Existing law provides for the creation, modification, and termination of trusts, and regulates the acts of trustees in administering a trust. Existing law establishes provisions by which a trustee may give a notice of proposed action regarding certain matters, while prohibiting the use of these notices for other specified actions, including preliminary and final distributions and discharge.

This bill would instead authorize a trustee to provide a notice of proposed action for preliminary and final distributions. The bill would make other technical, nonsubstantive changes in that regard.

Existing law provides for the creation, modification, and termination of trusts, and regulates the acts of trustees in administering a trust. Existing law establishes provisions by which a trustee may give a notice of proposed action regarding certain matters, while prohibiting the use of these notices for other specified actions, including preliminary and final distributions and discharge.

This bill would instead authorize a trustee to provide a notice of proposed action for preliminary and final distributions. The bill would make other technical, nonsubstantive changes in that regard.

Existing law provides for the creation, modification, and termination of trusts, and regulates the acts of trustees in administering a trust. Existing law establishes provisions by which a trustee may give a notice of proposed action regarding certain matters, while prohibiting the use of these notices for other specified actions, including preliminary and final distributions and discharge. Existing law requires that a notice of proposed action include a time within which objections to a proposed action can be made, which shall be at least 45 days from the mailing of the notice.

This bill would instead authorize a trustee to provide a notice of proposed action for preliminary and final discharges and would reduce the minimum amount of time within which objections to a proposed action can be made to 30 days from the date of mailing of the notice. distributions. The bill would make other technical, nonsubstantive changes in that regard.

Existing law provides for the creation, modification, and termination of trusts, and regulates the acts of trustees in administering a trust. Existing law establishes provisions by which a trustee may give a notice of proposed action regarding certain matters, while prohibiting the use of these notices for other specified actions, including preliminary and final distributions and discharge. Existing law requires that a notice of proposed action include a time within which objections to a proposed action can be made, which shall be at least 45 days from the mailing of the notice.

This bill would instead authorize a trustee to provide a notice of proposed action for preliminary and final discharges and would reduce the minimum amount of time within which objections to a proposed action can be made to 30 days from the date of mailing of the notice.

 CONSENT  

Bill No: AB 1700

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 7-0, 6/21/16

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

ASSEMBLY FLOOR: 65-0, 3/17/16 (Consent) - See last page for vote

SUBJECT:

SOURCE: The Executive Committee of the Trusts & Estates Section of the State Bar

DIGEST: This bill eliminates the statutory provision that prevents a trustee from using a notice of proposed action (an out of court procedure) for a preliminary and final distribution of trust assets, effectively allowing the notice of proposed action to be used for a preliminary and final distribution of trust assets. This bill clarifies that the notice of proposed action process cannot be used by a trustee to discharge himself or herself and avoid any liability related to the discharge.

ANALYSIS:

Existing law:

