Existing law regulates the administration of trusts by trustees on behalf of beneficiaries. Existing law authorizes, if the principal of a trust does not exceed $40,000 in value, the trustee to terminate the trust.

This bill would instead authorize a trustee to terminate a trust if the principal does not exceed $50,000 in value.

Existing law regulates the administration of trusts by trustees on behalf of beneficiaries. Existing law authorizes, if the principal of a trust does not exceed $40,000 in value, the trustee to terminate the trust.

This bill would instead authorize a trustee to terminate a trust if the principal does not exceed $50,000 in value.

Existing law regulates the administration of trusts by trustees on behalf of beneficiaries. Existing law authorizes, if the principal of a trust does not exceed $40,000 in value, the trustee to terminate the trust.

This bill would, instead, grant a trustee the power would instead authorize a trustee to terminate a trust if the principal does not exceed $100,000 $50,000 in value.

Existing law regulates the administration of trusts by trustees on behalf of beneficiaries. Existing law authorizes, if the principal of a trust does not exceed $40,000 in value, the trustee to terminate the trust.

This bill would, instead, grant a trustee the power to terminate a trust if the principal does not exceed $100,000 in value.

 CONSENT  

Bill No: AB 2426

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 7-0, 6/12/18

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

ASSEMBLY FLOOR: 72-0, 4/9/18 (Consent) - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill increases the value of a trust that a trustee may terminate without court approval from $40,000 to $50,000.

ANALYSIS:

Existing law:

1. Governs the creation, validation, modification, termination, and administration of trusts, and provides for the adjudication of disputes relating to trusts. Provides for the rights and responsibilities of all parties to a trust, i.e., the settlor (i.e., the creator of the trust), trustee, beneficiary, heir, and a third party, such as a creditor. (Prob. Code Sec. 15000 et seq.)
2. Provides that a trust terminates when any of the following occurs: the term of the trust expires; the trust purpose is fulfilled; the trust purpose becomes unlawful; the trust purpose becomes impossible to fulfill; or the trust is revoked. (Prob. Code Sec. 15407.)
3. Provides that on termination of the trust, the trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust. (Prob. Code Sec. 15407(b).)
4. Provides that if a trust is terminated by the trustee pursuant to Probate Code Section 15408(b), the trust property may be distributed, without the need for a court order, as determined by the trustee according to the manner provided in the trust instrument or in a manner directed by the court that conforms as nearly as possible to the intention of the settlor as expressed in the trust instrument. (Prob. Code Sec. 15410(e) & (d).)
5. Provides that if the trust instrument does not provide a manner of distribution at termination and the settlor’s intent is not adequately expressed in the trust instrument, the trustee may distribute the trust property to the living beneficiaries on an actuarial basis. (Prob. Code Sec. 15410(e).)
6. Provides, generally, that in order to terminate or modify a trust, a trustee or beneficiary must petition the court to do so, and, if the court finds that the fair market value of the principal of the trust has become so low in relation to the cost of administration that continuation of the trust under its existing terms will defeat or substantially impair the accomplishments of its purposes, the court may order the termination or modification, as long as it does so in a manner that conforms as nearly as possible to the intention of the settlor. (Prob. Code. Sec. 15408(a).)
7. Provides that, notwithstanding the provision described above, if the trust principal does not exceed $40,000 in value, the trustee has the power to terminate the trust. (Prob. Code. Sec. 15408(b).)

This bill raises that cap to $50,000.

Background

A trust is a means for property to be managed and distributed to specified beneficiaries in accordance with the wishes of the trust’s creator, or “settlor.” The settlor typically transfers property into the trust, designates beneficiaries, and establishes guidelines for the management and distribution of the trust assets by a trustee, who has a legal obligation to implement the settlor’s intent and make reasonable decisions with regard to the trust property.

While trusts have numerous financial advantages, including the convenience of avoiding probate, the costs of administering a trust can be significant, particularly in the case of institutional trustees. Thus, at some point, the costs of administering the trust exceed its benefits and ultimately disadvantage the beneficiaries. At this point, it is in the beneficiaries’ interest to terminate the trust and distribute the assets in accordance with the intent of the settlor.

To terminate a trust, existing law generally requires a trustee that wishes to petition a court to determine whether termination is justified. But this process is itself costly, and further diminishes the assets of the trust. Recognizing this problem, existing law provides that if the trust principal is $40,000 or less, the trustee may terminate the trust without a court’s approval.

