THIRD READING  

Bill No: AB 327

Author: Maienschein (D)

Introduced: 1/31/19

Vote: 21

SENATE JUDICIARY COMMITTEE: 9-0, 6/4/19

AYES: Jackson, Borgeas, Allen, Caballero, Jones, Monning, Stern, Umberg, Wieckowski

ASSEMBLY FLOOR: 71-1, 3/21/19 - See last page for vote

SUBJECT: Estates and trusts: at-death transfers

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

DIGEST:

This bill provides that an at-death transfer, as defined, between spouses by will, revocable trust, beneficiary form, or other instrument is not subject to a presumption of undue influence under a Family Code provision applicable to interspousal contracts.

ANALYSIS:

Existing law:

1. Defines “undue influence” as excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will in a manner that results in inequity. Requires the following factors to be considered: the vulnerability of the victim, the influencer’s apparent authority, and the actions or tactics used by the influencer. Specifies that this statutory definition supplements the common law meaning of undue influence without superseding or interfering with the operation of that law. (Prob. Code § 86; Welf. & Inst. Code § 15610.70.)
2. Provides that the underlying principles relating to undue influence are applicable to both wills and living trusts. (See Rice v. Clark (2002) 28 Cal.4th 89, 96.)
3. Specifies that execution or revocation of a will or a part of a will is ineffective to the extent the execution or revocation was procured by duress, menace, fraud, or undue influence. (Prob. Code § 6104.)
4. Provides that contestants of a will have the burden of proof with regard to showing that the will was a product of undue influence. (Prob. Code § 8252(a).)
5. Creates a presumption that a provision of an instrument that makes a donative transfer to certain disqualified beneficiaries is the product of fraud or undue influence and is thus invalid. Disqualified beneficiaries include certain persons who drafted the instrument and care custodians, as specified. (Prob. Code § 21380.)
6. Provides that if spouses enter into a transaction with each other, they are subject to general rules governing fiduciary relationships, including a duty of the highest good faith and fair dealing, and prohibits a spouse from taking unfair advantage of the other. These transactions are subject to the same rights and duties of nonmarital business partners, and include a right to certain disclosures and accountings. Excludes from these provisions situations involving waivers of spousal rights and duties related to the administration of a trust. (Fam. Code § 721.)
7. Establishes, in the event a spouse secures an advantage in a property-related transaction with the other spouse in violation of Family Code section 721, a rebuttable presumption that the advantaged spouse exercised undue influence over the other. (In re Marriage of Fossum (2011) 192 Cal.App.4th 336, 344.) Applies this rebuttable presumption in the context of certain testamentary transfers. (Lintz v. Lintz (2014) 222 Cal.App.4th 1346, 1353.)

This bill:

1. Provides that an at-death transfer, as defined, between spouses by will, revocable trust, beneficiary form, or other instrument is not subject to Family Code section 721 or any presumptions of undue influence created by that section.
2. Clarifies that the bill’s provisions do not limit the application of other statutory or common law presumptions of undue influence that may apply to an at-death transfer between spouses.

Background

Under the Probate Code and common law, an extensive framework seeks to balance a party’s freedom to make testamentary gifts with the need to protect them from making a testamentary decision under undue influence. Existing law imposes the burden on challengers to show that the testamentary instrument was the product of undue influence. However, under the Probate Code and common law, this burden may shift to the recipient if there is sufficient evidence of undue influence.

Additionally, Family Code section 721 establishes a rebuttable presumption of undue influence that arises if one spouse obtains an advantage over the other in a contract between the spouses. Although this statute has generally been applied in the context of a spouse’s self-serving use of community property, Lintz v. Lintz (2014) 222 Cal.App.4th 1346 held that section 721 applies to certain testamentary transfers. (Id. at 1353.)

Arguing that the existing Probate Code and common law scheme for preventing undue influence in the context of testamentary gifts is sufficient, and that applying section 721 to testamentary transfers is disruptive, costly, and inefficient, the Executive Committee of the Trusts and Estates Section of the California Lawyers Association has sponsored this bill to provide that section 721 does not apply to at-death transfers by testamentary instruments. The bill also clarifies that it does not limit the application of other statutory or common law presumptions of undue influence. The bill has no known opposition.

Comments

1. Probate Code and common law presumptions of undue influence

“As a general proposition, California law allows a testator to dispose of property as he or she sees fit without regard to whether the dispositions specified are appropriate or fair. [Citations.] Testamentary competence is presumed. [Citations.] [¶] This presumption can be overcome if it is shown that the testator was affected by undue influence.” (Estate of Sarabia (1990) 221 Cal.App.3d 599, 604.)

The underlying principles relating to undue influence are applicable to both wills and living trusts. (See Rice v. Clark (2002) 28 Cal.4th 89, 96, citing Hagen v. Hickenbottom (1995) 41 Cal.App.4th 168, 182, [legal principles governing undue influence apply to inter vivos trusts].) Under the Probate Code, “undue influence” means excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will in a manner that results in inequity. (Prob. Code § 86; Welf. & Inst. Code § 15610.70.) This statutory definition is intended to supplement the common law meaning of undue influence without superseding or interfering with the operation of that law. (Prob. Code § 86.)

