, absent evidence of contrary intent by the donor, the
designated transferee is entitled to either the gifted property
or, if the property is not available, the full value thereof,
not reduced by amount of any intervening encumbrance imposed by
a conservator, agent, or trustee."
This bill would provide greater protection to beneficiaries of
gifts that are encumbered by a conservator, attorney-in-fact, or
trustee, as specified, by including encumbrances of the gift
through deeds of trust or other instruments. As such, this bill
would be consistent with other Probate Code Sections which
provide for encumbrances other than just mortgages. (See Prob.
Code Secs. 9152, 18104, 19324).
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Support : Executive Committee of the Trusts & Estates Section of
the State Bar of California
Opposition : None Known
HISTORY
Source : Conference of California Bar Associations
Related Pending Legislation : None Known
Prior Legislation :
AB 1784 (Harman, Ch. 138, Stats. 2002) See Background and
Comment 2.
AB 3686 (Horcher, Ch. 806, Stats. 1994) See Background and
Comment 2.
Prior Vote :
Assembly Floor (Ayes 77, Noes 0)
Assembly Committee on Judiciary (Ayes 10, Noes 0)
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