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 delete the provision prohibiting a court from terminating an irrevocable trust that is subject to a valid restraint on the transfer of a beneficiarys interest and instead authorize the court to terminate a trust with this restraint if the court finds good cause to do so. The bill would specify that a court is authorized to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust when the class is described as heirs or next of kin. 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. The bill would also make clarifying changes.

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 delete the provision prohibiting a court from terminating an irrevocable trust that is subject to a valid restraint on the transfer of a beneficiarys interest and instead authorize the court to terminate a trust with this restraint if the court finds good cause to do so. The bill would specify that a court is authorized to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust when the class is described as heirs or next of kin. 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. The bill would also make clarifying changes.

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 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 prohibiting a court from terminating an irrevocable trust that is subject to a valid restraint on the transfer of a beneficiarys interest. interest and instead authorize the court to terminate a trust with this restraint if the court finds good cause to do so. The bill would specify that a court is authorized to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust when the class is described as heirs or next of kin. 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. The bill would also make clarifying changes.

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 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.

 UNFINISHED BUSINESS  

Bill No: SB 333

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 6-0, 4/4/17

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

NO VOTE RECORDED: Anderson

SENATE FLOOR: 36-0, 4/20/17 (Consent)

AYES: Anderson, Atkins, Bates, Berryhill, Bradford, Cannella, De León, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Jackson, Leyva, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

NO VOTE RECORDED: Allen, Beall, Hueso, Lara

ASSEMBLY FLOOR: 74-0, 6/19/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: Trusts & Estates Section of the California State Bar

DIGEST:

This bill revises and recasts provisions relating the modification or termination of an irrevocable trust to delete the provision prohibiting a court from terminating an irrevocable trust that is subject to a valid restraint on the transfer of a beneficiary’s interest and instead authorize the court to terminate a trust with this restraint if the court finds good cause to do so. This bill specifies that a court is authorized to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust when the class is described as “heirs” or “next of kin.” This bill also authorizes 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. This bill also makes clarifying changes.

Assembly Amendments

recasts the bill so that a good cause determination is needed for an irrevocable trust to be modified or terminated without the consent of all beneficiaries.

ANALYSIS:

Existing law:

1. Provides that, unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settlor. (Prob. Code Sec. 15400.)
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. (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).)
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. (Prob. Code Sec. 15403(c).)
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. (Prob. Code Sec. 15300.)
5. Authorizes the settlor and all beneficiaries of an irrevocable trust to compel the modification or termination of the trust, if all parties consent. (Prob. Code Sec. 15404(a).)
6. 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 when any beneficiary does not consent, as long as the interests of the beneficiaries who do not consent are not substantially impaired. (Prob. Code Sec. 15404(b).)
7. 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. (Prob. Code Sec. 15404(c.).)
8. Provides, with respect to beneficiary consent to those petitions to compel modification or termination of the trust, 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.)
9. 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:

1. Clarifies that if all beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust.
2. Provides that if a trust is subject to a valid restraint on the transfer of a beneficiary’s interest, as provided, the trust may not be terminated with the consent of all beneficiaries unless the court determines there is good cause to do so.
3. Allows a court, if a trust provides for disposition of principal to "heirs" or "next of kin," to limit the class of beneficiaries whose consent is necessary to modify or terminate the trust to the beneficiaries who are reasonably likely to take under the circumstances.
4. Provides that an irrevocable trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval. 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.

Comments

Purpose of the bill. The existing statutes governing modification and termination of trusts are flawed in a number of ways, and would benefit from clarification and a modest expansion of the ability of consenting beneficiaries to terminate a trust with court approval under section 15403 [of the Probate Code].

SB 333 makes the modification and/or termination of trusts more available under section 15403 by eliminating the outright prohibition on termination of trusts by the court where the trust is subject to a valid spendthrift provision, instead making the spendthrift provision a factor that the court is to consider when considering a termination of a trust proposed by all beneficiaries. As well as, harmonize the current inconsistency between sections 15403 and 15404 regarding the ability of a court to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust by providing the court with authority to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to those beneficiaries who are reasonably likely to take under the circumstances.