Any part of a testamentary instrument executed under undue influence is invalid. (See Prob. Code § 6104.) Parties challenging a testamentary instrument on the basis that it was executed under undue influence have the burden of proof. (Prob. Code § 8252(a).) However, in certain circumstances, this presumption shifts if a provision of the instrument makes a donative transfer to certain disqualified beneficiaries, including certain persons who drafted the instrument and care custodians or individuals with close relationships to care custodians, as specified, if the instrument was completed within 90 days of the caretaker’s services to the transferor. (Prob. Code § 21380.) This statutory presumption is conclusive as to the drafter and, as to a care custodian, rebuttable by a showing of clear and convincing evidence that the transfer was not the product of fraud or undue influence. (Ibid.) The presumption is intended to supplement the common law on fraud and undue influence, without superseding or interfering in the operation of that law. (Prob. Code § 21392.)

At common law, undue influence has been defined as “pressure brought to bear directly on the testamentary act, sufficient to overcome the testator's free will, amounting in effect to coercion destroying the testator’s free agency.” (Rice v. Clark (2002) 28 Cal.4th 89, 96.) Under common law principles, a presumption of undue influence arises if the challenger shows: (a) the person alleged to have exerted undue influence had a confidential relationship with the testator; (b) the person actively participated in procuring the instrument’s preparation or execution; and (c) the person would benefit unduly by the testamentary instrument. (Id. at 97.)

Thus, under the Probate Code and common law, an extensive framework seeks to balance a party’s freedom to make testamentary gifts with the need to protect them from making a testamentary decision under undue influence. Existing law imposes the burden on challengers to show that the testamentary instrument was the product of undue influence. However, under the Probate Code and common law, this burden may shift to the recipient if there is sufficient evidence of undue influence.

1. Supersedes the holding in Lintz v. Lintz that applied the Family Code presumption of undue influence for certain inter-spousal transactions to testamentary transfers

The Family Code provides that if spouses enter into a transaction with each other, they are subject to general rules governing fiduciary relationships, including a duty of the highest good faith and fair dealing, and prohibits a spouse from taking unfair advantage of the other. (Fam. Code § 721(b).) These transactions are subject to the same rights and duties of nonmarital business partners, and include a right to certain disclosures and accountings. (Id.) Excluded from these provisions are certain situations involving waivers of spousal rights and duties related to the administration of a trust. (Id.) If a spouse secures an advantage in a property-related transaction with the other spouse in violation of Family Code section 721, a rebuttable presumption arises that the advantaged spouse exercised undue influence over the other. (In re Marriage of Fossum (2011) 192 Cal.App.4th 336, 344.)

A 2014 California Court of Appeal case applied this presumption in the context of certain testamentary transfers. (Lintz v. Lintz (2014) 222 Cal.App.4th 1346, 1353.) That case involved a couple who remarried. Both spouses had children from prior marriages. In 2004, they married for the second time, four years before the decedent died at age 81. At the time, the decedent had an estate plan that provided for his children, grandchildren, and son-in-law. The court described subsequent events as follows:

In May 2005 decedent executed a tenth amendment to the trust. The tenth amendment provided defendant with fifty percent of decedent's assets upon his death, with the remaining fifty percent to be distributed among decedent's children and grandchildren. Between May 2005 and 2008 decedent executed several additional trust amendments, increasingly providing defendant with more of decedent’s assets upon his death and disinheriting his two eldest children. Ultimately, in June 2008 defendant and decedent, as joint settlors and trustees, executed the Lintz Family Revocable Trust. The trust, prepared by defendant’s attorney at defendant’s direction, purportedly designated all of decedent’s property as community property, gave defendant an exclusive life interest in decedent's estate, and gave defendant the right to disinherit decedent's youngest child and leave any unspent residue to defendant’s two children.

(Id. at 1350.) The court held that the trial court below erred in failing to apply the presumption of undue influence that arises under Family Code section 721. However, this error did not affect the outcome: the court noted that “[e]ven without that burden, defendant did not prevail on the issue of undue influence below.” (Id. at 1353.) The court further noted that “[o]ur conclusion that the presumption applies only weakens her position on appeal.” (Ibid.)

Although the Court of Appeal’s interpretation does not appear to be inconsistent with the plain language of section 721, it can be argued that, as a matter of public policy, the presumption of undue influence that section establishes should not be extended to testamentary decisions. Section 721 has generally been applied in the context of one spouse’s misuse of community property in a way that disproportionately advantages that party, and is often raised in the context of a divorce as the former spouses seek to divide marital assets. The same concerns are not as prevalent in the context of an at-death donative transfer. In fact, existing statutes seek to ensure that the spouse receives their share of the estate: a surviving spouse who is omitted from a decedent’s testamentary instrument nevertheless presumptively receives their intestate share of the estate. (Prob. Code § 21160.) Moreover, as noted above, section 721 currently does not apply to certain duties related to the administration of a trust. Exempting at-death donative transfers from this provision is arguably consistent with this policy. Finally, as described above, an extensive statutory and common law framework exists to prevent donative transfers made under undue influence.

