Existing law authorizes the beneficiaries of an irrevocable trust, upon the consent of all beneficiaries, to compel the modification or termination of the trust upon petition to the court. Existing law prohibits the modification or termination of an irrevocable trust if the continuance of the trust is necessary to carry out a material purpose of the trust, unless the court determines that modification or termination under the circumstances outweighs the interest in accomplishing a material purpose of the trust. Notwithstanding that provision, existing law prohibits the court from terminating a trust that is subject to a valid restraint on the transfer of a beneficiarys interest.

This bill would revise and recast these provisions to instead authorize, upon the consent of all beneficiaries, the modification or termination of an irrevocable trust as agreed to by the beneficiaries upon petition to the court. The bill would instead authorize the court, in determining whether modification or termination would defeat a material purpose of the trust, to take into consideration any factors deemed relevant to the court, including require the court, in making the determination described above with respect to a proposed termination of an irrevocable trust, to consider whether the trust is subject to a valid restraint on the transfer of a beneficiarys interest. The bill would delete the provision that the court is prohibited from terminating an irrevocable trust that is subject to a valid restraint on the transfer of a beneficiarys interest. The bill would also make clarifying changes.

Existing law authorizes the settlor and the beneficiaries of a trust, upon the consent of the settlor and all beneficiaries, to compel the modification or termination of the trust.

This bill would revise and recast those provisions and instead authorize the trust to be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.

Existing law authorizes the beneficiaries of an irrevocable trust, upon the consent of all beneficiaries, to compel the modification or termination of the trust upon petition to the court. Existing law prohibits the modification or termination of an irrevocable trust if the continuance of the trust is necessary to carry out a material purpose of the trust, unless the court determines that modification or termination under the circumstances outweighs the interest in accomplishing a material purpose of the trust. Notwithstanding that provision, existing law prohibits the court from terminating a trust that is subject to a valid restraint on the transfer of a beneficiarys interest.

This bill would revise and recast these provisions to instead authorize, upon the consent of all beneficiaries, the modification or termination of an irrevocable trust as agreed to by the beneficiaries upon petition to the court. The bill would instead authorize the court, in determining whether modification or termination would defeat a material purpose of the trust, to take into consideration any factors deemed relevant to the court, including whether the trust is subject to a valid restraint on the transfer of a beneficiarys interest. The bill would delete the provision that the court is prohibited from terminating an irrevocable trust that is subject to a valid restraint on the transfer of a beneficiarys interest.

Existing law authorizes the settlor and the beneficiaries of a trust, upon the consent of the settlor and all beneficiaries, to compel the modification or termination of the trust.

This bill would revise and recast those provisions and instead authorize the trust to be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.

Existing law provides that the presumption of fertility is rebuttable in determining the class of beneficiaries whose consent is necessary to modify or terminate a trust pursuant to the above-described provisions.

This bill would additionally authorize the court to limit the beneficiaries whose consent is required under those provisions to beneficiaries whose interests would be substantially impaired by the modification or termination, as specified.

 CONSENT  

Bill No: SB 1158

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 6-0, 5/3/16

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

NO VOTE RECORDED: Hertzberg

SUBJECT:

SOURCE: Author

DIGEST: This bill establishes that an irrevocable trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination. This bill also clarifies that in making a determination with respect to a proposed termination of an irrevocable trust pursuant to a beneficiary’s petition, the court must consider whether the trust is subject to a spendthrift provision. This bill also makes other clarifying changes.