Allows a Court to Change an Irrevocable Trust with a Spendthrift Clause. A spendthrift provision in a trust is used by the settlor to control what trust assets a beneficiary will receive and when, limiting what a beneficiary is able to obtain, either voluntarily or involuntarily. A settlor may choose to use a spendthrift clause if a beneficiary is a poor money manager, has a gambling or a drug problem, or is an easy target for those who may use the beneficiary for his or her money. A spendthrift clause makes the beneficiary’s interest in the trust property unreachable by the beneficiary’s creditors until the money or assets are distributed to the beneficiary, and is a restraint on the transfer of the property to the beneficiary.

Current law prevents a court from terminating a trust that is subject to a valid restraint on the transfer of the beneficiary’s interest. This bill, as recently amended, strikes that prohibition and instead allows the trust to be terminated, with the consent of all beneficiaries, if the court determines that there is good cause to do so. This gives the court discretion to terminate an irrevocable trust, including one with a spendthrift clause, provided there is a good reason to do so.

The bill's sponsor, the Trusts and Estates Section of the State Bar, asserts that in modern trust drafting, spendthrift provisions are ubiquitous and, as a result, existing law largely precludes trust 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.”

Despite the sponsor's contention that spendthrift clauses are included in most trusts, if a settlor includes a spendthrift clause in an irrevocable trust, that clause should not lightly be undone by the beneficiaries or the court. If the settlor wanted the beneficiaries, or their creditors, to have greater access to the trust property, the settlor might not have included a spendthrift clause in the trust. On the other hand, if circumstances change and the settlor’s purpose for establishing the trust cannot be effectuated, it is not unreasonable that the court have 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 and there is good cause for eliminating a spendthrift clause. This bill, by providing that the trust may not be terminated unless the court determines there is a good reason to do so, maintains the settlor’s intent in establishing the spendthrift clause unless good cause requires otherwise.

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 authorizes 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.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 6/20/17)

Trusts & Estates Section of the California State Bar (source)

Judicial Council

OPPOSITION: (Verified 6/20/17)

None received

ASSEMBLY FLOOR: 74-0, 6/19/17

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

NO VOTE RECORDED: Travis Allen, Bocanegra, Calderon, Chen, Muratsuchi, O'Donnell

Prepared by:

6/21/17 13:38:25

**** END ****

Date of Hearing: June 13, 2017

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

SBPCA Bill Id:SB 333

Author:(Anderson) – As Amended Ver:June 7, 2017

PROPOSED CONSENT

SENATE VOTE: 36-0

SUBJECT: Trusts: modification or termination

KEY ISSUE: SHOULD TERMINATing OR MODIFYing IRREVOCABLE TRUSTS be made easier BY ALLOWING COURTS TO DO SO EVEN IF THE TRUST CONTAINS A SPENDTHRIFT CLAUSE AND BY CLARIFYING THAT THE SETTLOR AND ALL BENEFICIARIES CAN DO so EVEN WITHOUT COURT APPROVAL?

SYNOPSIS

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 and may provide certain tax advantages. 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 in a separate document. There are two types of living trusts, revocable and irrevocable trusts. Unlike a revocable trust, an irrevocable trust does not permit the person creating the trust (in California, the settlor) to revoke or change the trust without the consent of the beneficiaries of the trust and/or the court.

Current law provides procedures to seek modification or termination of an irrevocable trust, either when the settlor and beneficiaries agree or when the beneficiaries alone agree, which often occurs after the death of the settlor. This bill, sponsored by the Trusts & Estates Section of the State Bar, revises these procedures and makes it easier to change or terminate an existing irrevocable trust. In particular, as recently amended, this bill allows a court, with the consent of all beneficiaries, to terminate a trust with a spendthrift clause, which is prohibited today, provided there is good cause to do so. It also allows a court to limit the beneficiaries who must give consent to a modification or termination to those beneficiaries who are reasonably likely to take under the circumstances.