1. Provides that, a trustee may give a notice of proposed action (NOPA) regarding a matter governed by the Uniform Principal and Income Act and to exercise the trustee’s general trust powers. For the purpose of NOPA, a proposed action includes a course of action or a decision not to take action.
2. Provides that the trustee who elects to provide the NOPA shall mail notice of the proposed action to each of the following:
   • a beneficiary who is receiving, or is entitled to receive, income under the trust, including a beneficiary who is entitled to receive income at the discretion of the trustee; and
   • a beneficiary who would receive a distribution of principal if the trust were terminated at the time the notice is given.
3. Provides that NOPA is not required to be given to a person who consents in writing to the proposed action. The consent may be executed at any time before or after the proposed action is taken.
4. Provides that a trustee is not required to provide a copy of the NOPA to a beneficiary who is known to the trustee but who cannot be located by the trustee after reasonable diligence or who is unknown to the trustee.
5. Provides that the trustee may not use a NOPA in any of the following actions:
   • allowance of the trustee’s compensation;
   • allowance of compensation of the attorney for the trustee;
   • settlement of accounts;
   • preliminary and final distributions and discharge;
   • sale of property of the trust to the trustee or to the attorney for the trustee;
   • exchange of property of the trust for property of the trustee or for property of the attorney for the trustee;
   • grant of an option to purchase property of the trust to the trustee or to the attorney for the trustee;
   • allowance, payment, or compromise of a claim of the trustee, or the attorney for the trustee, against the trust;
   • compromise or settlement of a claim, action, or proceeding by the trust against the trustee or against the attorney for the trust; or
   • extension, renewal, or modification of the terms of a debt or other obligation of the trustee, or the attorney for the trustee, owing to or in favor of the trust.
6. Provides that the NOPA shall state that it is given pursuant to this section and shall include all of the following:
   • the name and mailing address of the trustee;
   • the name and telephone number of a person who may be contacted for additional information;
   • a description of the action proposed to be taken and an explanation of the reasons for the action;
   • the time within which objections to the proposed action can be made, which shall be at least 45 days from the mailing of the NOPA; or
   • the date on or after which the proposed action may be taken or is effective.
7. Provides that a beneficiary may object to the proposed action by mailing a written objection to the trustee at the address stated in the NOPA within the time period specified in the NOPA.
8. Provides that a trustee is not liable to a beneficiary for an action, as specified, if the trustee does not receive a written objection to the proposed action from a beneficiary within the applicable period and the other NOPA requirements are satisfied. If no beneficiary entitled to notice objects, the trustee is not liable to any current or future beneficiary with respect to the proposed action.
9. Provides that if the trustee receives a written objection within the applicable period, either the trustee or a beneficiary may petition the court to have the proposed action taken as proposed, taken with modifications, or denied. In the proceeding, a beneficiary objecting to the proposed action has the burden of proving that the trustee’s proposed action should not be taken. A beneficiary who has not objected is not estopped from opposing the proposed action in the proceeding.
10. Provides that  if the trustee decides not to implement the proposed action, the trustee shall notify the beneficiaries of the decision not to take the action and the reasons for the decision, and the trustee’s decision not to implement the proposed action does not itself give rise to liability to any current or future beneficiary. A beneficiary may petition the court to have the action taken, and has the burden of proving that it should be taken.
11. Provides that the NOPA provisions do not require a trustee to use these procedures prior to taking any action.

This bill:

1. Eliminates the provision that the trustee could not use a NOPA for a preliminary and final distribution of trust assets, effectively allowing the NOPA to be used for a preliminary and final distribution of trust assets.
2. Clarifies that the NOPA process cannot be used by a trustee to discharge himself or herself and avoid any liability.

Background

The NOPA process allows a trustee to take certain action without court approval and then limits the trustee's potential liability with respect to that action if the NOPA process was followed. The NOPA process can be used for trustee actions under the Uniform Principal and Income Act (UPIA). A trustee can also use the NOPA to exercise the trustee’s general trust powers.

To effectively use the NOPA, the trustee must give notice of the proposed action (or nonaction) to beneficiaries who are entitled to receive income under the trust or to receive distribution of principal, unless the beneficiary has already consented in writing or cannot be located. The notice must state a description of the actions to be taken and the reasons for the action. The notice must also state the time within which objections to the proposed action can be made, which cannot be less than 45 days from the mailing of the NOPA. A beneficiary may object to the action by sending a written objection to the trustee within the specified time period. The trustee may take the action and will not be liable to a beneficiary for that action if no written objection is received by the trustee. If a beneficiary objects, either the trustee or the beneficiary can seek court approval for the action or a different action.

Certain actions are specifically exempted from the NOPA process. These actions include allowance for the trustee’s or the trustee’s attorney's compensation, sale of trust property to the trustee or the trustee’s attorney, and settlement of a claim against the trustee. These exemptions seek to avoid providing immunity from liability to a trustee who may be self-dealing. Also exempted are preliminary and final trust distributions and discharges.

This bill eliminates the statutory provision that prevents a trustee from using a NOPA for a preliminary and final distribution of trust assets, effectively allowing the NOPA to be used for a preliminary and final distribution of trust assets. This bill also clarifies that the NOPA process cannot be used by a trustee to discharge himself or herself and avoid any liability related to the discharge.

Comments

The author writes:

California Probate Code section 16500 et seq. permits a trustee, in specified situations, to notify the beneficiaries of a trust of a proposed course of action and obtain their prior consent, either directly by a beneficiary’s written consent or implicitly as a result of a beneficiary’s failure to timely object.

Such a “Notice of Proposed Action” (NOPA) procedure is intended to promote efficient administration of trusts, encourage open communication between trustees and beneficiaries, and to provide trustees with a mechanism for obtaining the beneficiaries’ consent (directly or by implication) prior to undertaking a course of action. Utilization of the procedure allows a trustee to confidently undertake a course of action without having to incur the expense and possible delay associated with a court hearing on the matter.

The current NOPA procedure for trust administrations requires a notice period of 45 days, during which a beneficiary may object to the proposed course of action, and prohibits the use of the procedure to obtain approval of a proposed action that involves a distribution to the trust beneficiaries.