ANALYSIS:

Existing law:

1. Provides that, unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settlor.
2. Provides that if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust upon petition to the court. However, if the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust.
3. Prohibits the court from permitting termination of the trust that is subject to a valid restraint on transfer of the beneficiary’s interest, as specified.
4. Prohibits, except as otherwise provided, transfer of a beneficiary’s interest in income under the trust if the trust instrument provides that a beneficiary’s interest income is not subject to voluntary or involuntary transfer, and provides that the beneficiary’s interest in income is not subject to enforcement of a money judgment until paid to the beneficiary.
5. Authorizes the settlor and all beneficiaries of an irrevocable trust to compel the modification or termination of an irrevocable trust if the settlor and all beneficiaries of an irrevocable trust consent. However, if any beneficiary does not consent to the modification or termination of the trust, existing law authorizes the other beneficiaries, with the consent of the settlor, to petition the court to compel a modification or a partial termination of the trust if the interests of the beneficiaries who do not consent are not substantially impaired.
6. Authorizes the court to limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances if the trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy.
7. Provides that the consent of a beneficiary who lacks legal capacity, including a minor, or who is an unascertained or unborn person may be given in proceedings before the court by a guardian ad litem, if it would be appropriate to do so, with respect to beneficiary consent to those petitions to compel modification or termination of the trust. In determining whether to give consent, existing law authorizes the guardian ad litem of the minor to rely on general family benefit accruing to living members of the beneficiary’s family as a basis for approving a modification or termination of the trust.
8. Provides that the presumption of fertility is rebuttable in determining the class of beneficiaries whose consent is necessary to modify or terminate the trust.

This bill:

1. Clarifies that if all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust.
2. Strikes the prohibition of the court’s discretion to permit termination of a trust subject to a valid restraint on the transfer of a beneficiary’s interest, and, instead, require a court, in making a determination with respect to a proposed termination of an irrevocable trust, to consider whether the trust is subject to a valid restraint on the transfer of a beneficiary’s interest, as specified.
3. Clarifies that an irrevocable trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.
4. Clarifies that if any beneficiary does not consent to the modification or termination of an irrevocable trust, with the consent of the settlor, the court may modify or partially terminate the trust if the interests of the beneficiaries who do not consent are not substantially impaired.
5. Clarifies that a court may limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to the beneficiaries who are reasonably likely to take under the circumstances.

Background

As part of a person’s estate planning, he or she may create a trust into which the person transfers specified property. Trusts are commonly used to avoid probate of the person’s estate upon the person’s death and may provide certain tax advantages relative to the property. There are two types of trust estate plans; a testamentary trust, which is written into a will and becomes effective upon death, and a living or inter vivos trust, which is created by a separate document. There are two types of inter vivos trusts, revocable and irrevocable. Unlike a revocable trust, an irrevocable trust does not permit the person creating the trust, referred to as the settlor, to revoke, alter, and amend the trust without the consent of the beneficiaries of the trust.

Existing law provides procedures for modification or termination of an irrevocable trust when the settlor and beneficiaries consent to the trust. If the settlor is not available to consent to modification or termination of the trust, the consent of all of the beneficiaries is required, and the beneficiaries must follow separate procedures to modify or terminate the trust. This bill revises these procedures.

Comments

The author writes:

Certain flaws in the existing statutes governing modification and termination of trusts ([Probate Code S]ection 15400 et seq.) may be summarized as follows:

[Probate Code] Section[s] 15403 and 15404 both use the word “compel,” which results in a lack of clarity in those sections. While the word “compel” typically connotes someone or something being forced or required to do something, that is not what is occurring under either section 15403 or 15404. . . . The statutes should be clarified with respect to their confusing use of the term “compel.”

Under current law, a court is precluded from terminating a trust under section 15403 (where all beneficiaries of an irrevocable trust consent) if the trust is subject to a valid restraint on transfer of the beneficiary’s interest as provided in Chapter 2 of the Probate Code, i.e., a “spendthrift provision.” In modern trust drafting, spendthrift provisions are ubiquitous and, as a result, section 15403 largely precludes their termination. Courts should not be precluded from terminating a trust containing a spendthrift provision; rather, courts should be given the discretion, after giving due consideration to the spendthrift provision, to terminate a trust containing a spendthrift provision under appropriate circumstances. [Emphasis in original.]

