2024 Year-End Estate Planning: California Updates

Uniform Directed Trust Act and Uniform Fiduciary Income and Principal Act Become Effective

As reported in Katten's 2023 Year-End Advisory, the California Uniform Directed Trust Act (UDTA) and the Uniform Fiduciary Income and Principal Act (UFIPA) became effective January 1, 2024. The UDTA provides a method for regulating directed trusts in California and establishes the duties and responsibilities of the non-trustee fiduciaries and directed trustees. The UFIPA includes specific changes to the California Probate Code that provide trustees greater flexibility in managing unitrusts, or converting an income trust to a unitrust (unless the trust qualifies for a special tax benefit or involves a fiduciary who is not an independent person), allows fiduciaries to allocate tax receipts and make trust distributions, and further expands the power of trust fiduciaries to make determinations concerning allocation of income and principal, among other changes to trust administration and judicial oversight of California fiduciaries.

Increase to Small Estate Probate Procedures

Assembly Bill 2016 (AB 2016) passed the California Legislature on August 29, 2024, and was approved by Governor Gavin Newsom on September 21, 2024. Under existing law, the Probate Court establishes procedures through which a successor of a decedent may, without petitioning the court for letters of administration or filing a petition to probate the decedent's will, dispose of a portion of a decedent's real and personal property if the gross value of the decedent's estate does not exceed $184,500, which amount is adjusted by the Judicial Council every three years. These summary procedures allow some estates or portions thereof to be distributed to heirs in order to avoid unnecessary delays and expenses related to court supervision.

In recognition of the rising values of residences in the state, AB 2016 will materially change the small estate probate procedures in California. Specifically, AB 2016 will amend current law related to the transfer of real property and allow for the transfer of the primary residence of a decedent only via a Petition to Determine Succession to Real Property if the value of the real property does not exceed $750,000 – a significant increase from the current threshold of $184,500. While a petitioner is no longer able to include the decedent's personal property in a Petition to Determine Succession to Real Property, the Small Estate Affidavit procedure to transfer personal property of a decedent remains in place if the value of the property does not exceed $184,500. The proponents of the statutory change argue that the new law will ensure that average Californians can transfer their largest asset to their heirs without being forced to use the lengthy and costly probate process, ensuring the intergenerational transfer of assets, which is critical for low‐ and moderate‐income households to build wealth.

However, the new law requires that a successor who files a Petition to Determine Succession to Real Property shall deliver notice of the petition to each intestate heir, beneficiary and devisee named in the petition – a complication that is not required under current law. The notice requirement will likely result in heirs making claims against the estate which will drive up the costs of administration. In addition, the law, as modified, is limited to a decedent's primary residence, whereas current law permits any real and personal property under the threshold to be summarily distributed.

The bill will amend Probate Code Sections 13100-13101, 13150-13152 and 13154, will repeal Section 13158 and will become effective January 1, 2025.

Strengthening of Regulations Concerning Professional Fiduciaries

The California Legislature has approved Assembly Bill 2148 (AB 2148) which governs the Professional Fiduciaries Bureau and which will oversee and regulate those persons acting in the capacity of a professional fiduciary in California. Professional Fiduciaries are routinely appointed to protect the interests of adults with mental disabilities, minors, elderly persons, conservatees and fiduciaries, to assist such persons with administration of estates and trusts, representation in court and as may otherwise be needed. Professional fiduciaries are held to a higher fiduciary standard than a lay trustee or trust fiduciary as they are licensed and represent themselves as having advanced skills, expertise and knowledge related to such administration.

AB 2148 seeks to address a gap in existing law by authorizing professional fiduciaries to organize as a "professional corporation" pursuant to the provisions of the Moscone Knox Professional Corporation Act. AB 2148 will require a professional fiduciary corporation to register with and be subject to the regulation of the Professional Fiduciaries Bureau and all other requirements under the Professional Fiduciaries Act. The bill will also prohibit a court from appointing a professional fiduciary to serve in any capacity unless such person is registered with the Professional Fiduciaries Bureau.

California Supreme Court Makes Long-Awaited Ruling Concerning Approved Method of Trust Modification

As previously reported, California courts have been split concerning the required procedure for modifying California revocable trusts since the Fourth District Court of Appeal handed down its decision in Haggerty v. Thornton (2021) 68 Cal.App.5th 1003. In Haggerty, the court concluded that unless a trust expressly provides that a particular method of modification is exclusive, the stated method is not required for a modification to be effective, and the statutory procedure for modification and revocation is an acceptable method of modifying the trust.

The statutory provisions at issue in Haggerty are Probate Code sections 15401 and 15402, which govern modifications and revocations of California trusts. Section 15401 provides that a trust may be revoked by any method provided in the trust or by a writing, other than a will, signed by the settlor or any other person holding the power of revocation and delivered to the trustee during the lifetime of the settlor or person holding the power to revoke. The latter method of revocation is the "statutory" method. Section 15401 further provides that if the trust instrument explicitly makes the method of revocation provided in the trust instrument the exclusive method of revocation, then that method must be used to effectively revoke the trust. In contrast to Section 15401, Section 15402, which governs modification, provides simply that unless the trust instrument provides otherwise, if a trust is revocable by the settlor, the settlor may modify the trust by the procedure for revocation. Because the provisions concerning modification do not include the language concerning situations in which a settlor has made a specific method of modification the exclusive method, courts have come to vastly different rulings in deciding how California trusts may be modified.

To wit, in stark contrast to the Fourth District's more lenient approach to modification in Haggerty, the Fifth District Court of Appeal in King v. Lynch (2012) 139 Cal.App.4th 1186, Third District Court of Appeal in Pena v. Dey (2019) 39 Cal.App.5th 546, First District Court of Appeal in Balistreri v. Balistreri (2022) 75 Cal.App.5th 511 and Second District Court of Appeal in Diaz v. Zuniga (2023) 91 Cal.App.5th 916 have all held that when a trust sets forth a method or procedure for trust modification, such designated method must be followed in order for a modification to be effective, regardless of whether the trust expressly provides that the designated method is the exclusive method of modification.

On February 8, 2024, the California Supreme Court issued its opinion in Haggerty and resolved the circuit split in favor of the Fourth District's interpretation. The court held that the statutory method for revocation is available where the trust provides for a method of modification but does not expressly make the method exclusive, setting aside the King, Balistreri, Pena and Diaz decisions.

As the California Supreme Court has now settled this issue, it is incumbent on California settlors who intend to control the method by which their trusts can be modified to provide an explicit statement in any trust instrument that directly sets forth the method of amendment or modification and which provides whether such procedure is the exclusive method by which the trust may be modified. Absent such explicit provision, a California revocable trust may be modified by a writing, other than a will, signed by the settlor or any other person holding the power of revocation and delivered to the trustee during the lifetime of the settlor or person holding the power to revoke.