This bill is almost identical to SB 1158 (Anderson, 2016), which passed the Senate, but was not heard in this Committee. There is no known opposition to this bill.

SUMMARY: Clarifies and expands how an irrevocable trust may be modified or terminated. Specifically, 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. Provides that if a trust is subject to a valid restraint on the transfer of a beneficiary’s interest, as provided, the trust may not be terminated with the consent of all beneficiaries unless the court determines there is good cause to do so.
3. Allows a court, if a trust provides for disposition of principal to "heirs" or "next of kin," to limit the class of beneficiaries whose consent is necessary to modify or terminate the trust to the beneficiaries who are reasonably likely to take under the circumstances.
4. Provides that an irrevocable trust may be modified or terminated by the written consent of the settlor and all beneficiaries without court approval. 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.

EXISTING LAW:

1. Provides that, unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settlor. (Probate Code Section 15400. Unless stated otherwise, all further references are to that code.)
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. Prohibits the court from terminating a trust that is subject to a valid restraint on transfer of the beneficiary’s interest, as specified. (Section 15403.)
3. Except as otherwise provided, prohibits transfer of a beneficiary’s interest in income under a trust if the trust instrument provides that a beneficiary’s interest in the trust's 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 (also known as a spendthrift provision). (Section 15300.)
4. Authorizes the settlor and all beneficiaries of an irrevocable trust to compel the modification or termination of the trust. If any beneficiary does not consent, 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, provided the interests of the beneficiaries who do not consent are not substantially impaired. 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 describe a class of persons who would take under the rules of intestacy, authorizes the court to limit the class of beneficiaries whose consent is needed to modify or terminate the trust to the beneficiaries who are reasonably likely to take under the circumstances. (Section 15404.)
5. Provides that, when seeking to modify or terminate a trust under 2) and 4), above, 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. In determining whether to give consent, authorizes the guardian ad litem 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. (Section 15405.)
6. Provides that the presumption of fertility is rebuttable in determining the class of beneficiaries whose consent is necessary to modify or terminate the trust. (Section 15406.)

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

COMMENTS: 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 and may provide certain tax advantages. 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 in a separate document. There are two types of living trusts, revocable and irrevocable trusts. Unlike a revocable trust, an irrevocable trust does not permit the person creating the trust (in California, the settlor) to revoke or change the trust without the consent of the beneficiaries of the trust and/or the court.

Current law provides procedures to seek modification or termination of an irrevocable trust, either when the settlor and beneficiaries agree or when the beneficiaries agree. This bill revises these procedures and makes it easier to modify or terminate an existing irrevocable trust.

Allows a Court to Change an Irrevocable Trust with a Spendthrift Clause: A spendthrift provision in a trust is used by the settlor to control what trust assets a beneficiary will receive and when, limiting what a beneficiary is able to obtain, either voluntarily or involuntarily. A settlor may choose to use a spendthrift clause if a beneficiary is a poor money manager, has a gambling or a drug problem, or is an easy target for those who may use the beneficiary for his or her money. A spendthrift clause makes the beneficiary’s interest in the trust property unreachable by the beneficiary’s creditors until the money or assets are distributed to the beneficiary, and is a restraint on the transfer of the property to the beneficiary.

Current law prevents a court from terminating a trust that is subject to a valid restraint on the transfer of the beneficiary’s interest. This bill, as recently amended, strikes that prohibition and instead allows the trust to be terminated, with the consent of all beneficiaries, if the court determines that there is good cause to do so. This gives the court discretion to terminate an irrevocable trust, including one with a spendthrift clause, provided there is a good reason to do so.

The bill's sponsor, the Trusts and Estates Section of the State Bar, asserts that in modern trust drafting, spendthrift provisions are ubiquitous and, as a result, existing law largely precludes trust 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.”