With respect to modification or termination under section 15403 (with the consent of all beneficiaries), there is no provision allowing the court to limit the class of beneficiaries whose consent is required. With respect to modification or termination under section 15404 (with the consent of the settlor and all beneficiaries), section 15404(c) authorizes the court to limit the class of beneficiaries whose consent is required to the beneficiaries who are reasonably likely to take under the circumstances. The rationale for this inconsistency is unclear, as the court seemingly should have the ability to limit the class of beneficiaries whose consent is required under both circumstances.

A spendthrift provision in a trust may be used by the settlor to control how much a beneficiary will receive and when. A spendthrift provision also makes the beneficiary’s inheritance in the trust unreachable by the beneficiary’s creditors until the money or assets are distributed to the beneficiary. Existing law provides that the court does not have discretion to permit termination of a trust that is subject to a spendthrift provision. This bill would strike that provision and, instead, require the court, in making a determination with respect to a proposed termination of an irrevocable trust pursuant to a beneficiary’s petition, to consider whether the trust is subject to a spendthrift provision.

This bill, by providing that the court has to consider whether the trust contains a spendthrift provision when making a determination on a proposed termination of an irrevocable trust, maintains the presumption in favor of the settlor’s intent in creating the spendthrift provision.

Related/Prior Legislation

AB 1855 (Bonta, 2016) enacts the Uniform Trust Decanting Act, under which a fiduciary of an irrevocable trust may distribute the property of a first trust to one or more second trust or modify the terms of the first trust without the consent of the beneficiaries or approval of the court, subject to certain exceptions. AB 1855 is in the Assembly Judiciary Committee.

AB 1683 (Hagman, Chapter 55, Statutes of 2012) provided that the power of a person other than the settlor to revoke a trust applies to all or a portion of the trust contributed by the settlor, regardless of whether the settlor’s portion was separate or community property, and regardless of whether the power to revoke is exercisable during the lifetime of the settlor or continues after the settlor’s death, or both.

SB 202 (Harman, Chapter 621, Statutes of 2010), among other things, raised the amount from $20,000 to $40,000 at which a trustee could terminate a trust without a court order, and clarified trustee reporting requirements, beneficiary waivers to an account, and the effect of late service of the notification by trustee.

AB 2652 (McAlister, Chapter 820, Statutes of 1986), among other things, 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.

AB 759 (Friedman, Chapter 79, Statutes of 1990) revised and recast the Probate Code and, among other things, continued the trust modification and termination provisions under prior law.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 5/5/16)

Executive Committee of the Trusts and Estates Section of the State Bar of California

OPPOSITION: (Verified 5/5/16)

None received

Prepared by: Margie Estrada / JUD. / (916) 651-4113

5/6/16 14:26:29

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015-2016 Regular Session

Bill No: SB 1158 (Author:Anderson)

Version: April 25, 2016

Hearing Date: May 3, 2016

Fiscal: No

Urgency: No

Consultant: TMW

SUBJECT

Trusts: modification or termination

DESCRIPTION

This bill would clarify the ability of all beneficiaries of an irrevocable trust to petition the court for a modification or termination of the trust. This bill would also require the court to consider, in making a determination with respect to a proposed termination of an irrevocable trust, whether the trust is subject to a valid restraint on the transfer of a beneficiary’s interest. This bill, if the irrevocable trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, would authorize the court to limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances.

This bill would clarify that an irrevocable trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination. This bill would also make other clarifying changes related to a petition by consenting beneficiaries, with the consent of the settlor, for modification or partial termination of an irrevocable trust.

BACKGROUND

As part of a person’s estate planning, he or she may create a trust into which the person transfers specified property. Trusts are commonly used to avoid probate of the person’s estate upon the person’s death and may provide certain tax advantages relative to the property. There are two types of trust estate plans; a testamentary trust, which is written into a will and becomes effective upon death, and a living or inter vivos trust, which is created by a separate document. There are two types of inter vivos trusts, revocable and irrevocable. Unlike a revocable trust, an irrevocable trust does not permit the person creating the trust, referred to as the settlor, to revoke, alter, and amend the trust without the consent of the beneficiaries of the trust.