FISCAL EFFECT: Appropriation: No Fiscal Com.: No Local: No

SUPPORT: (Verified 6/3/19)

Executive Committee of the Trusts and Estates Section of the California Lawyers

Association (source)

OPPOSITION: (Verified 6/3/19)

None received

ARGUMENTS IN SUPPORT: The sponsor of this bill, Executive Committee of the Trusts and Estates Section of the California Lawyers Association, argues as follows:

First, Lintz harms the public because it holds that the most common disposition in a revocable trust (i.e., leaving one’s property to one’s spouse after one dies) is now presumptively invalid. Lintz thus contradicts the reasonable expectation of married people throughout the state and acts as an unreasonable spur to litigation. Second, Lintz undermines both the Family Code and the Probate Code by applying the Family Code in a context that is traditionally governed by the Probate Code (i.e., the context of donative transfers that only occur on death). The legislative history of Family Code section 721 demonstrates that the Legislature meant section 721 to govern the spouses’ “management of community property” rather than trust contests that occur after death and are thus traditionally governed by the Probate Code and related case law. Third, in applying the section 721 presumption to revocable trusts but not wills, Lintz unwittingly favors formal probate administration over private trust administration, increasing the costs and time delays for the public. Finally, Lintz places an extra financial burden on married persons who desire to establish a joint revocable trust to avoid probate to make testamentary gifts to each other on death. Before Lintz, if there was an adequate written conflict waiver in effect, one attorney could often represent both spouses in joint estate planning involving testamentary gifts of community property to each other through a single revocable trust. After Lintz, each spouse may need to retain independent counsel to safely overcome the presumption of undue influence in order to make a testamentary gift of community property to his or her spouse through a revocable trust.

ASSEMBLY FLOOR: 71-1, 3/21/19

AYES: Aguiar-Curry, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Carrillo, Cervantes, Chau, Chen, Chiu, Choi, Chu, Cooley, Dahle, Daly, Diep, Eggman, Flora, Frazier, Friedman, Gabriel, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

NOES: Gallagher

NO VOTE RECORDED: Arambula, Calderon, Cooper, Cunningham, Fong, Gray, Limón, Quirk

Prepared by: Josh Tosney / JUD. / (916) 651-4113

6/5/19 15:20:12

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2019-2020 Regular Session

Bill No: AB 327 (Author:Maienschein)

Version: January 31, 2019

Hearing Date: June 4, 2019

Fiscal: No

Urgency: No

Consultant: JT

SUBJECT

Estates and trusts: at-death transfers

DIGEST

This bill provides that an at-death transfer, as defined, between spouses by will, revocable trust, beneficiary form, or other instrument is not subject to a presumption of undue influence under a Family Code provision applicable to interspousal contracts.

EXECUTIVE SUMMARY

Under the Probate Code and common law, an extensive framework seeks to balance a party’s freedom to make testamentary gifts with the need to protect them from making a testamentary decision under undue influence. Existing law imposes the burden on challengers to show that the testamentary instrument was the product of undue influence. However, under the Probate Code and common law, this burden may shift to the recipient if there is sufficient evidence of undue influence.

Additionally, Family Code section 721 establishes a rebuttable presumption of undue influence that arises if one spouse obtains an advantage over the other in a contract between the spouses. Although this statute has generally been applied in the context of a spouse’s self-serving use of community property, Lintz v. Lintz (2014) 222 Cal.App.4th 1346 held that section 721 applies to certain testamentary transfers. (Id. at 1353.)

Arguing that the existing Probate Code and common law scheme for preventing undue influence in the context of testamentary gifts is sufficient, and that applying section 721 to testamentary transfers is disruptive, costly, and inefficient, the Executive Committee of the Trusts and Estates Section of the California Lawyers Association (TEXCOM) has sponsored this bill to provide that section 721 does not apply to at-death transfers by testamentary instruments. The bill would also clarify that it does not limit the application of other statutory or common law presumptions of undue influence. The bill has no known opposition.

PROPOSED CHANGES TO THE LAW

Existing law:

1. Defines “undue influence” as excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will in a manner that results in inequity. Requires the following factors to be considered: the vulnerability of the victim, the influencer’s apparent authority, and the actions or tactics used by the influencer. Specifies that this statutory definition supplements the common law meaning of undue influence without superseding or interfering with the operation of that law. (Prob. Code § 86; Welf. & Inst. Code § 15610.70.)
2. Provides that the underlying principles relating to undue influence are applicable to both wills and living trusts. (See Rice v. Clark (2002) 28 Cal.4th 89, 96.)
3. Specifies that execution or revocation of a will or a part of a will is ineffective to the extent the execution or revocation was procured by duress, menace, fraud, or undue influence. (Prob. Code § 6104.)
4. Provides that contestants of a will have the burden of proof with regard to showing that the will was a product of undue influence. (Prob. Code § 8252(a).)
5. Creates a presumption that a provision of an instrument that makes a donative transfer to certain disqualified beneficiaries is the product of fraud or undue influence and is thus invalid. Disqualified beneficiaries include certain persons who drafted the instrument and care custodians, as specified. (Prob. Code § 21380.)
6. Provides that if spouses enter into a transaction with each other, they are subject to general rules governing fiduciary relationships, including a duty of the highest good faith and fair dealing, and prohibits a spouse from taking unfair advantage of the other. These transactions are subject to the same rights and duties of nonmarital business partners, and include a right to certain disclosures and accountings. Excludes from these provisions situations involving waivers of spousal rights and duties related to the administration of a trust. (Fam. Code § 721.)
7. In the event a spouse secures an advantage in a property-related transaction with the other spouse in violation of Family Code section 721, establishes a rebuttable presumption that the advantaged spouse exercised undue influence over the other. (In re Marriage of Fossum (2011) 192 Cal.App.4th 336, 344.) Applies this rebuttable presumption in the context of certain testamentary transfers. (Lintz v. Lintz (2014) 222 Cal.App.4th 1346, 1353.)

This bill:

1. Provides that an at-death transfer, as defined, between spouses by will, revocable trust, beneficiary form, or other instrument is not subject to Family Code section 721 or any presumptions of undue influence created by that section.
2. Clarifies that the bill’s provisions do not limit the application of other statutory or common law presumptions of undue influence that may apply to an at-death transfer between spouses.

COMMENTS

1. Probate Code and common law presumptions of undue influence

“As a general proposition, California law allows a testator to dispose of property as he or she sees fit without regard to whether the dispositions specified are appropriate or fair. [Citations.] Testamentary competence is presumed. [Citations.] [¶] This presumption can be overcome if it is shown that the testator was affected by undue influence.” (Estate of Sarabia (1990) 221 Cal.App.3d 599, 604.)

The underlying principles relating to undue influence are applicable to both wills and living trusts. (See Rice v. Clark (2002) 28 Cal.4th 89, 96, citing Hagen v. Hickenbottom (1995) 41 Cal.App.4th 168, 182, [legal principles governing undue influence apply to inter vivos trusts].) Under the Probate Code, “undue influence” means excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will in a manner that results in inequity. (Prob. Code § 86; Welf. & Inst. Code § 15610.70.) This statutory definition is intended to supplement the common law meaning of undue influence without superseding or interfering with the operation of that law. (Prob. Code § 86.)

Any part of a testamentary instrument executed under undue influence is invalid. (See Prob. Code § 6104.) Parties challenging a testamentary instrument on the basis that it was executed under undue influence have the burden of proof. (Prob. Code § 8252(a).) However, in certain circumstances, this presumption shifts if a provision of the instrument makes a donative transfer to certain disqualified beneficiaries, including certain persons who drafted the instrument and care custodians or individuals with close relationships to care custodians, as specified, if the instrument was completed within 90 days of the caretaker’s services to the transferor. (Prob. Code § 21380.) This statutory presumption is conclusive as to the drafter and, as to a care custodian, rebuttable by a showing of clear and convincing evidence that the transfer was not the product of fraud or undue influence. (Ibid.) The presumption is intended to supplement the common law on fraud and undue influence, without superseding or interfering in the operation of that law. (Prob. Code § 21392.)

At common law, undue influence has been defined as “pressure brought to bear directly on the testamentary act, sufficient to overcome the testator's free will, amounting in effect to coercion destroying the testator’s free agency.” (Rice v. Clark (2002) 28 Cal.4th 89, 96.) Under common law principles, a presumption of undue influence arises if the challenger shows: (1) the person alleged to have exerted undue influence had a confidential relationship with the testator; (2) the person actively participated in procuring the instrument’s preparation or execution; and (3) the person would benefit unduly by the testamentary instrument. (Id. at 97.)

Thus, under the Probate Code and common law, an extensive framework seeks to balance a party’s freedom to make testamentary gifts with the need to protect them from making a testamentary decision under undue influence. Existing law imposes the burden on challengers to show that the testamentary instrument was the product of undue influence. However, under the Probate Code and common law, this burden may shift to the recipient if there is sufficient evidence of undue influence.

2. Supersedes the holding in Lintz v. Lintz that applied the Family Code presumption of undue influence for certain inter-spousal transactions to testamentary transfers

The Family Code provides that if spouses enter into a transaction with each other, they are subject to general rules governing fiduciary relationships, including a duty of the highest good faith and fair dealing, and prohibits a spouse from taking unfair advantage of the other. (Fam. Code § 721(b).) These transactions are subject to the same rights and duties of nonmarital business partners, and include a right to certain disclosures and accountings. (Id.) Excluded from these provisions are certain situations involving waivers of spousal rights and duties related to the administration of a trust. (Id.) If a spouse secures an advantage in a property-related transaction with the other spouse in violation of Family Code section 721, a rebuttable presumption arises that the advantaged spouse exercised undue influence over the other. (In re Marriage of Fossum (2011) 192 Cal.App.4th 336, 344.)