Despite the sponsor's contention that spendthrift clauses are included in most trusts, if a settlor includes a spendthrift clause in an irrevocable trust, that clause should not lightly be undone by the beneficiaries or the court. If the settlor wanted the beneficiaries, or their creditors, to have greater access to the trust property, the settlor might not have included a spendthrift clause in the trust. On the other hand, if circumstances change and the settlor’s purpose for establishing the trust cannot be effectuated, it is not unreasonable that the court have 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 and there is good cause for eliminating a spendthrift clause. This bill, by providing that the trust may not be terminated unless the court determines there is a good reason to do so, maintains the settlor’s intent in establishing the spendthrift clause unless good cause requires otherwise.

Allows the Court to Limit Which Beneficiaries Must Consent to a Trust Modification or Termination: If a trust provides for the disposition of principal to a class of persons described only as “heirs” or “next of kin” of the settlor and the settlor and beneficiaries seek to modify or terminate the trust, current law allows a court to limit the class of beneficiaries whose consent is needed to modify or terminate the trust to the beneficiaries who are reasonably likely to take under the circumstances. This allows the court to limit these groups to potentially exclude unborn or remote beneficiaries. This bill expands that provision to allow the court to limit the class of beneficiaries whose consent is needed to modify or terminate the trust to those instances when only the beneficiaries, and not the settlor and the beneficiaries, are petitioning the court for a trust modification or termination.

This change harmonizes the consent required for trust modification or termination between those instances when the settlor and the beneficiaries seek to change the trust and those instances when just the beneficiaries seek that change, removing the current statutory inconsistency. The Trusts & Estates Section of the State Bar writes that the rationale for this inconsistency is unclear, and the court should instead have the ability to limit the class of beneficiaries whose consent is required under both circumstances. Moreover, the author notes, this change provides the court with discretion to exclude unborn or unascertainable beneficiaries whose existence, under current law, would prevent a court from modifying or terminating a trust, when requested by the beneficiaries, even if there is good reason to do so, as long as not all beneficiaries, including broadly all "heirs" or "next of kin," cannot consent.

The Bill Makes Other Clarifying and Technical Changes. The bill also makes a number of other clarifying changes to ensure that existing trust modification and termination provisions are more functional and not ambiguous. Existing law requires that if all beneficiaries consent to a modification or termination of a trust, they can compel modification or termination upon petition to the court. This bill clarifies that if all the beneficiaries of an irrevocable trust consent, they may petition the court for modification or termination of the trust. This change removes any ambiguity about what it means to compel trust modification or termination and clarifies what the court may do in these instances.

Likewise, existing law provides that if the settlor and all beneficiaries of a trust consent, they may compel the modification or termination of the trust. This bill eliminates the word "compel" and simply authorizes the settlor and beneficiaries to modify or terminate the trust without a court order. This makes sense, since those affected by the trust – the settlor and the beneficiaries – all agree that the trust should be changed, making court approval in these instances unnecessary.

ARGUMENTS IN SUPPORT: The Judicial Council writes that the "clarifying changes in the law that would be enacted through SB 333 should enhance the court's ability to provide a more efficient delivery of justice in overseeing and administering trusts."

REGISTERED SUPPORT / OPPOSITION:

Support

Trusts & Estates Section of the State Bar (sponsor)

Judicial Council

Opposition

None on file

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

 CONSENT  

Bill No: SB 333

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 6-0, 4/4/17

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

NO VOTE RECORDED: Anderson

SUBJECT:

SOURCE: Author

DIGEST: This bill clarifies the ability of all beneficiaries of an irrevocable trust to petition the court for a modification or termination of the trust. This bill requires the court 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 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 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. This bill 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. This bill also makes 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.

ANALYSIS:

Existing law:

1. Provides that, unless a trust is expressly made irrevocable by the trust instrument, the trust is revocable by the settlor. (Prob. Code Sec. 15400.)
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. (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).)
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. (Prob. Code Sec. 15403(c).)
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. (Prob. Code Sec. 15300.)
5. Authorizes the settlor and all beneficiaries of an irrevocable trust to compel the modification or termination of the trust, if all parties consent. (Prob. Code Sec. 15404(a).)
6. 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 when any beneficiary does not consent, as long as the interests of the beneficiaries who do not consent are not substantially impaired. (Prob. Code Sec. 15404(b).)
7. 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. (Prob. Code Sec. 15404(c.).)
8. Provides, with respect to beneficiary consent to those petitions to compel modification or termination of the trust, 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.)
9. 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:

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.