Existing law provides procedures for modification or termination of an irrevocable trust when the settlor and beneficiaries consent to the trust. If the settlor is not available to consent to modification or termination of the trust, the consent of all of the beneficiaries is required, and the beneficiaries must follow separate procedures to modify or terminate the trust. This bill would revise these procedures.

A prior version of this bill would have changed the presumption in favor of maintaining the settlor’s ability to direct his or her money as he or she pleased through testamentary documents to instead create a presumption that the court’s determination, based upon the beneficiaries’ assertions, was more favorable than maintaining the settlor’s intent. Recent amendments remove those provisions from the bill.

CHANGES TO EXISTING LAW

Existing law provides that, unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settlor. (Prob. Code Sec. 15400.)

Existing law provides that if all beneficiaries of an irrevocable trust consent, they may compel modification or termination of the trust upon petition to the court. (Prob. Code Sec. 15403(a).) However, if the continuance of the trust is necessary to carry out a material purpose of the trust, the trust cannot be modified or terminated unless the court, in its discretion, determines that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust. (Prob. Code Sec. 15403(b).)

Existing law prohibits the court from permitting termination of the trust that is subject to a valid restraint on transfer of the beneficiary’s interest, as specified. (Prob. Code Sec. 15403(c).)

Existing law, except as otherwise provided, prohibits transfer of a beneficiary’s interest in income under the trust if the trust instrument provides that a beneficiary’s interest income is not subject to voluntary or involuntary transfer, and provides that the beneficiary’s interest in income is not subject to enforcement of a money judgment until paid to the beneficiary. (Prob. Code Sec. 15300.)

Existing law, if the settlor and all beneficiaries of an irrevocable trust consent, authorizes them to compel the modification or termination of the trust. (Prob. Code Sec. 15404(a).) However, if any beneficiary does not consent to the modification or termination of the trust, existing law authorizes the other beneficiaries, with the consent of the settlor, to petition the court to compel a modification or a partial termination of the trust if the interests of the beneficiaries who do not consent are not substantially impaired. (Prob. Code Sec. 15404(b).)

Existing law, if the trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor, or using other words that describe the class of all persons who would take under the rules of intestacy, authorizes the court to limit the class of beneficiaries whose consent is needed to compel the modification or termination of the trust to the beneficiaries who are reasonably likely to take under the circumstances. (Prob. Code Sec. 15404(c).)

Existing law, with respect to beneficiary consent to those petitions to compel modification or termination of the trust, provides that the consent of a beneficiary who lacks legal capacity, including a minor, or who is an unascertained or unborn person may be given in proceedings before the court by a guardian ad litem, if it would be appropriate to do so. (Prob. Code Sec. 15404.) In determining whether to give consent, existing law authorizes the guardian ad litem of the minor to rely on general family benefit accruing to living members of the beneficiary’s family as a basis for approving a modification or termination of the trust. (Prob. Code Sec. 15404.)

Existing law provides that the presumption of fertility is rebuttable in determining the class of beneficiaries whose consent is necessary to modify or terminate the trust. (Prob. Code Sec. 15406.)

This bill would clarify that if all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust.

This bill would strike the prohibition of the court’s discretion to permit termination of a trust subject to a valid restraint on the transfer of a beneficiary’s interest, and, instead, require a court, in making a determination with respect to a proposed termination of an irrevocable trust, to consider whether the trust is subject to a valid restraint on the transfer of a beneficiary’s interest, as specified.

This bill would clarify that an irrevocable trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval of the modification or termination.

This bill would clarify that if any beneficiary does not consent to the modification or termination of an irrevocable trust, with the consent of the settlor, the court may modify or partially terminate the trust if the interests of the beneficiaries who do not consent are not substantially impaired.

This bill would clarify that a court may limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to the beneficiaries who are reasonably likely to take under the circumstances.