A 2014 California Court of Appeal case applied this presumption in the context of certain testamentary transfers. (Lintz v. Lintz (2014) 222 Cal.App.4th 1346, 1353.) That case involved a couple who remarried. Both spouses had children from prior marriages. In 2004, they married for the second time, four years before the decedent died at age 81. At the time, the decedent had an estate plan that provided for his children, grandchildren, and son-in-law. The court described subsequent events as follows:

In May 2005 decedent executed a tenth amendment to the trust. The tenth amendment provided defendant with fifty percent of decedent's assets upon his death, with the remaining fifty percent to be distributed among decedent's children and grandchildren. Between May 2005 and 2008 decedent executed several additional trust amendments, increasingly providing defendant with more of decedent’s assets upon his death and disinheriting his two eldest children. Ultimately, in June 2008 defendant and decedent, as joint settlors and trustees, executed the Lintz Family Revocable Trust. The trust, prepared by defendant’s attorney at defendant’s direction, purportedly designated all of decedent’s property as community property, gave defendant an exclusive life interest in decedent's estate, and gave defendant the right to disinherit decedent's youngest child and leave any unspent residue to defendant’s two children.

(Id. at 1350.) The court held that the trial court below erred in failing to apply the presumption of undue influence that arises under Family Code section 721. However, this error did not affect the outcome: the court noted that “[e]ven without that burden, defendant did not prevail on the issue of undue influence below.” (Id. at 1353.) The court further noted that “[o]ur conclusion that the presumption applies only weakens her position on appeal.” (Ibid.)

Although the Court of Appeal’s interpretation does not appear to be inconsistent with the plain language of section 721, it can be argued that, as a matter of public policy, the presumption of undue influence that section establishes should not be extended to testamentary decisions. Section 721 has generally been applied in the context of one spouse’s misuse of community property in a way that disproportionately advantages that party, and is often raised in the context of a divorce as the former spouses seek to divide marital assets. The same concerns are not as prevalent in the context of an at-death donative transfer. In fact, existing statutes seek to ensure that the spouse receives their share of the estate: a surviving spouse who is omitted from a decedent’s testamentary instrument nevertheless presumptively receives their intestate share of the estate. (Prob. Code § 21160.) Moreover, as noted above, section 721 currently does not apply to certain duties related to the administration of a trust. Exempting at-death donative transfers from this provision is arguably consistent with this policy. Finally, as described above, an extensive statutory and common law framework exists to prevent donative transfers made under undue influence.

The sponsor of this bill, TEXCOM, argues as follows:

First, Lintz harms the public because it holds that the most common disposition in a revocable trust (i.e., leaving one’s property to one’s spouse after one dies) is now presumptively invalid. Lintz thus contradicts the reasonable expectation of married people throughout the state and acts as an unreasonable spur to litigation. Second, Lintz undermines both the Family Code and the Probate Code by applying the Family Code in a context that is traditionally governed by the Probate Code (i.e., the context of donative transfers that only occur on death). The legislative history of Family Code section 721 demonstrates that the Legislature meant section 721 to govern the spouses’ “management of community property” rather than trust contests that occur after death and are thus traditionally governed by the Probate Code and related case law. Third, in applying the section 721 presumption to revocable trusts but not wills, Lintz unwittingly favors formal probate administration over private trust administration, increasing the costs and time delays for the public. Finally, Lintz places an extra financial burden on married persons who desire to establish a joint revocable trust to avoid probate to make testamentary gifts to each other on death. Before Lintz, if there was an adequate written conflict waiver in effect, one attorney could often represent both spouses in joint estate planning involving testamentary gifts of community property to each other through a single revocable trust. After Lintz, each spouse may need to retain independent counsel to safely overcome the presumption of undue influence in order to make a testamentary gift of community property to his or her spouse through a revocable trust.

SUPPORT

Executive Committee of the Trusts and Estates Section of the California Lawyers

Association (sponsor)

OPPOSITION

None known

RELATED LEGISLATION

Pending Legislation: None known

Prior Legislation:

SB 105 (Harman, Ch. 553, Stats. 2010) revised and recast certain provisions of the Probate Code related to restrictions on donative transfers to specified persons that became irrevocable on or after January 1, 2011.

PRIOR VOTES:

Assembly Floor (Ayes 71, Noes 1)

Assembly Judiciary Committee (Ayes 10, Noes 1)

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

ASSEMBLY THIRD READING

ATR Bill Id:AB 327

Author:(Maienschein)

As Introduced Ver:January 31, 2019

Majority vote

SUMMARY:

Exempts at-death transfers between spouses from the statutory requirement that spouses have a fiduciary relationship with each other and neither shall take advantage of the other.

Major Provisions

1. Provides that an at-death transfer between spouses by will, revocable trust, beneficiary form, or other instrument is not subject to either the statutory general fiduciary duty between spouses, which imposes a duty of the highest good faith and fair dealing on each spouse, or any other presumptions of undue influence created by that general statutory fiduciary duty.
2. Provides that 1), above, does not limit the application of any other statutory or common law presumption of undue influence that may apply to an at-death transfer between spouses.