This bill increases that threshold to $50,000.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 6/12/18)

None received

OPPOSITION: (Verified 6/12/18)

None received

ARGUMENTS IN SUPPORT: The author writes:

This bill increases the amount where a trustee may terminate a trust without a court order to $50,000 or less. Such an amendment helps preserve the principal balance of the trust, thereby avoiding additional fees and expenses associated with trust administration and costs associated with a court termination.

ASSEMBLY FLOOR: 72-0, 4/9/18

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bonta, Brough, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chávez, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Rendon

NO VOTE RECORDED: Chen, Cristina Garcia, Jones-Sawyer, Obernolte, Wood

Prepared by:

6/15/18 10:17:45

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: AB 2426 (Author:Maienschein)

Version: March 6, 2018

Hearing Date: June 12, 2018

Fiscal: No

Urgency: No

Consultant: JDT

SUBJECT

Trustee: power to terminate trust

DESCRIPTION

This bill would increase the value of a trust that a trustee may terminate without court approval from $40,000 to $50,000.

BACKGROUND

A trust is a means for property to be managed and distributed to specified beneficiaries in accordance with the wishes of the trust’s creator, or “settlor.” The settlor typically transfers property into the trust, designates beneficiaries, and establishes guidelines for the management and distribution of the trust assets by a trustee, who has a legal obligation to implement the settlor’s intent and make reasonable decisions with regard to the trust property.

While trusts have numerous financial advantages, including the convenience of avoiding probate, the costs of administering a trust can be significant, particularly in the case of institutional trustees. Thus, at some point, the costs of administering the trust exceed its benefits and ultimately disadvantage the beneficiaries. At this point, it is in the beneficiaries’ interest to terminate the trust and distribute the assets in accordance with the intent of the settlor.

To terminate a trust, existing law generally requires a trustee that wishes to petition a court to determine whether termination is justified. But this process is itself costly, and further diminishes the assets of the trust. Recognizing this problem, existing law provides that if the trust principal is $40,000 or less, the trustee may terminate the trust without a court’s approval.

This bill would increase that threshold to $50,000.

CHANGES TO EXISTING LAW

Existing law governs the creation, validation, modification, termination, and administration of trusts, and provides for the adjudication of disputes relating to trusts. Provides for the rights and responsibilities of all parties to a trust, i.e., the settlor (i.e., the creator of the trust), trustee, beneficiary, heir, and a third party, such as a creditor. (Prob. Code Sec. 15000 et seq.)

Existing law provides that a trust terminates when any of the following occurs: the term of the trust expires; the trust purpose is fulfilled; the trust purpose becomes unlawful; the trust purpose becomes impossible to fulfill; or the trust is revoked. (Prob. Code Sec. 15407.)

Existing law also provides that on termination of the trust, the trustee continues to have the powers reasonably necessary under the circumstances to wind up the affairs of the trust. (Prob. Code Sec. 15407(b).)

Existing law provides that if a trust is terminated by the trustee pursuant to Probate Code Section 15408(b), the trust property may be distributed, without the need for a court order, as determined by the trustee according to the manner provided in the trust instrument or in a manner directed by the court that conforms as nearly as possible to the intention of the settlor as expressed in the trust instrument. (Prob. Code Sec. 15410(e) & (d).)

Existing law provides that if the trust instrument does not provide a manner of distribution at termination and the settlor’s intent is not adequately expressed in the trust instrument, the trustee may distribute the trust property to the living beneficiaries on an actuarial basis. (Prob. Code Sec. 15410(e).)

Existing law generally provides that, in order to terminate or modify a trust, a trustee or beneficiary must petition the court to do so, and, if the court finds that the fair market value of the principal of the trust has become so low in relation to the cost of administration that continuation of the trust under its existing terms will defeat or substantially impair the accomplishments of its purposes, the court may order the termination or modification, as long as it does so in a manner that conforms as nearly as possible to the intention of the settlor. (Prob. Code. Sec. 15408(a).)

Existing law provides that, notwithstanding the provision described above, if the trust principal does not exceed $40,000 in value, the trustee has the power to terminate the trust. (Prob. Code. Sec. 15408(b).)

This bill would raise that cap to $50,000.

COMMENT

1. Stated need for the bill

The author writes:

This bill increases the amount where a trustee may terminate a trust without a court order to $50,000 or less. Such an amendment helps preserve the principal balance of the trust, thereby avoiding additional fees and expenses associated with trust administration and costs associated with a court termination.

The bill’s sponsor, the California Bankers Association, writes that this bill will help preserve the principal balance in trusts by avoiding the additional fees and expenses associated with trust administration and costs associated with a court termination.

