CURIOUS CLAUSES AND PROBLEMATIC PROVISIONS PRESENTED TO THE SOUTH BAY ESTATE PLANNING COUNCIL APRIL 13, 2017

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1 CURIOUS CLAUSES AND PROBLEMATIC PROVISIONS PRESENTED TO THE SOUTH BAY ESTATE PLANNING COUNCIL APRIL 13, 2017 I. PRIMARY GOAL OF DRAFTING: ACCOMPLISH THE CLIENT'S DESIRES, REQUIRING THE PRACTITIONER TO DRAFT AS II. III. CLEARLY AS POSSIBLE FIRST ISSUE: WHERE ARE THE ASSETS? A. Background: In a typical Trust-based estate plan, most practitioners provide instructions to the client to transfer all (or most) accounts, business interests, and complete some type of asset schedule or separate assignment. Hopefully, the client follows the practitioner's instructions to avoid a probate surprise at a later date. However, the asset schedule or separate assignment often includes general statements allocating tangible personal property to the Trust (as well as stating the Settlors' general intention to transfer all assets to the Trust). B. Example Wills Containing Specific Bequests: There are several practitioners who include specific bequests in the Will in a Trust-based estate plan. However, if all assets have been transferred to the Trust leaving nothing to administer pursuant to the terms of the Will. In that scenario, what assets fund such specific bequests? Thus an internal conflict is created in the estate plan. 1. Drafting rationale: It may be easier to make changes to the Will rather than to amend the Trust. 2. Queries: (a) Are the gifts stated in the Will only to be made from ancillary assets payable to the Testator's estate (as opposed to assets held in or payable to the Trust)? (b) Are the provisions of the Will incorporated by reference into the Trust? (c) If the Will is updated and the Trust is not, is the new Will some type of amendment to the Trust? SECOND ISSUE: WHAT HAPPENS WHEN PROVISIONS CONFLICT BETWEEN DOCUMENTS? There are a number of common provisions that are included in Wills that can cause direct conflict with the Trust. A. A common Will provision distributes all tangible personal property to the Testator's spouse. However what happens when the Trust document itself includes specific gifts of tangible personal property on one spouse's death? 1. Drafting rationale: If certain items of tangible personal property are considered part of the probatable estate, directing such items to pass directly to the surviving spouse rather than the Trust opens the door for the use of a spousal property petition rather than a full probate. The spousal property petition is a desirable alternative to a full probate proceeding as it is comparatively significantly more cost efficient and expedient. 1

2 IV. 2. Query: (a) What is the benefit of this provision if there is an assignment in place? What items are we concerned about? B. Similarly, it is common to use an "all to the surviving spouse" clause with respect to the residue of an estate when the Trust is an "A" trust plan or "A with Disclaimer" trust plan. However, what happens when there are specific gifts upon the Decedent's death? What is the result if certain monetary gifts are made to a trust that is unfunded or underfunded? 1. Query: How do we avoid conflict between the Will and the Trust while still taking advantage of the spousal property petition for assets passing via the Will? THIRD ISSUE: INCORPORATING BY REFERENCE A. Rules: 1. A writing in existence when a will is executed may be incorporated by reference if the language of the will manifests this intent and describes the writing sufficiently to permits its identification. California Probate Code Any attempt to incorporate a document that does not exist when the will is executed is ineffective. However, a documents that does not exist when the will is executed, but exists later when a codicil is executed, may be validly incorporated by reference into the will by the codicil. Simon v. Grayson (1940) 15 C2D 531, 533. B. Common usages: 1. Schedule A of a trust 2. Incorporate by reference various probate code sections 3. Tangible personal property exhibits C. Special exception to tangible personal property exhibits: (See Clauses 1 &2) 1. A will may refer to a writing that directs disposition of tangible personal property not otherwise disposed of by the will, except for money that is common coin or currency (i.e., not collectables) and property used primarily in a trade or business. The writing must be dated and either be in the testator's handwriting or be signed by the testator. Probate Code 6132(a). The writing may be written or signed by the testator before or after the execution of the will and need not have significance apart from its effect on the dispositions of property made by the will. Probate Code 6132(c). The testator may make subsequent handwritten or signed changes to the writing, and the most recent writing controls the disposition. Probate Code 6132(d). If there are inconsistent dispositions, a dated writing will control over an undated writing unless it can be established that the undated writing was created later than the dated writing. Probate Code 6132(e). The value of any single item of tangible personal property disposed of by the writing may not exceed $5000 and the total value of tangible personal property identified and disposed of by the writing may not exceed $25,000. Probate Code 6132(g). 2