COMMENTS:

This bill is in response to a court of appeals case from 2014 that, among other things, held that the Family Code Section 721 fiduciary duty that requires spouses to treat each other with the highest degree of good faith and fair dealing applies to testamentary instruments, such as wills or trusts. In that case, Lintz v. Lintz (2014) 222 Cal. App. 4th 1346, a wealthy decedent's third wife, assisted by her own attorneys, repeatedly convinced the decedent to amend his trust so that eventually his own children were disinherited and she was able to control all of the assets. When he died, the marriage had lasted less than five years. The court determined that she exercised undue influence over her husband and the appellate court agreed. Among other undue influence findings – and there were several – the court held that the wife violated the Family Code provision imposing a duty of the highest good faith and fair dealing on spouses, and prohibiting them from taking unfair advantage of the other.

This bill would prevent the application of the fiduciary duty between spouses to testamentary instruments, including wills and trusts. This bill does not prevent a challenge to a testamentary disposition to a spouse. It simply requires that the challenger bear the burden of persuasion that the transfer was the result of undue influence.

According to the Author:

This bill is necessary "to eliminate the ambiguity and establish that Family Code Section 721 does not create a presumption of undue influence when one spouse names the other spouse as a beneficiary of a revocable trust or other instrument making a donative transfer on death. This proposal establishes that in the testamentary context (i.e., when one spouse makes a donative transfer to the other spouse and that transfer only becomes effective at death), any presumption of undue influence must come from some other statutory or common law source and not from Family Code section 721."

Arguments in Support:

The bill's sponsor, the Trusts & Estates Section of the California Lawyers Association, writes that the Lintz case has created several problems that this bill will solve:

First, Lintz harms the public because it holds that the most common disposition in a revocable trust (i.e., leaving one's property to one's spouse after one dies) is now presumptively invalid. Lintz thus contradicts the reasonable expectation of married people throughout the state and acts as an unreasonable spur to litigation. Second, . . . in applying the section 721 presumption to revocable trusts but not wills, Lintz unwittingly favors formal probate administration over private trust administration, increasing the costs and time delays for the public. Finally, Lintz places an extra financial burden on married persons who desire to establish a joint revocable trust to avoid probate to make testamentary gifts to each other on death. Before Lintz, if there was an adequate written conflict waiver in effect, one attorney could often represent both spouses in joint estate planning involving testamentary gifts of community property to each other through a single revocable trust. After Lintz, each spouse may need to retain independent counsel to safely overcome the presumption of undue influence in order to make a testamentary gift of community property to his or her spouse through a revocable trust.

Arguments in Opposition:

There is no opposition on file.

FISCAL COMMENTS:

None

VOTES:

ASM JUDICIARY: 10-1-1

YES: Mark Stone, Chau, Chiu, Gonzalez, Holden, Kalra, Kiley, Maienschein, Obernolte, Reyes

NO: Gallagher

ABS, ABST OR NV: Petrie-Norris

UPDATED:

VERSION: January 31, 2019

CONSULTANT: Leora Gershenzon / JUD. / (916) 319-2334 FN: 0000047

Date of Hearing: March 12, 2019

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 327

Author:(Maienschein) – As Introduced Ver:January 31, 2019

PROPOSED CONSENT

SUBJECT: at-death transfers: SPOUSAL FIDUCIARY DUTY

KEY ISSUE: SHOULD THE STATUTORily required fiduciary duty THAT EACH SPOUSE OWES THE OTHER, INCLUDING THE HIGHEST DUTY of GOOD FAITH AND FAIR DEALING, NOT APPLY TO AT-DEATH TRANSFERS FROM ONE spouse TO ANOTHER, thus ENSURING that a TESTAMENTARY gift to a spouse does not, in and of itself, create a presumption of undue INFLUENCE?

SYNOPSIS

This bill is in response to a court of appeals case from 2014 that, among other things, held that the Family Code Section 721 fiduciary duty that requires spouses to treat each other with the highest good faith and fair dealing applies to revocable trusts. In that case, Lintz v. Lintz (2014) 222 Cal. App. 4^th 1346, a wealthy decedent’s third wife, assisted by her own attorneys, repeatedly convinced the decedent to amend his trust so that eventually his own children were disinherited and she was able to control all of the assets. The trial court determined that she exercised undue influence over her husband and the appellate court agreed. Among other undue influence findings – and there were several – the court held that the wife violated the Family Code provision imposing a fiduciary duty on transactions between spouses and prohibiting them from taking unfair advantage of the other, and, as a result, shifted the burden of proof to the surviving spouse to show why the bequest to her was not the result of undue influence.

This bill, sponsored by the Trusts & Estates Section of the California Lawyers Association, would prevent the application of the fiduciary duty between spouses to testamentary instruments (including wills and trusts). The author writes that this bill is necessary “to eliminate the ambiguity and establish that Family Code section 721 does not create a presumption of undue influence when one spouse names the other spouse as a beneficiary of a revocable trust or other instrument making a donative transfer on death.” A testamentary transfer to a spouse can still be challenged, but the challenger would have the burden of establishing undue influence. This fits with the ordinary and usual assumption that most spouses will choose to care for their surviving spouses after death. There is no reported opposition to this bill.