In support, the Executive Committee of the Trusts and Estates Section of the California Lawyers Association writes:

The administrative and other expenses associated with administrating trust property (e.g., trustees’ fees, professionals’ fees, investment management fees, property tax, court filing fees) are ever-increasing. As a result, trusts with modest principal values are susceptible to having their property consumed by these types of administrative expenses. Allowing trusts that are “at risk” in this way to be terminated without a court order (which is likely to cost at least $2,000, i.e., 5% of a trust having a value of $40,000) is appropriate, and means that the trust property is more likely to reach the intended beneficiaries, as opposed to being reduced by the payment of administrative expenses. The current $40,000 threshold is too low, and TEXCOM supports the increase to $50,000 as a sensible—yet modest—change to the law.

2. Termination of an uneconomic trust

In 1985, the California Law Revision Commission (Commission) issued a report recommending that, among other things, a trustee be authorized to terminate a trust valued at $20,000 or less without obtaining a court order in order to terminate an uneconomical trust that could not achieve its purpose. (Recommendation proposing The Trust Law (Dec. 1985) 18 Cal. Law Revision Com. Rep. (1986), pp. 573-574.) The Commission recommended this non-judicial procedure because “[t]he problem with requiring trustees of such trusts to apply to the court is that such applications involve additional expense and there is a risk that the court may not grant approval of the termination.” (Id. at p. 574.) Accordingly, the Legislature enacted AB 2652 (McAlister, Ch. 820, Stats. 1986) which, among other things, added Section 15408 to the Probate Code and authorized trustees to terminate trusts valued at $20,000 or less without court approval.

The cap on trusts that can be terminated without court approval remained $20,000 until 2011. In 2010, the Uniform Trust Code was amended by the National Conference of Commissioners on Uniform Laws. The Uniform Trust Code assumes that a trust with a value of $50,000 or less is sufficiently likely to be inefficient to administer that a trustee should be able to terminate it without the expense of a judicial termination proceeding, but the Uniform Trust Code notes that jurisdictions may wish to designate a higher or lower figure. (National Conference of Commissioners on Uniform Laws, Uniform Trust Code, Section 414 and Comment (2010).) In 2010, SB 202 (Harman, Ch. 621) raised the cap to $40,000. This bill would make California’s cap match that of New Mexico and Texas. While some states have lower caps, others, including Arizona, Idaho, Montana, Nevada, and Utah, have caps of $100,000.

The Uniform Trust Code notes that the rule enabling a trustee to unilaterally terminate a trust that is below a specified value is a default rule that applies in the absence of a specific provision in the trust instrument establishing a different cap or a different procedure for termination without a court order. (Id.)

3. What happens when the trust is terminated?

Existing law provides that if a trust is terminated by the trustee pursuant to Probate Code Section 15408(b), the trust property may be distributed, without the need for a court order, as determined by the trustee according to the manner provided in the trust instrument or in a manner directed by the court that conforms as nearly as possible to the intention of the settlor as expressed in the trust instrument. (Prob. Code Sec. 15410(e) & (d).) Existing law also provides that if the trust instrument does not provide a manner of distribution at termination and the settlor’s intent is not adequately expressed in the trust instrument, the trustee may distribute the trust property to the living beneficiaries on an actuarial basis. (Prob. Code Sec. 15410(e).)

Support: Executive Committee of the Trusts and Estates Section of the California Lawyers Association

Opposition: None known

HISTORY

Source: California Bankers Association

Related Pending Legislation: None known

Prior Legislation: AB 2652 (McAlister, Ch. 820, Stats. 1986). See Comment 2.

Prior Vote:

Assembly Floor (Ayes 72, Noes 0)

Assembly Judiciary Committee (Ayes 10, Noes 0)

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

Date of Hearing: April 3, 2018

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 2426

Author:(Maienschein) – As Amended Ver:March 6, 2018

PROPOSED CONSENT

SUBJECT: Trustee: power to terminate trust

KEY ISSUE: SHOULD THE VALUE OF A TRUST THAT A TRUSTEE MAY TERMINATE WITHOUT COURT APPROVAL BE INCREASED FROM $40,000 TO $50,000?

SYNOPSIS

A trust, created by a written document and governed for the most part by the terms of that document, is managed by a trustee for the benefit of the trust's beneficiaries. Increasingly, trusts are replacing wills as the primary vehicle by which people transfer property at death. Trusts are revocable, unless stated otherwise, and generally become irrevocable on the death of the settlor (the creator of the trust). The principal advantage of a trust is that it can be drafted in such a way as to avoid probate.