AB 1700 would modify the NOPA procedure so as to dramatically increase its usefulness and enhance the ability of trustees to efficiently administer trusts in California in a timely and streamlined manner. The proposed changes in no way diminish the rights and protections currently afforded beneficiaries. And no changes are being made to the ability of a beneficiary to easily object to the proposed action.

AB 1700 would allow the use of the NOPA procedure with respect to proposed distributions by a trustee by removing the current restriction for such transactions. As all trust administrations involve distributions, such a change would enhance the usefulness of the procedure and improve efficiency in administration as protective court hearings could be avoided in most situations, and also facilitate more frequent distributions.

AB 1700 also clarifies that discharge means the discharge of a trustee.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 6/24/16)

The Executive Committee of the Trusts & Estates Section of the State Bar (source)

Professional Fiduciary Association of California

Judicial Council of California

OPPOSITION: (Verified 6/24/16)

None received

ARGUMENTS IN SUPPORT: According to the Executive Committee of the Trusts & Estates Section of the State Bar of California, Sponsors:

Under current law, the trust NOPA procedure may not be used to obtain approval of a proposed action that involves a distribution to the trust beneficiaries. TEXCOM believes that an amendment to Probate Code section 16501 that removes the current prohibition pertaining to distributions would further achieve the original purpose of the statute without diminishing a beneficiary’s rights to object or diluting a trustee’s fiduciary duties.

The proposed amendment to the statute would dramatically increase its usefulness and enhance the ability of trustees to efficiently administer trusts in California. Under current law, unless the trustee obtains the affirmative written approval by every beneficiary prior to a proposed plan of distribution, in order to be ensured that no beneficiary can later object to a distribution, a trustee is required to file a petition with the probate court seeking approval of a proposed distribution. Presently, no other method currently exists to reliably ensure that there are no beneficiary objections prior to such a distribution absent either obtaining affirmative consent or a court order. In most cases, no objection to the petition is received. Thus, such petitions unnecessarily strain the resources of California’s over-burdened court system.

Although in many trust administrations, receiving the affirmative consent of all interested parties to a proposed distribution may be possible, there are situations in which securing such consents is not cost effective or practical, such as when the trust has numerous beneficiaries, or in situations where a beneficiary has such a minor interest that getting him or her to respond is problematic.

[…]

In summary, by expanding the scope of the statute to allow the NOPA procedure to be used for trust distribution matters, the proposed amendment to the statute would increase the efficiency of trust administrations, enhance communication between trustees and beneficiaries, and reduce the burden on our courts, without diminishing any rights or protections currently afforded beneficiaries.

ASSEMBLY FLOOR: 65-0, 3/17/16

AYES: Achadjian, Alejo, Travis Allen, Baker, Bonilla, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chu, Cooley, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Maienschein, Mathis, Mayes, McCarty, Melendez, Mullin, Nazarian, Obernolte, Olsen, Patterson, Quirk, Ridley-Thomas, Rodriguez, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Rendon

NO VOTE RECORDED: Atkins, Bigelow, Bloom, Bonta, Chiu, Cooper, Dababneh, Gomez, Holden, Low, Medina, O'Donnell, Salas, Wood

Prepared by: 6/24/16 15:36:50

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015-2016 Regular Session

Bill No: AB 1700 (Author:Maienschein)

Version: March 14, 2016

Hearing Date: June 21, 2016

Fiscal: No

Urgency: No

Consultant: ME

SUBJECT

Trusts: Notice of proposed action by trustee

DESCRIPTION

This bill would eliminate the statutory provision that prevents a trustee from using a notice of proposed action (an out of court procedure) for a preliminary and final distribution of trust assets, effectively allowing the notice of proposed action to be used for a preliminary and final distribution of trust assets. This bill would also clarify that the notice of proposed action process cannot be used by a trustee to discharge himself or herself and avoid any liability related to the discharge.

BACKGROUND

The notice of proposed action (NOPA) process allows a trustee to take certain action without court approval and then limits the trustee's potential liability with respect to that action if the NOPA process was followed. The notice of proposed action (NOPA) process can be used for trustee actions under the Uniform Principal and Income Act (UPIA). A trustee can also use the notice of proposed action to exercise the trustee’s general trust powers.