3 2. Drafting rationale: Provides clients with a simple option for updating gifts of tangible personal property without the delay, expense and formality of executing formal estate planning documents. 3. Queries: (a) Does incorporation by reference apply to trusts? (i) If so, would it follow that Probate Code 6132 applies to trusts as well? (ii) If not, would creating or altering a personal property exhibit be deemed to be an amendment with all of the doctrines and formalities that apply? 4. What provisions should be used in preparing the trust language? (a) Does the side document need to specifically identify that it is a/the personal effects exhibit? (b) Does the date of side document matter? (c) Is there a time limitation for the discovery of any side document? (d) Timing of distribution? 5. What about the alternative of crafting the language as a Power of Appointment over the personal property? V. FOURTH ISSUE: RELYING ON THE DEFAULTS A. The probate code is filled with numerous provisions designed to provide a default structure for the average person. Many practitioners rely on the provisions in the Probate Code or incorporate the provisions of the Probate Code by reference in various documents. B. Are you clear on what the default provides? Abatement. Abatement is a proportional reduction of distributions when the funds or assets of the estate (or trust) are insufficient to fully make such distributions. Some estates are too small to accommodate not only the administration expenses and debts/creditors claims but also all the different types of bequests to beneficiaries. To allocate scarce resources, certain distributions are reduced or eliminated. Classification of the bequest is the key to arranging the order in which the gifts are abated. Specific distributions are frequently included in a trust (or Will) provisions, and frequently the financial resources of the Trustor can change over time. However practitioners rarely include an abatement clause, and instead rely on the default statutory scheme. (a) Probate Code provides the order of abatement as follows: (i) Property not disposed of by the instrument; (ii) Residuary gifts; (iii) General gifts to persons other than the transferor's relatives (iv) General gifts to the transferor's relatives (v) Specific gifts to persons other than the transferor's relatives (vi) Specific gifts to the transferor's relatives Note: Under this provision, "relative" refers to the intestate heirs. 3

4 VI. C. What is the impact on the your document if the default changes? Uniform Statutory Form Power of Attorney: (See attached AB 1082 and Bill Analysis) (a) Probate Code 4401 provides for a statutory form power of attorney. Option L on the form gives authority with respect to "Retirement Plan Transactions." (b) Probate Code 4462 lists the powers granted to an Agent with respect to said retirement plan transactions. (c) Prior to July of 2011, statutory powers of attorney permitted the Agent the authority to change a beneficiary designation on retirement account (as well as insurance policies and annuities). (d) On July 25, 2011, AB 1082 was signed into law and filed with the California Secretary of State, amending a significant number of Probate Code Sections relating to the statutory power of attorney. (e) Queries: (i) What provisions govern with respect to statutory powers of attorney executed prior to July 25, 2011? (ii) Is the key date the date the statutory power of attorney was executed, became effective, or the date the Agent seeks to act under a power granted thereunder? ONE ADDITIONAL SENTENCE A. Often one additional sentence can provide much needed (and appreciated) clarification. B. Lapse/anti lapse: Generally, a distribution in a decedent's Will ( or Trust) to a beneficiary who predeceases the decedent will fail (lapse). However, the anti-lapse statute is a rule of construction which provides that under certain conditions a distribution in a decedent's Will ( or Trust) to a beneficiary who predeceases the decedent will instead pass on to the deceased beneficiary's descendants (rather than fail). See Probate Code and Believe it or not there are still "dead distributions" that happen, opening the door for disharmony and litigation. 1. Example: "The balance of the trust estate shall be distributed, in equal shares, to the following named individuals: John Dough; Sarah Wheat; Peter Bagel; Emily Bah-Get; Stephanie Rye; Thomas Naan; and Petunia Pita." No alternative distribution is provided for a deceased beneficiary's share, and the lapse/anti lapse rules will apply. Several issues will need to be addressed to ascertain whether the anti lapse rules apply if a beneficiary fails to survive the Decedent, namely: was the beneficiary survived by issue, was the deceased beneficiary "kindred," and was the distribution a "class gift" (with voluminous case law to sort through to determine based on the language of the gift). 2. Extra sentence: A simple provision providing for an alternative distribution (to the deceased beneficiary's issue or augmenting proportionately the remaining shares) can do wonders! 4