Comments

Purpose of the bill. The existing statutes governing modification and termination of trusts are flawed in a number of ways, and would benefit from clarification and a modest expansion of the ability of consenting beneficiaries to terminate a trust with court approval under section 15403 [of the Probate Code].

SB 333 makes the modification and/or termination of trusts more available under section 15403 by eliminating the outright prohibition on termination of trusts by the court where the trust is subject to a valid spendthrift provision, instead making the spendthrift provision a factor that the court is to consider when considering a termination of a trust proposed by all beneficiaries. As well as, harmonize the current inconsistency between sections 15403 and 15404 regarding the ability of a court to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust by providing the court with authority to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to those beneficiaries who are reasonably likely to take under the circumstances.

Spendthrift provisions. 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.”

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 their 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 their 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.

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 interest 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 the trust when the consent of the settlor is unavailable.

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 harmonizes 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.

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 clarifies that if all 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.

TEXCOM 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.” Senate Judiciary staff notes that these statutes were modeled after sections 337 and 338 of the Restatement (Second) of Trusts (1957).

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 authorizes 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.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 4/6/17)

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

Judicial Council of California

OPPOSITION: (Verified 4/6/17)

None received

Prepared by: Marisa Shea / JUD. /

4/10/17 15:11:31

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: SB 333 (Author:Anderson)

Version: February 13, 2017

Hearing Date: April 4, 2017

Fiscal: No

Urgency: No

Consultant: MS

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 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 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, 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.

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 in 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 a separate procedure to modify or terminate the trust. This bill would revise these procedures.

This bill is almost identical to SB 1158 (Anderson, 2016), which was heard in this committee last year. SB 1158 was never heard in its Assembly policy committee at the request of the Author.

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 authorizes the settlor and all beneficiaries of an irrevocable trust to compel the modification or termination of the trust, if all parties consent. (Prob. Code Sec. 15404(a).)

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 when any beneficiary does not consent, as long as the interests of the beneficiaries who do not consent are not substantially impaired. (Prob. Code Sec. 15404(b).)

Existing law 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. (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:

The existing statutes governing modification and termination of trusts are flawed in a number of ways, and would benefit from clarification and a modest expansion of the ability of consenting beneficiaries to terminate a trust with court approval under section 15403 [of the Probate Code].

SB 333 would make the modification and/or termination of trusts more available under section 15403 by eliminating the outright prohibition on termination of trusts by the court where the trust is subject to a valid spendthrift provision, instead making the spendthrift provision a factor that the court is to consider when considering a termination of a trust proposed by all beneficiaries. As well as, harmonize the current inconsistency between sections 15403 and 15404 regarding the ability of a court to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust by providing the court with authority to limit the class of beneficiaries whose consent is necessary to modify or terminate a trust to those beneficiaries who are reasonably likely to take under the circumstances.

1. 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.

The Executive Committee of the Trusts and Estates Section of the State Bar of California (TEXCOM), sponsor, 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 their 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 their 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.

1. 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 interest 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 the trust when the consent of the settlor is unavailable.

TEXCOM contends that Probate 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 Sec. 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 actual 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:

1. 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.
2. 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.

1. 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 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.

TEXCOM 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).

1. 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: Judicial Council of California

Opposition: None Known

HISTORY

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

Related Pending Legislation: None Known

Prior Legislation:

AB 1855 (Bonta, 2016) would have enacted the Uniform Trust Decanting Act, but was held in Senate Judiciary Committee. The Uniform Trust Decanting Act provides a fiduciary of an irrevocable trust the authority to distribute the property of a first trust to one or more second trusts or to modify the terms of the first trust without the consent of the beneficiaries or approval of the court, subject to certain exceptions.

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 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.

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.

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