To effectively use the notice of proposed action, the trustee must give notice of the proposed action (or nonaction) to beneficiaries who are entitled to receive income under the trust or to receive distribution of principal, unless the beneficiary has already consented in writing or cannot be located. The notice must state a description of the actions to be taken and the reasons for the action. The notice must also state the time within which objections to the proposed action can be made, which cannot be less than 45 days from the mailing of the notice of proposed action. A beneficiary may object to the action by sending a written objection to the trustee within the specified time period. The trustee may take the action and will not be liable to a beneficiary for that action if no written objection is received by the trustee. If a beneficiary objects, either the trustee or the beneficiary can seek court approval for the action or a different action.

Certain actions are specifically exempted from the notice of proposed action process. These actions include allowance for the trustee’s or the trustee’s attorney's compensation, sale of trust property to the trustee or the trustee’s attorney, and settlement of a claim against the trustee. These exemptions seek to avoid providing immunity from liability to a trustee who may be self-dealing. Also exempted are preliminary and final trust distributions and discharges.

This bill would eliminate the statutory provision that prevents a trustee from using a notice of proposed action for a preliminary and final distribution of trust assets, effectively allowing the notice of proposed action to be used for a preliminary and final distribution of trust assets. This bill would also clarify that the notice of proposed action process cannot be used by a trustee to discharge himself or herself and avoid any liability related to the discharge.

CHANGES TO EXISTING LAW

Existing law provides that, a trustee may give a notice of proposed action (NOPA) regarding a matter governed by the Uniform Principal and Income Act and to exercise the trustee’s general trust powers. For the purpose of NOPA, a proposed action includes a course of action or a decision not to take action. (Prob. Code Sec. 16500.)

Existing law provides that the trustee who elects to provide the notice of proposed action shall mail notice of the proposed action to each of the following:

• a beneficiary who is receiving, or is entitled to receive, income under the trust, including a beneficiary who is entitled to receive income at the discretion of the trustee; and
• a beneficiary who would receive a distribution of principal if the trust were terminated at the time the notice is given. (Prob. Code Sec. 16501(a).)

Existing law provides that notice of proposed action is not required to be given to a person who consents in writing to the proposed action. The consent may be executed at any time before or after the proposed action is taken. (Prob. Code Sec. 16501(b).)

Existing law provides that a trustee is not required to provide a copy of the notice of proposed action to a beneficiary who is known to the trustee but who cannot be located by the trustee after reasonable diligence or who is unknown to the trustee. (Prob. Code Sec. 16501(c).)

Existing law provides that the trustee may not use a notice of proposed action in any of the following actions:

• allowance of the trustee’s compensation;
• allowance of compensation of the attorney for the trustee;
• settlement of accounts;
• preliminary and final distributions and discharge;
• sale of property of the trust to the trustee or to the attorney for the trustee;
• exchange of property of the trust for property of the trustee or for property of the attorney for the trustee;
• grant of an option to purchase property of the trust to the trustee or to the attorney for the trustee;
• allowance, payment, or compromise of a claim of the trustee, or the attorney for the trustee, against the trust;
• compromise or settlement of a claim, action, or proceeding by the trust against the trustee or against the attorney for the trust; or
• extension, renewal, or modification of the terms of a debt or other obligation of the trustee, or the attorney for the trustee, owing to or in favor of the trust. (Prob. Code Sec. 16501(d).)

Existing law provides that the notice of proposed action shall state that it is given pursuant to this section and shall include all of the following:

• the name and mailing address of the trustee;
• the name and telephone number of a person who may be contacted for additional information;
• a description of the action proposed to be taken and an explanation of the reasons for the action;
• the time within which objections to the proposed action can be made, which shall be at least 45 days from the mailing of the notice of proposed action; or
• the date on or after which the proposed action may be taken or is effective. (Prob. Code Sec. 16502.)

Existing law provides that a beneficiary may object to the proposed action by mailing a written objection to the trustee at the address stated in the notice of proposed action within the time period specified in the notice of proposed action. (Prob. Code Sec. 16503(a).)

Existing law provides that a trustee is not liable to a beneficiary for an action, as specified, if the trustee does not receive a written objection to the proposed action from a beneficiary within the applicable period and the other NOPA requirements are satisfied. If no beneficiary entitled to notice objects, the trustee is not liable to any current or future beneficiary with respect to the proposed action. (Prob. Code Sec. 16503(b).)

Existing law provides that if the trustee receives a written objection within the applicable period, either the trustee or a beneficiary may petition the court to have the proposed action taken as proposed, taken with modifications, or denied. In the proceeding, a beneficiary objecting to the proposed action has the burden of proving that the trustee’s proposed action should not be taken. A beneficiary who has not objected is not estopped from opposing the proposed action in the proceeding. (Prob. Code Sec. 16503(c).)