A trustee is a fiduciary and, particularly if the trustee is an institutional trustee, will often charge a fee for that service. Additionally, trusts typically pay higher tax rates than individuals. As a result, while there are many advantages for holding property in trust for beneficiaries, at some point it is not financially advantageous to do so. Recognizing this, current law allows a trustee to terminate a trust, without court approval, if the principal of the trust does not exceed $40,000. Sponsored by the California Bankers Association, this bill seeks to increase the value of a trust that a trustee may terminate without court permission from $40,000 to $50,000. The author states that this change "helps preserve the principal balance of the trust, thereby avoiding additional fees and expenses associated with trust administration and costs associated with a court termination." There is no known opposition to this bill.

SUMMARY: Increases the value of a trust that a trustee may terminate without court approval. Specifically, this bill allows a trustee to terminate a trust, without court approval, if the value of the trust does not exceed $50,000, an increase from the $40,000 limit permitted today.

EXISTING LAW:

1. Governs the creation, validation, modification, termination, and administration of trusts, and provides for the adjudication of disputes relating to trusts. Provides for the rights and responsibilities of all parties to a trust, i.e., the settlor (i.e., the creator of the trust), trustee, beneficiary, heir, and a third party, such as a creditor. (Probate Code Section 15000 et seq. All further statutory references are to that code unless stated otherwise.)
2. Allows a trustee to terminate a trust, without court approval, if the value of the trust does not exceed $40,000. (Section 15408.)

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

COMMENTS: A trust, created by a written document and governed for the most part by the terms of that document, is managed by a trustee for the benefit of the trust's beneficiaries. Increasingly, trusts are replacing wills as the primary vehicle by which people transfer property at death. Trusts are revocable, unless stated otherwise, and generally become irrevocable on the death of the settlor. The principal advantage of the revocable trust, made irrevocable by the death of the settlor or upon the happening of an event specified in the trust, is that it can be drafted in such a way as to avoid probate court altogether when the time comes to distribute the estate of a decedent to the beneficiaries.

The trustee is a fiduciary and, particularly if the trustee is an institutional trustee, will often charge a fee for that service. Additionally trusts generally pay higher tax rates than individuals. As a result, while there are many advantages for holding property in trust for beneficiaries, at some point it is not financially advantageous to do so. Recognizing this, current law allows a trustee to terminate a trust, without court approval, if the principal of the trust does not exceed $40,000. This bill increases that amount to $50,000. The author states that this change "helps preserve the principal balance of the trust, thereby avoiding additional fees and expenses associated with trust administration and costs associated with a court termination."

This bill increases the size of a trust that a trustee may terminate without court approval. Current law allows a trustee to terminate a trust, without court approval, if the principal of the trust does not exceed $40,000. The purpose of this provision is that, at some point, it is not cost-effective to continue a trust, and, allowing a trustee to terminate the trust without seeking court permission, prevents the trustee, when the trust principal falls too low, from using up the last remains of a trust by going to court. The original value of a trust that could be terminated by the trustee was set at a $20,000 in 1986. It was increased in 2010 to $40,000 by SB 202 (Harman), Chap. 621, Stats. 2010. That doubling from $20,000 to $40,000 simply kept pace with inflation.

This bill raises the value of a trust that a trustee can terminate without court approval from $40,000 to $50,000. Since 2010, the consumer price index has increased, but not quite by 25 percent. If this bill was just seeking to keep pace with inflation, it would increase the value of a trust that can be terminated without court approval from $40,000 to approximately $46,000. This bill instead increases that amount to $50,000.

Moving to the $50,000 threshold, however, is consistent with the Uniform Trust Code, last amended in 2010 by the National Conference of Commissioners on Uniform Laws, which sets the recommended threshold for a trustee to terminate a trust without court approval at $50,000. The commissioners note that "a trust with a value of $50,000 or less is sufficiently likely to be inefficient to administer that a trustee should be able to terminate it without the expense of a judicial termination proceeding," but that "a settlor is free to set [in the trust document] a higher or lower figure or to specify different procedures or to prohibit termination without a court order." (National Conference of Commissioners on Uniform Laws, Uniform Trust Code, Section 414 and Comment (2010).) Needless to say, if a settlor thinks that $50,000 is not the right threshold to allow a trustee to terminate the trust without court approval, the settlor can set a different amount in the trust document.

In support of the bill, the bill's sponsor, the California Bankers Association, writes that this bill will help preserve the property in the trust.

REGISTERED SUPPORT / OPPOSITION:

Support

California Bankers Association (sponsor)

Opposition

None on file

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