COMMENT

1. Stated need for the bill

The author writes:

Certain flaws in the existing statutes governing modification and termination of trusts ([Probate Code S]ection 15400 et seq.) may be summarized as follows:

[Probate Code] Section[s] 15403 and 15404 both use the word “compel,” which results in a lack of clarity in those sections. While the word “compel” typically connotes someone or something being forced or required to do something, that is not what is occurring under either section 15403 or 15404. . . . The statutes should be clarified with respect to their confusing use of the term “compel.”

Under current law, a court is precluded from terminating a trust under section 15403 (where all beneficiaries of an irrevocable trust consent) if the trust is subject to a valid restraint on transfer of the beneficiary’s interest as provided in Chapter 2 of the Probate Code, i.e., a “spendthrift provision.” In modern trust drafting, spendthrift provisions are ubiquitous and, as a result, section 15403 largely precludes their termination. Courts should not be precluded from terminating a trust containing a spendthrift provision; rather, courts should be given the discretion, after giving due consideration to the spendthrift provision, to terminate a trust containing a spendthrift provision under appropriate circumstances. [Emphasis in original.]

With respect to modification or termination under section 15403 (with the consent of all beneficiaries), there is no provision allowing the court to limit the class of beneficiaries whose consent is required. With respect to modification or termination under section 15404 (with the consent of the settlor and all beneficiaries), section 15404(c) authorizes the court to limit the class of beneficiaries whose consent is required to the beneficiaries who are reasonably likely to take under the circumstances. The rationale for this inconsistency is unclear, as the court seemingly should have the ability to limit the class of beneficiaries whose consent is required under both circumstances.

2. Spendthrift provisions

A spendthrift provision in a trust may be used by the settlor to control how much a beneficiary will receive and when. Common reasons to use a spendthrift provision include that the beneficiary is a poor money manager, has a gambling or substance addiction, or is an easy target for individuals who may use the beneficiary for his or her money. A spendthrift provision also makes the beneficiary’s inheritance in the trust unreachable by the beneficiary’s creditors until the money or assets are distributed to the beneficiary. As such, the spendthrift provision is a restraint on the transfer of the inheritance to the beneficiary.

Existing law provides that the court does not have discretion to permit termination of a trust that is subject to a valid restraint on the transfer of the beneficiary’s interest (spendthrift provision). (Prob. Code Sec. 15403(b).) This bill would strike that provision and, instead, require the court, in making a determination with respect to a proposed termination of an irrevocable trust pursuant to a beneficiary’s petition, to consider whether the trust is subject to a spendthrift provision.

TEXCOM asserts that there is limited availability of the procedure afforded by Probate Code Section 15403 because of the prohibition on termination by a court of a trust that is subject to a valid restraint on transfer of the beneficiary’s interest. According to TEXCOM, “[u]nder current law, a court is precluded from terminating a trust under [S]ection 15403 (where all beneficiaries of an irrevocable trust consent) if the trust is subject to a valid restraint on transfer of the beneficiary’s interest as provided in Chapter 2 of the Probate Code, i.e., a ‘spendthrift provision.’ In modern trust drafting, spendthrift provisions are ubiquitous and, as a result, [S]ection 15403 largely precludes their termination. Courts should not be precluded from terminating a trust containing a spendthrift provision; rather, courts should be given the discretion, after giving due consideration to the spendthrift provision, to terminate a trust containing a spendthrift provision under appropriate circumstances.”

According to the California Law Revision Commission, Probate Code Section 15403(b) “gives the court some discretion in applying the material purposes doctrine, except in situations where transfer of the beneficiary’s interest is restrained, such as by a spendthrift provision. See Section 15300 (restraint on transfer of beneficiary’s interest). Section 15403 permits termination of an irrevocable trust with the consent of all beneficiaries where the trust provides for successive beneficiaries or postpones enjoyment of a beneficiary’s interest. The discretionary power provided in subdivision (b) also represents a change in the prior California case-law rule. [Citation.] Section 15403 is intended to provide some degree of flexibility in applying the material purposes doctrine in situations where transfer of the beneficiary’s interest is not restrained.” (Recommendation Proposing New Probate Code, 20 Cal. L. Revision Comm’n Reports (1990) 1001, 1876.) Under this statute, a court must determine the purpose or purposes of a trust and which purposes are material. This provision, while allowing the court some latitude on modifying or terminating the trust, reiterates the preference to continue the settlor’s purpose for creating the trust.