5 C. Charged against the whole versus the recipient's distributive share. When distributions are made from one grouping of assets among 2 or more beneficiaries, it can save a lot of heartache to state either "any distribution to or for the benefit of a beneficiary pursuant to the provisions of this Paragraph shall be charged against the trust estate as a whole rather than against the ultimate distributive share of the beneficiary to whom or for whose benefit such distribution is made" or "any distribution pursuant to or for the benefit of a beneficiary pursuant to the provisions of this Paragraph shall be charged against the ultimate distributive share of the beneficiary to whom or for whose benefit such distribution is made." 5

6 Clause 1 Distribution of Tangible Personal Property by Memorandum: Each Settlor may dispose of items of tangible personal property by a signed written memorandum executed after the execution of this trust. The memorandum must reasonably identify the items and the beneficiary designated to receive each item. If either or both Settlors execute a memorandum, the Trustee shall incorporate the memorandum by reference into this instrument to the extent permitted by law. The Trustee shall distribute the items of tangible personal property listed in the memorandum as promptly as practicable after the death of a Settlor who completed the memorandum, together with any insurance policies covering the property and any claims under those policies, as provided in the memorandum. If either or both Settlors leave multiple written memoranda that conflict as to the disposition of any item of tangible personal property, the memorandum with the most recent date will control as to that item. If the memorandum with the most recent date conflicts with a provision of this instrument as to the specific distribution of any item of tangible personal property, the provisions of the memorandum with the most recent date will control as to those items that are in conflict. If the law does not permit incorporation of the memorandum by reference, the memorandum will then serve as an amendment to the trust, but only to the extent this amendment solely disposes of tangible personal property. The Settlors request that the Trustee follow their wishes and distribute the items of tangible personal property listed in the memorandum according to its terms. Clause 2 (a) Following the death of Settlor, Settlor's household and personal effects shall be promptly distributed by Trustee to such person or persons, as to the item or items or proportions specified, as Settlor may at any time or times appoint by written instrument signed and dated by Settlor and delivered to the then Trustee hereunder prior to Settlor's death. If there is more than one such instrument, the one bearing the date nearest preceding Settlor's death shall govern to the extent it conflicts with any earlier such instrument. If the Trustee fails to locate such an instrument within sixty ( 60) days following Settlor's death, it shall be conclusively presumed that Settlor left no such instrument. To the extent that any such articles are not disposed of by such appointment, such articles shall be disposed of as provided in Paragraph 6.02(b) below. (b) Following the death of Settlor, all household and personal effects of Settlor not effectively disposed of as provided in Paragraph 6.02(a) above, including, but not limited to, jewelry, vehicles, household articles, furniture, furnishings and objects of art, shall be sold, abandoned or donated to charity, and the net sale proceeds, if any, shall be distributed in shares of approximately equal value to Settlor's issue, by right of representation, as they shall agree or, if they cannot agree, as Trustee, in Trustee's sole discretion, shall determine. 6