Existing law provides that  if the trustee decides not to implement the proposed action, the trustee shall notify the beneficiaries of the decision not to take the action and the reasons for the decision, and the trustee’s decision not to implement the proposed action does not itself give rise to liability to any current or future beneficiary. A beneficiary may petition the court to have the action taken, and has the burden of proving that it should be taken. (Prob. Code Sec. 16503(d).)

Existing law provides that the NOPA provisions do not require a trustee to use these procedures prior to taking any action. (Prob. Code Sec. 16504.)

This bill would eliminate the provision that the trustee could not use a notice of proposed action for a preliminary and final distribution of trust assets, effectively allowing the notice of proposed action to be used for a preliminary and final distribution of trust assets.

This bill would clarify that the notice of proposed action process cannot be used by a trustee to discharge himself or herself and avoid any liability.

COMMENT

1. Stated need for the bill

According to the author:

California Probate Code section 16500 et seq. permits a trustee, in specified situations, to notify the beneficiaries of a trust of a proposed course of action and obtain their prior consent, either directly by a beneficiary’s written consent or implicitly as a result of a beneficiary’s failure to timely object.

Such a “Notice of Proposed Action” (NOPA) procedure is intended to promote efficient administration of trusts, encourage open communication between trustees and beneficiaries, and to provide trustees with a mechanism for obtaining the beneficiaries’ consent (directly or by implication) prior to undertaking a course of action. Utilization of the procedure allows a trustee to confidently undertake a course of action without having to incur the expense and possible delay associated with a court hearing on the matter.

The current NOPA procedure for trust administrations requires a notice period of 45 days, during which a beneficiary may object to the proposed course of action, and prohibits the use of the procedure to obtain approval of a proposed action that involves a distribution to the trust beneficiaries.

AB 1700 would modify the NOPA procedure so as to dramatically increase its usefulness and enhance the ability of trustees to efficiently administer trusts in California in a timely and streamlined manner. The proposed changes in no way diminish the rights and protections currently afforded beneficiaries. And no changes are being made to the ability of a beneficiary to easily object to the proposed action.

AB 1700 would allow the use of the NOPA procedure with respect to proposed distributions by a trustee by removing the current restriction for such transactions. As all trust administrations involve distributions, such a change would enhance the usefulness of the procedure and improve efficiency in administration as protective court hearings could be avoided in most situations, and also facilitate more frequent distributions.

AB 1700 also clarifies that discharge means the discharge of a trustee.

1. Arguments in support

According to the Executive Committee of the Trusts & Estates Section of the State Bar of California, Sponsors:

Under current law, the trust NOPA procedure may not be used to obtain approval of a proposed action that involves a distribution to the trust beneficiaries. TEXCOM believes that an amendment to Probate Code section 16501 that removes the current prohibition pertaining to distributions would further achieve the original purpose of the statute without diminishing a beneficiary’s rights to object or diluting a trustee’s fiduciary duties.

The proposed amendment to the statute would dramatically increase its usefulness and enhance the ability of trustees to efficiently administer trusts in California. Under current law, unless the trustee obtains the affirmative written approval by every beneficiary prior to a proposed plan of distribution, in order to be ensured that no beneficiary can later object to a distribution, a trustee is required to file a petition with the probate court seeking approval of a proposed distribution. Presently, no other method currently exists to reliably ensure that there are no beneficiary objections prior to such a distribution absent either obtaining affirmative consent or a court order. In most cases, no objection to the petition is received. Thus, such petitions unnecessarily strain the resources of California’s over-burdened court system.

Although in many trust administrations, receiving the affirmative consent of all interested parties to a proposed distribution may be possible, there are situations in which securing such consents is not cost effective or practical, such as when the trust has numerous beneficiaries, or in situations where a beneficiary has such a minor interest that getting him or her to respond is problematic.

[…]

In summary, by expanding the scope of the statute to allow the NOPA procedure to be used for trust distribution matters, the proposed amendment to the statute would increase the efficiency of trust administrations, enhance communication between trustees and beneficiaries, and reduce the burden on our courts, without diminishing any rights or protections currently afforded beneficiaries.