With respect to spendthrift provisions, the doctrine that property may be made inalienable by such declaration of a spendthrift provision rests upon the theory that a donor has the right to give his property to another upon any conditions which he sees fit to impose, and that, inasmuch as such a gift takes nothing from the prior or subsequent creditors of the beneficiary to which they previously had the right to look for payment, they cannot complain that the donor has provided that the property or income shall go or be paid personally to the beneficiary and shall not be subject to the claims of creditors. (Parscal v. Parscal (1983) 148 Cal.App.3d 1098, 1102-1103.) The validity of a spendthrift provision in a trust is predicated upon the consideration that a person is free to make any desired disposition of his property. (Ibid.)

If the settlor includes a spendthrift provision in the trust because he or she believes the beneficiaries do not manage money well, the settlor’s purpose should not be disregarded in favor of the beneficiaries’ wants or pursuant to the court’s opinion. If the settlor wanted the beneficiaries to have the money sooner, there would not be a spendthrift provision. On the other hand, if circumstances change and the settlor’s purpose for establishing the trust cannot be effectuated, the court has the ability to modify the trust after determining that the reason for doing so under the circumstances outweighs the interest in accomplishing a material purpose of the trust. This bill, by providing that the court has to consider whether the trust contains a spendthrift provision when making a determination on a proposed termination of an irrevocable trust, would maintain the presumption in favor of the settlor’s intent in creating the spendthrift provision.

3. Doctrine of worthier title

Existing law, when modifying or terminating an irrevocable trust with the consent of the settlor and beneficiaries, provides a path to modification or partial termination of a trust if the interests of the beneficiaries who do not consent are not substantially impaired. (Prob. Code Sec. 15404(b).) Existing law allows the court to limit the class of beneficiaries whose consent is needed to compel the modification or termination to the beneficiaries who are reasonably likely to take under the circumstances. (Prob. Code Sec. 15404(c).) Similarly, this bill would authorize the court to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust when the consent of the settlor is unavailable.

TEXCOM contends that Probate Code Sections 15403 and 15404 should be harmonized and remove the current inconsistency regarding the class of beneficiaries. Further, TEXCOM argues that there is a lack of discretion afforded to the court to limit, where appropriate, the class of beneficiaries whose consent is necessary to modify or terminate a trust. TEXCOM notes that relative to trusts, the Probate Code defines “beneficiary” to mean a person to whom a donative transfer of property is made or that person’s successor in interest, including a person who has any present or future interest, vested or contingent. (Prob. Code Section 86.) TEXCOM contends that the result of this definition is that the class of persons required to consent to a modification or termination of a trust is very broad, and frequently includes beneficiaries who are unborn or unascertainable. Further, TEXCOM notes that included within this definition of “beneficiary” are persons whose interests in the trust are extremely remote, e.g., where the likelihood of their actually taking under the instrument is very low. TEXCOM asserts that “[c]urrent law is somewhat inconsistent regarding the ability of the court to limit the class of beneficiaries whose consent is needed to modify or terminate a trust:

a. With respect to modification or termination under [S]ection 15403 (with the consent of all beneficiaries), there is no provision allowing the court to limit the class of beneficiaries whose consent is required.

b. With respect to modification or termination under [S]ection 15404 (with the consent of the settlor and all beneficiaries), [S]ection 15404(c) authorizes the court to limit the class of beneficiaries whose consent is required to the beneficiaries who are reasonably likely to take under the circumstances.

TEXCOM asserts that the rationale for this inconsistency is unclear, as the court seemingly should have the ability to limit the class of beneficiaries whose consent is required under both circumstances.

