New Trustee Requirements for Incapacitated Settlors
I need to inform you of the requirements under the California Probate Code relating to Trustees serving on behalf of incapacitated Settlors. There were some major updates to the rules which you should be aware of in case you're serving on behalf of an incapacitated settlor or if you have concerns about any future incapacity yourself. I personally feel the new rules are intrusive for clients who do NOT want their personal Trust affairs known to beneficiaries during their lifetimes and you may agree. Obviously, you shouldn't hesitate to contact me with any questions if you feel these circumstances pertain to your Trust documents.
Last year, California Probate Code Sections 15800 and 16069 were amended by Assembly Bill 1079. The legal changes affect Trustees who assume their role when the Settlor or Trustor (the Trust’s creator) becomes incapacitated.
The law now says that a Trust becomes "irrevocable" for all intents and purposes when a Settlor becomes incapacitated and no longer has the cognitive ability to revoke the Trust. At that point, when the person or persons who hold power to revoke the Trust are no longer competent, the Trustee MUST THEN PROVIDE NOTICE AND A COPY OF THE TRUST AND ALL AMENDMENTS within 60 days to all the beneficiaries and heirs who would be entitled to notice once the Settlor dies (See CA Probate Code Section 15800).
In addition, the Trustee must provide a formal accounting, at least annually, to any beneficiary entitled to income or principal if the Trustor dies. A formal accounting outlines all of the assets in the Trust at the start of the administration period, any gains/losses from sales of Trust assets, any expenses paid on behalf of the settlor and any remaining assets at the end of the accounting.
In short, now Trustees will need to account from the time they took over on behalf of the Settlor's incapacity on an annual basis to all eventual beneficiaries of the Trust who stand to inherit when the settlor dies. This is a huge change to the default rule previously that a Trustee only had duties to the Settlor (the person with the power to revoke the Trust) upon taking over for an incapacitated Settlor. Now, the rule dictates that a beneficiary entitled to 2% of your Trust assets might have the ability to know all about your finances related to the Trust long before you're deceased. If you're like me and don't believe this is anyone's business during your lifetime, this is concerning. I should note that this rule does not apply to a joint revocable Trust where one Settlor is incapacitated while both Settlors are alive because in that scenario the other Settlor will have the revocation power needed to avoid this provision. This would be common in cases where one spouse is determined to be incapacitated while the other spouse is competent.
The Trusts I draft require a determination of incapacity to be made by two (2) qualified physicians before a successor Trustee can take over the Trust for the benefit of the Settlor. Therefore, if you are the Trustee serving on behalf of an incapacitated Settlor currently, you may want to reach out to me about what needs to be completed in light of this update to the law.
Finally, if you are a little concerned about the implications of these new rules as it relates to the possibility of your own incapacity, I do have some good news. You are expressly allowed to "opt out" of this default rule by amending your Trust. (Section 15800b starts as follows: "Except to the extent that the Trust instrument otherwise provides...."). A simple Amendment along the lines of "Section 15800(b) shall not apply to my Trust in the event of my subsequent incapacity" would be a clear way to avoid the implications of this new law.
My quick take is that for people who trust their Trustees (hopefully everyone receiving this email), this is an intrusive amount of information for a potentially minor beneficiary to receive about my financial affairs if I'm alive but incapacitated. Arguably, this revision to the law came about because some trustee acted inappropriately using an incapacitated settlor's Trust assets and the beneficiaries were harmed. (Another case of "bad facts" leading to "bad law"). But, although I understand the desire to protect my eventual beneficiaries from a crooked Trustee, I'm less concerned about that than beneficiaries reviewing my financials during my lifetime and planning what to do with my money upon my eventual demise.
That's the law. Don't shoot the messenger. Just reach out if you have questions or concerns.