1. Promotes efficiencies and continues to protect beneficiaries from self-dealing trustees

Current law prohibits the trustee from using a notice of proposed action in any of the following actions:

• allowance of the trustee’s compensation;
• allowance of compensation of the attorney for the trustee;
• settlement of accounts;
• preliminary and final distributions and discharge;
• sale of property of the trust to the trustee or to the attorney for the trustee;
• exchange of property of the trust for property of the trustee or for property of the attorney for the trustee;
• grant of an option to purchase property of the trust to the trustee or to the attorney for the trustee;
• allowance, payment, or compromise of a claim of the trustee, or the attorney for the trustee, against the trust;
• compromise or settlement of a claim, action, or proceeding by the trust against the trustee or against the attorney for the trust; or
• extension, renewal, or modification of the terms of a debt or other obligation of the trustee, or the attorney for the trustee, owing to or in favor of the trust.

All of these prohibitions, except the prohibitions against using the NOPA for the preliminary and final distributions and settlement of accounts, seek to prevent trustees that are engaging in self-dealing from being immunized for their actions in the event a beneficiary would not object. Having the court oversee, for example, a trustee’s compensation decisions, sale of trust property to the trustee or attorney for the trustee is arguably necessary to prevent trustees from bilking beneficiaries. However, it is arguably appropriate to allow the trustee to use a more streamlined process, that only gets the court involved when beneficiaries object, for preliminary and final distributions. If a trustee was giving himself/herself a distribution in the preliminary or final distribution, the NOPA could not be used by a trustee because of already existing prohibitions. Finally, and as the author notes, an added benefit to the use of a streamlined process is saved court resources.

Support: Professional Fiduciary Association of California (PFAC); Judicial Council of California

Opposition: None Known

HISTORY

Source: The Executive Committee of the Trusts & Estates Section of the State Bar (TEXCOM)

Related Pending Legislation: None Known

Prior Legislation:

SB 1021 (Poochigian, Ch. 54, Stats. 2004) allowed the notice of proposed action provisions to be used for the trustee’s general trust powers subject to exemption and extended the period in which beneficiary could object from 30 days to 45 days.

AB 846 (Ackerman, Ch. 145, Stats. 1999) enacted the Uniform Principal and Income Act which contained the notice of proposed action by trustees.

Prior Vote:

Assembly Floor (Ayes 65, Noes 0)

Assembly Judiciary Committee (Ayes 9, Noes 0)

**************

Date of Hearing: March 8, 2016

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 1700

Author:(Maienschein) – As Introduced Ver:January 25, 2016

PROPOSED CONSENT (As Proposed to be Amended)

SUBJECT: TRUSTEE Notice of proposed action: DISTRIBUTIONS

KEY ISSUE: SHOULD A TRUSTEE BE PERMITTED TO USE THE OUT-OF-COURT NOTICE OF PROPOSED ACTION PROCESS TO DISTRIBUTE TRUST FUNDS without risk of liability?

SYNOPSIS

This non-controversial bill, sponsored by the Trusts & Estates Section of the State Bar, expands the use of an out-of-court procedure to allow trustees to take various actions without risk of liability for taking those actions. Under the out-of-court notice of proposed action process, a trustee may voluntarily choose to provide a simplified notice of a proposed action or non-action to the trust beneficiaries and allow them to object. If the beneficiaries do not object within the provided timeframe, the trustee may take the action without risk of liability. If a beneficiary objects, the trustee may seek court approval to take the proposed action.

The notice of proposed action process was originally limited to trustee actions under the Uniform Principal and Income Act. In 2004, the Legislature expanded that to allow a trustee to use the notice of proposed action for the trustee’s general trust powers, whether derived from statute or the trust instrument itself, subject to specific exemptions. (SB 1021 (Poochigian), Chap. 54, Stats. 2004.) That bill also extended the timeframe for beneficiaries to object from 30 days to 45 days.

This bill, as proposed to be amended, makes two changes to the trustee notice of proposed action to, according to the author, promote the efficiency of trust administration. First, the bill deletes the current exemption that prevents use of the notice of proposed action process for a preliminary and final distribution of trust assets. Second, it clarifies that the notice of proposed action process cannot be used by a trustee to discharge himself or herself and avoid any liability. The Trusts & Estates Section believes that these changes will "dramatically increase" the usefulness of the notice of action procedure and will "enhance the ability of trustees to efficiently administer trusts in California." There is no reported opposition to these proposed changes.

SUMMARY: Allows a trustee to use the notice of proposed action process to make trust distributions. Specifically, this bill:

1. Eliminates an exemption to allow a trustee to use the notice of proposed action to make a preliminary or final trust distribution.
2. Clarifies that a trustee may not use the notice of proposed action process to discharge himself or herself.