SUMMARY: Exempts at-death transfers between spouses from the statutory requirement that spouses have a fiduciary relationship with each other and neither shall take advantage of the other. Specifically, this bill:

1. Provides that an at-death transfer between spouses by will, revocable trust, beneficiary form, or other instrument is not subject to either the statutory general fiduciary duty between spouses, which imposes a duty of the highest good faith and fair dealing on each spouse, or any other presumptions of undue influence created by that general statutory fiduciary duty.
2. Provides that 1), above, does not limit the application of any other statutory or common law presumption of undue influence that may apply to an at-death transfer between spouses.

EXISTING LAW:

1. Except as provided, makes spouses, in transactions between themselves, subject to the general rules governing fiduciary relationships that control the actions of persons occupying confidential relations with each other, which imposes a duty of the highest good faith and fair dealing on each spouse, and neither shall take any unfair advantage of the other. Makes this confidential relationship a fiduciary relationship subject to the same rights and duties of non-marital business partners, as provided. (Family Code Section 721.)
2. Exempts from the spousal fiduciary duty under 1), above, a valid waiver of rights as a surviving spouse and trustee duties, which are governed by their own standard of care. (Id.)
3. Defines “at-death transfer” as a transfer that is revocable during the lifetime of the transferor, but does not include a joint tenancy or joint account with right of survivorship. (Probate Code Section 21104.)
4. Presumptively invalidates any provision of an instrument that makes a donative transfer to certain disqualified beneficiaries as the product of fraud or undue influence. Disqualified beneficiaries include:
   1. The person who drafted the instrument and any relative, domestic partner, cohabitant, or employee of the person who drafted the instrument; and
   2. A care custodian of a dependent adult who is the transferor, as provided, and any relative, cohabitant, or domestic partner of the care custodian. (Probate Code Section 21380.)
5. Provides the statutory presumption in 4), above, does not apply if, among other things, the donative transfer is to a relative or cohabitant of the transferor. (Probate Code Section 21382.)
6. If a decedent fails to provide in a testamentary instrument for the surviving spouse who married the decedent after the execution of all of the decedent’s testamentary instruments, provides the omitted spouse with a share in the decedent’s estate, including community property, quasi-community property and separate property, as provided, unless:
   1. The decedent’s failure to provide for the spouse was intentional and that intention appears from the testamentary instruments;
   2. The decedent provided for the spouse by transfer outside of the estate passing by the decedent’s testamentary instruments; or
   3. The spouse made a valid agreement waiving the right to share in the decedent’s estate. (Sections 21610-11.)

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

COMMENTS: This bill is in response to a court of appeals case from 2014 that, among other things, held that the Family Code Section 721 fiduciary duty that requires spouses to treat each other with the highest degree of good faith and fair dealing applies to testamentary instruments, such as wills or trusts. In that case, Lintz v. Lintz (2014) 222 Cal. App. 4^th 1346, a wealthy decedent’s third wife, assisted by her own attorneys, repeatedly convinced the decedent to amend his trust so that eventually his own children were disinherited and she was able to control all of the assets. When he died, the marriage had lasted less than five years. The court determined that she exercised undue influence over her husband and the appellate court agreed. Among other undue influence findings – and there were several – the court held that the wife violated the Family Code provision imposing a duty of the highest good faith and fair dealing on spouses, and prohibiting them from taking unfair advantage of the other.

This bill would prevent the application of the fiduciary duty between spouses to testamentary instruments, including wills and trusts. The author writes that this bill is necessary “to eliminate the ambiguity and establish that Family Code section 721 does not create a presumption of undue influence when one spouse names the other spouse as a beneficiary of a revocable trust or other instrument making a donative transfer on death. This proposal establishes that in the testamentary context (i.e., when one spouse makes a donative transfer to the other spouse and that transfer only becomes effective at death), any presumption of undue influence must come from some other statutory or common law source and not from Family Code section 721.”

The Lintz Case. As stated above, the Lintz case involved the decedent’s third wife. The couple married first in 1999 and divorced six months later, then remarried in 2005 and that marriage lasted for four years, until the decedent died at 81 years of age. Both had children from prior marriages. When they remarried, the decedent’s estate plan provided for his children and grandchildren and a former son-in-law. The appellate court explains what happened next:

In May 2005 decedent executed a tenth amendment to the trust. The tenth amendment provided defendant with fifty percent of decedent's assets upon his death, with the remaining fifty percent to be distributed among decedent's children and grandchildren. Between May 2005 and 2008 decedent executed several additional trust amendments, increasingly providing defendant with more of decedent's assets upon his death and disinheriting his two eldest children. Ultimately, in June 2008 defendant and decedent, as joint settlors and trustees, executed the Lintz Family Revocable Trust. The trust, prepared by defendant's attorney at defendant's direction, purportedly designated all of decedent's property as community property, gave defendant an exclusive life interest in decedent's estate, and gave defendant the right to disinherit decedent's youngest child and leave any unspent residue to defendant's two children. (Lintz v. Lintz, 222 Cal. App. 4^th at 1350.)