7 Bill Text - AB-1082 Powers of attorney: statutory form power of attorney. Page 1 of 4 4/11/2017 Home Bill Information California Law Publications Other Resources My Subscriptions My Favorites AB-1082 Powers of attorney: statutory form power of attorney. ( ) SHARE THIS: Assembly Bill No CHAPTER 113 An act to amend Sections 4260, 4264, 4401, 4407, 4457, 4458, 4460, 4461, and 4462 of, and to repeal and add Section 4465 of, the Probate Code, relating to powers of attorney. [ Approved by Governor July 25, Filed with Secretary of State July 25, ] LEGISLATIVE COUNSELʹS DIGEST AB 1082, Gatto. Powers of attorney: statutory form power of attorney. Existing law, the Power of Attorney Law, sets forth the authority of an attorney-in-fact, defined as a person who is granted authority to act for the principal in a power of attorney. Under existing law, the attorney-in-fact may be granted general authority to act on behalf of the principal and authority to act by incorporating powers by reference to other laws. Existing law requires express authority in the power of attorney in order for an attorneyin-fact to take specified actions, including creating, modifying, or revoking a trust and exercising the right to make a disclaimer on behalf of the principal. Other provisions of existing law, the Uniform Statutory Form Power of Attorney Act, set forth a form in which the principal designates the category of powers granted to the agent pursuant to the power of attorney, referred to as a statutory form power of attorney, and defines the extent of the powers so conferred on the agent. Under existing law, the provisions setting forth the authority of an attorney-in-fact are inapplicable to a statutory form power of attorney. This bill would, instead, apply the attorney-in-fact provisions to a statutory form power of attorney, except for those providing to the attorney-in-fact general authority and powers by reference to other laws. The bill would revise certain powers that require express authority in the power of attorney for their exercise by the attorney-infact, specifying that an attorney-in-fact may modify, revoke, or terminate a trust in whole or in part, but only as provided in the trust instrument, and that the attorney-in-fact may reject, disclaim, release, or consent to a reduction or modification of a share in, or payment from, an estate, trust, or other fund. The bill would also revise the statutory form power of attorney to notify the principal that it does not include all of the powers available under law for an attorney-in-fact and would revise the agent s power under a statutory form power of attorney with regard to insurance, annuity, and retirement plan transactions and estate, trust, and other beneficiary transactions. The bill would specify that the power of an agent under a statutory form power of attorney with respect to personal and family maintenance is not dependent on any other authority to make gifts on the principal s behalf and is not limited by any other limitation applicable to the agent s authority to make gifts on the principal s behalf. Vote: majority Appropriation: no Fiscal Committee: no Local Program: no THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 4260 of the Probate Code is amended to read: (a) Except as specified in subdivision (b), this article applies to all powers of attorney under this division.

8 Bill Text - AB-1082 Powers of attorney: statutory form power of attorney. Page 2 of 4 4/11/2017 (b) Sections 4261 and 4263 do not apply to the provisions of Part 3 (commencing with Section 4400). SEC. 2. Section 4264 of the Probate Code is amended to read: An attorney-in-fact under a power of attorney may perform any of the following acts on behalf of the principal or with the property of the principal only if the power of attorney expressly grants that authority to the attorney-in-fact: (a) Create, modify, revoke, or terminate a trust, in whole or in part. If a power of attorney under this division empowers the attorney-in-fact to modify or revoke a trust created by the principal, the trust may be modified or revoked by the attorney-in-fact only as provided in the trust instrument. (b) Fund with the principal s property a trust not created by the principal or a person authorized to create a trust on behalf of the principal. (c) Make or revoke a gift of the principal s property in trust or otherwise. (d) Exercise the right to reject, disclaim, release, or consent to a reduction in, or modification of, a share in, or payment from, an estate, trust, or other fund on behalf of the principal. This subdivision does not limit the attorney-in-fact s authority to disclaim a detrimental transfer to the principal with the approval of the court. (e) Create or change survivorship interests in the principal s property or in property in which the principal may have an interest. (f) Designate or change the designation of beneficiaries to receive any property, benefit, or contract right on the principal s death. (g) Make a loan to the attorney-in-fact. SEC. 3. Section 4401 of the Probate Code is amended to read: The following statutory form power of attorney is legally sufficient when the requirements of Section 4402 are satisfied: PRINTER PLEASE NOTE: TIP-IN MATERIAL TO BE INSERTED SEC. 4. Section 4407 of the Probate Code is amended to read: The provisions of this division apply to a statutory form power of attorney except when there is a conflicting provision in this part, in which case the provision of this part governs, or when a provision of this division is expressly made inapplicable to a statutory form power of attorney. SEC. 5. Section 4457 of the Probate Code is amended to read: In a statutory form power of attorney, the language granting power with respect to insurance and annuity transactions empowers the agent to do all of the following: (a) Continue, pay the premium or assessment on, modify, rescind, release, or terminate a contract procured by or on behalf of the principal that insures or provides an annuity to either the principal or another person, whether or not the principal is a beneficiary under the contract. (b) Procure new, different, and additional contracts of insurance and annuities for the principal and the principal s spouse, children, and other dependents, and select the amount, type of insurance or annuity, and mode of payment. (c) Pay the premium or assessment on, modify, rescind, release, or terminate a contract of insurance or annuity procured by the agent. (d) Apply for and receive a loan on the security of the contract of insurance or annuity. (e) Surrender and receive the cash surrender value. (f) Exercise an election. (g) Change the manner of paying premiums.