EXISTING LAW:

1. Grants a trustee broad powers to administer an estate under a trust instrument, including, among others, the power to hold, sell or exchange trust property, receive and distribute income, and compromise or settle claims against the estate. Specifically vests the trustee with fiduciary duties related to management of the estate, and makes the trustee liable to the beneficiary for losses resulting from a breach of those duties. (Probate Code Section 16200 et seq. Unless stated otherwise, all further statutory references are to the Probate Code.)
2. Provides a trustee, under the Uniform Principal and Income Act, default rules for distributing to trust beneficiaries the net income and principal receipts acquired by a trust so that distributions under a trust generally conform to distributions under a will. These default rules do not apply if the trust contains different provisions. (Section 16320 et seq.)
3. Permits a trustee, acting under general trustee powers, whether from statute or the trust itself, or the Uniform Principal and Income Act, to give notice of a proposed action, including a decision not to take action, to adult beneficiaries who are entitled to receive income under the trust or to receive distribution of principal, and specifies the contents of the notice to be given. Requires that the notice state the time within which objections to the proposed action can be made, which cannot be less than 45 days from the mailing of the notice of proposed action. (Section 16500 et seq.)
4. Specifies the procedure for a trust beneficiary to object to the proposed action, and allows the trustee to petition the court for authority to proceed, if objection is received as specified, and for a beneficiary to petition the court to order the trustee to take such action, if the trustee's proposal is not to take the action. Places the burden on the beneficiary to prove to the court that the action should not be taken, or should be taken, as the case may be. (Section 16503.)
5. Provides that a trustee is not liable to a beneficiary for an action taken under the notice of proposed action process if the trustee properly notifies the beneficiary and does not receive a written objection from the beneficiary within the required timeframe. (Id.)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: The Probate Code empowers the administrator or personal representative of a decedent's estate to notice a proposed action to beneficiaries and other affected parties, before taking or not taking an action, in order to provide the noticed parties the opportunity to consent or to object. (Section 10500 et seq.) Administration of a decedent's estate occurs largely under court supervision. Trustees, on the other hand, are vested by statute with broad powers to administer assets in a trust, with little supervision by the court. Trustees have a very similar notice of proposed action procedure that allows trustees, should they so choose, to notify trust beneficiaries of a proposed action and to allow the beneficiaries to object in a simplified process. If the beneficiaries do not oppose within the provided timeframe, the trustee may take the action, without risk of liability. If the beneficiary objects, the trustee may go to court to seek approval in order to take the proposed action without risk of liability.

The notice of proposed action process was originally limited to trustee actions under the Uniform Principal and Income Act. In 2004, the Legislature expanded that to allow a trustee to use the notice of proposed action for the trustee’s general trust powers, whether derived from statute or the trust instrument itself, subject to specific exemptions. (SB 1021 (Poochigian), Chap. 54, Stats. 2004.) That bill also extended the timeframe for beneficiaries to object from 30 days to 45 days.

This bill, sponsored by the Trusts & Estates Section of the Bar, makes two changes to the trustee notice of proposed action to, according to the author and the sponsor, promote the efficiency of trust administration. First, the bill deletes the current exemption that prevents use of the notice of proposed action process for a preliminary and final distribution of trust assets. Second, clarifies that the notice of action process cannot be used to discharge a trustee. In support of the bill the author writes:

AB 1700 would modify the [notice of proposed action] procedure so as to dramatically increase its usefulness and enhance the ability of trustees to efficiently administer trusts in California in a timely and streamlined manner. The proposed changes in no way diminish the rights and protections currently afforded beneficiaries. And no changes are being made to the ability of a beneficiary to easily object to the proposed action.

Notice of Proposed Action Process: The notice of proposed action process allows a trustee to take certain action without court approval and then limits the trustee's potential liability with respect to that action. A trustee may elect to use the voluntary notice of action process to take action -- or not take action, as the case may be -- under the general trustee powers, whether provided by statute or the trust itself, or the Uniform Principal and Income Act. To do so, the trustee must give notice of the proposed action, or the decision not to take action, to beneficiaries who are entitled to receive income under the trust or to receive distribution of principal, unless the beneficiary has already consented in writing or cannot be located. The notice must state a description of the actions to be taken and the reasons for the action.

The notice must state the time within which objections to the proposed action can be made, which cannot be less than 45 days from the mailing of the notice of proposed action. A beneficiary may object to the action by sending a written objection to the trustee within the time period specified in the notice of proposed action. If no objection is received by the deadline, the trustee may take the action and is not liable to a beneficiary for that action. If a beneficiary objects, either the trustee or the beneficiary can seek court approval for the action or a different action.