In response to an action brought by the decedent’s children, the probate court found Ms. Lintz liable for financial elder abuse under Welfare & Institutions Code Section 15610.30, breach of fiduciary duty, and conversion of the decedent’s separate property. The court also held that the decedent had testamentary capacity, but that his wife exercised undue influence in the revision of his estate plans.

The appellate court upheld the trial court decision, finding that, among other things, the Family Code’s fiduciary duty that spouses have for each other extends to the execution of a trust; and, given the advantage that the wife received from the trust amendments and the resulting harm to her spouse, the presumption arises that the advantaged spouse obtained the trust amendments unfairly. The presumption is not absolute. The wife could have established that her spouse “acted freely and voluntarily, with ‘full knowledge of all facts, and with a complete understanding of the effect of the transaction.’” (Id. at 1353, quoting In re Marriage Fossum (2011) 192 Cal.App.4^th 336, 344.)

The court also found that other presumption of undue influence, as well as elder abuse, applied in this case so that this case would almost assuredly have had the same result even if the spousal fiduciary duty did not apply to testamentary instruments, as this bill proposes.

This Bill Seeks to Exempt Testamentary Transfers from the Spousal Fiduciary Duty. This bill would specifically and broadly exempt an at-death transfer by will, revocable trust, beneficiary form, or other instrument from the Family Code Section 721 fiduciary duty between spouses and from any presumption of undue influence created by that section. Thus, under this bill, no presumption would arise, based on the fiduciary duty that governs spouses’ transaction with each other, regarding undue influence. The law today already exempts from that fiduciary duty a valid waiver of rights as a surviving spouse and trustee duties, which are governed by their own standard of care. This bill would simply add at-death transfers to that list.

As discussed above, the surviving spouse in the Lintz case would almost assuredly still have lost even without the spousal fiduciary duty. Even without a presumption that an at-death transfer that advantaged the surviving spouse and disadvantaged the deceased spouse was the result of undue influence, the deceased spouse’s children should have been able to establish, with their own burden of persuasion, that their step-mother exercised undue influence in the trust amendments.

Prior to the Linz case, the California Supreme Court reiterated the basic presumption test for undue influence of testamentary instruments:

Although a person challenging the testamentary instrument ordinarily bears the burden of proving undue influence, this court and the Courts of Appeal have held that a presumption of undue influence, shifting the burden of proof, arises upon the challenger's showing that (1) the person alleged to have exerted undue influence had a confidential relationship with the testator; (2) the person actively participated in procuring the instrument's preparation or execution; and (3) the person would benefit unduly by the testamentary instrument. (Rice v. Clark (2002) 28 Cal.4^th 89, 96-97 (citations omitted, emphasis added).)

The sponsor, the Trusts and Estates Section of the California Lawyers Association, argues that this undue influence burden shifting test is far more appropriate than relying on the spousal fiduciary relationship, which can shift the burden of proof as soon as the surviving spouse benefits from the deceased spouse’s bequest, which would likely occur in every case. A testamentary transfer to a spouse, generally the most common disposition in a will or trust, writes the author, “is now presumptively invalid under Family Code section 721. Lintz thus contradicts the reasonable expectation of married people throughout the state and acts as an unreasonable spur to litigation.” Bequeaths to spouses are the normal and expected testamentary disposition and a presumption that such transfers are the result of undue influence could create unwarranted litigation and unfair results.

This bill does not prevent a challenge to a testamentary disposition to a spouse. It simply requires that the challenger bear the burden of persuasion that the transfer was the result of undue influence.

ARGUMENTS IN SUPPORT: The bill’s sponsor, the Trusts & Estates Section of the California Lawyers Association, writes that the Lintz case has created several problems that this bill will solve:

First, Lintz harms the public because it holds that the most common disposition in a revocable trust (i.e., leaving one’s property to one’s spouse after one dies) is now presumptively invalid. Lintz thus contradicts the reasonable expectation of married people throughout the state and acts as an unreasonable spur to litigation. Second, . . . in applying the section 721 presumption to revocable trusts but not wills, Lintz unwittingly favors formal probate administration over private trust administration, increasing the costs and time delays for the public. Finally, Lintz places an extra financial burden on married persons who desire to establish a joint revocable trust to avoid probate to make testamentary gifts to each other on death. Before Lintz, if there was an adequate written conflict waiver in effect, one attorney could often represent both spouses in joint estate planning involving testamentary gifts of community property to each other through a single revocable trust. After Lintz, each spouse may need to retain independent counsel to safely overcome the presumption of undue influence in order to make a testamentary gift of community property to his or her spouse through a revocable trust.

REGISTERED SUPPORT / OPPOSITION:

Support

Trusts & Estates Section of the California Lawyers Association (sponsor)

Opposition

None on file

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