According to the California Law Revision Commission, Probate Code Section 15404(c) reinstates a limited form of the doctrine of worthier title, which was abolished in California in 1959. (See 1959 Cal. Stat. ch. 122; see also Recommendation and Study Relating to The Doctrine of Worthier Title, 2 Cal. L. Revision Comm’n Reports D-1 (1959). “Under subdivision (c), the need to obtain the consent of persons constituting the class of heirs or next of kin of the settlor may be excused by the court as to beneficiaries (typically unborn or remote beneficiaries) who are not reasonably likely to take principal under the trust. This limitation protects the interests of beneficiaries who are likely to take while permitting the settlor to modify or terminate an otherwise irrevocable trust in line with the probable intent of the settlor.” (Recommendation Proposing New Probate Code, 20 Cal. L. Revision Comm’n Reports (1990) 1001, 1877.)

In keeping with this limited form of the doctrine of worthier title, this bill would harmonize the two situations where the beneficiaries may ask the court to modify or terminate the trust by adding the class limitation authorization currently under Probate Code Section 15404 to Probate Code Section 15403.

4. Clarifying method for requesting modification or termination of irrevocable trust

Existing law requires that if all beneficiaries consent to a modification or termination of the trust, they can compel modification or termination upon petition to the court. (Prob. Code Sec. 15403(a).) This bill would clarify that if all the beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust. This bill would also make other conforming revisions.

The Executive Committee of the Trusts & Estates Section of the State Bar of California (TEXCOM), sponsor, argues that existing Probate Code Section 15403 provides that, if all beneficiaries of an irrevocable trust consent, “they may compel modification or termination of the trust upon petition to the court.” TEXCOM asserts that it is not clear who or what is being compelled in this context. According to TEXCOM, what is actually occurring under this provision is that the beneficiaries are requesting that the court modify or terminate a trust.” TEXCOM asserts that this same problem exists for situations where the settlor and beneficiaries are modifying or terminating a trust by their mutual agreement. Accordingly, TEXCOM contends that the statutes should be clarified with respect to their confusing use of the term “compel.” Staff notes that these statutes were modeled after Sections 337 and 338 of the Restatement (Second) of Trusts (1957).

5. Clarifying modification or termination of trust pursuant to consent of settlor and beneficiaries

Existing law provides that if the settlor and all beneficiaries of a trust consent, they may compel the modification or termination of the trust. (Prob. Code Sec. 15404.) This bill would authorize the settlor and beneficiaries to modify or terminate the trust without a court order.

According to the California Law Revision Commission, a trust may be modified or terminated pursuant to Probate Code Section 15404 without court approval. (Recommendation Proposing New Probate Code, 20 Cal. L. Revision Comm’n Reports (1990) 1001, 1877.) Since the reasoning behind the ability of the settlor and beneficiaries to compel modification or termination of the trust does not contemplate the necessity for judicial review, this provision of the bill is arguably an appropriate clarification of the law.

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: AB 1855 (Bonta, 2016) would enact the Uniform Trust Decanting Act, under which a fiduciary of an irrevocable trust may distribute the property of a first trust to one or more 2nd trust or modify the terms of the first trust without the consent of the beneficiaries or approval of the court, subject to certain exceptions. AB 1855 is in the Assembly Judiciary Committee.

Prior Legislation:

Ab 1683 (Hagman, Chapter 55, Statutes of 2012) provided that the power of a person other than the settlor to revoke a trust applies to all or a portion of the trust contributed by the settlor, regardless of whether the settlor’s portion was separate or community property, and regardless of whether the power to revoke is exercisable during the lifetime of the settlor or continues after the settlor’s death, or both.

SB 202 (Harman, Chapter 621, Statutes of 2010), among other things, raised the amount from $20,000 to $40,000 at which a trustee could terminate a trust without a court order, and clarified trustee reporting requirements, beneficiary waivers to an account, and the effect of late service of the notification by trustee.

AB 2652 (McAlister, Chapter 820, Statutes of 1986), among other things, 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.

AB 759 (Friedman, Ch. 79, Stats. 1990) revised and recast the Probate Code and, among other things, continued the trust modification and termination provisions under prior law.

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