Certain actions are specifically exempted from the notice of proposed action process. These actions include allowance for the trustee’s or the trustee’s attorney's compensation, sale of trust property to the trustee or the trustee’s attorney, and settlement of a claim against the trustee. These exemptions all seek to avoid providing immunity from liability to a trustee who may be self-dealing. Also exempted are preliminary and final trust distributions and discharges.

This Bill Will Expand Use of the Notice of Proposed Action Process: This bill changes the notice of proposed action process by eliminating a current exemption from the process and allowing trustees to use the process for preliminary and final distributions of trust assets. The Trust & Estates Section writes that change will "dramatically increase" the use of the notice of proposed action:

Every trust administration involves making distributions. It is a routine aspect of a trust administration. Expanding the scope of the statute to allow a trustee to use a notice of proposed action] procedure in conjunction with distribution matters would increase the efficiency of a trust administration without diminishing any rights or protections currently afforded beneficiaries. Such a procedure would allow trustees to easily communicate proposed distribution plans to beneficiaries and seek their consent, whether expressed directly by written consent, or indirectly by failure to object, without having to resort to the more costly and time consuming option of seeking court approval of the proposed distribution plan.

This bill also clarifies the exemption of discharges from the notice of proposed action process. The Trusts & Estates Section writes that discharge prohibition "was included in the initial legislation [creating the notice of proposed action process for trustees], which mirrored probate statutes." The discharge is generally not something that occurs in trust administration; rather it occurs in probate, where a personal representative can be discharged. However, in order to clarify the exemption, the bill, as proposed to be amended, exempts from the notice of proposed action process a discharge of the trustee. This should prevent a trustee from trying to insulate themselves from liability improperly somehow by attempting to discharge themselves.

Finally, this bill, as originally drafted, would have shortened the timeframe for when a beneficiary must object to a proposed action, from 45 days to 30 days. In 2004, the Legislature specifically extended the time to file written objections from 30 days to 45 days and this bill originally sought to reverse that extension. This Committee, in 2004, noted that extended period for objecting "was made to address concerns of the California Judges Association." While the California Judges Association has not, at this point, submitted a letter opposing the shortening of the time period to object, there is still concern that shortening the beneficiary's time period to object to an action, including now a partial or complete distribution of trust assets, could result in an inequitable or egregious situation. The 45-day period includes both the mailing of the notice to the beneficiaries and the beneficiaries' sending of their objections back to the trustee. While, this could be accomplished nearly instantaneously through email, each mailing could also take a week or more through regular mail service. If the objection is even a day late, a trustee will be protected against any liability for even an inappropriate action, including a distribution of all the trust property. Given this, the author has rightly agreed to leave the time period to object at 45 days. However, if all beneficiaries consent, the action can be taken before the 45 days expire.

Prior Legislation: AB 846 (Ackerman), Chap. 145, Stats. 1999, enacted the Uniform Principal and Income Act, which contained the notice of proposed action by trustees.

SB 1021 (Poochigian), Chap. 54, Stats. 2004, extended the notice of proposed action provisions to the trustee’s general trust powers subject to specific exemptions, and extended the timeframe for beneficiaries to object from 30 days to 45 days.

ARGUMENTS IN SUPPORT: In support of the bill, the Trusts & Estates Section of the State Bar writes:

The proposed amendment to the statute would dramatically increase its usefulness and enhance the ability of trustees to efficiently administer trusts in California. Under current law, unless the trustee obtains the affirmative written approval by every beneficiary prior to a proposed plan of distribution, in order to be ensured that no beneficiary can later object to a distribution, a trustee is required to file a petition with the probate court seeking approval of a proposed distribution. Presently, no other method currently exists to reliably ensure that there are no beneficiary objections prior to such a distribution absent either obtaining affirmative consent or a court order. In most cases, no objection to the petition is received. Thus, such petitions unnecessarily strain the resources of California’s over-burdened court system.

Although in many trust administrations, receiving the affirmative consent of all interested parties to a proposed distribution may be possible, there are situations in which securing such consents is not cost effective or practical, such as when the trust has numerous beneficiaries, or in situations where a beneficiary has such a minor interest that getting him or her to respond is problematic.

REGISTERED SUPPORT / OPPOSITION:

Support

Trusts & Estates Section of the State Bar (sponsor)

Opposition

None on file

Analysis Prepared by: Leora Gershenzon / JUD. / (916) 319-2334