9 Bill Text - AB-1082 Powers of attorney: statutory form power of attorney. Page 3 of 4 4/11/2017 (h) Change or convert the type of insurance contract or annuity as to any insurance contract or annuity with respect to which the principal has or claims to have a power described in this section. (i) Apply for and procure government aid to guarantee or pay premiums of a contract of insurance on the life of the principal. (j) Collect, sell, assign, hypothecate, borrow upon, or pledge the interest of the principal in a contract of insurance or annuity. (k) Pay from proceeds or otherwise, compromise or contest, and apply for refunds in connection with, a tax or assessment levied by a taxing authority with respect to a contract of insurance or annuity or its proceeds or liability accruing by reason of the tax or assessment. SEC. 6. Section 4458 of the Probate Code is amended to read: In a statutory form power of attorney, the language granting power with respect to estate, trust, and other beneficiary transactions, empowers the agent to act for the principal in all matters that affect a trust, probate estate, guardianship, conservatorship, escrow, custodianship, or other fund from which the principal is, may become, or claims to be entitled, as a beneficiary, to a share or payment, including the power to do all of the following: (a) Accept, receive, receipt for, sell, assign, pledge, or exchange, a share in, or payment from, the fund. (b) Demand or obtain by litigation or otherwise money or other thing of value to which the principal is, may become, or claims to be entitled by reason of the fund. (c) Initiate, participate in, and oppose litigation to ascertain the meaning, validity, or effect of a deed, will, declaration of trust, or other instrument or transaction affecting the interest of the principal. (d) Initiate, participate in, and oppose litigation to remove, substitute, or surcharge a fiduciary. (e) Conserve, invest, disburse, and use anything received for an authorized purpose. (f) Transfer an interest of the principal in real property, stocks, bonds, accounts with financial institutions, insurance, and other property, to the trustee of a revocable trust created by the principal as settlor. (g) Disclaim a detrimental transfer to the principal with the approval of the court. SEC. 7. Section 4460 of the Probate Code is amended to read: (a) In a statutory form power of attorney, the language granting power with respect to personal and family maintenance empowers the agent to do all of the following: (1) Do the acts necessary to maintain the customary standard of living of the principal, the principal s spouse, children, and other individuals customarily or legally entitled to be supported by the principal, including providing living quarters by purchase, lease, or other contract, or paying the operating costs, including interest, amortization payments, repairs, and taxes on premises owned by the principal and occupied by those individuals. (2) Provide for the individuals described in paragraph (1) all of the following: (A) Normal domestic help. (B) Usual vacations and travel expenses. (C) Funds for shelter, clothing, food, appropriate education, and other current living costs. (3) Pay for the individuals described in paragraph (1) necessary medical, dental, and surgical care, hospitalization, and custodial care. (4) Continue any provision made by the principal, for the individuals described in paragraph (1), for automobiles or other means of transportation, including registering, licensing, insuring, and replacing them. (5) Maintain or open charge accounts for the convenience of the individuals described in paragraph (1) and open new accounts the agent considers desirable to accomplish a lawful purpose. (6) Continue payments incidental to the membership or affiliation of the principal in a church, club, society, order, or other organization and continue contributions to those organizations.

10 Bill Text - AB-1082 Powers of attorney: statutory form power of attorney. Page 4 of 4 4/11/2017 (b) The authority of an agent with respect to personal and family maintenance under this section is not dependent on any other grant of authority to the agent to make gifts on the principal s behalf and is not limited by any limitation that otherwise applies to the authority of the agent to make gifts on the principal s behalf. SEC. 8. Section 4461 of the Probate Code is amended to read: In a statutory form power of attorney, the language granting power with respect to benefits from social security, medicare, medicaid, or other governmental programs, or civil or military service, empowers the agent to do all of the following: (a) Execute vouchers in the name of the principal for allowances and reimbursements payable by the United States or a foreign government or by a state or subdivision of a state to the principal, including allowances and reimbursements for transportation of the individuals described in paragraph (1) of subdivision (a) of Section 4460, and for shipment of their household effects. (b) Take possession and order the removal and shipment of property of the principal from a post, warehouse, depot, dock, or other place of storage or safekeeping, either governmental or private, and execute and deliver a release, voucher, receipt, bill of lading, shipping ticket, certificate, or other instrument for that purpose. (c) Prepare, file, and prosecute a claim of the principal to a benefit or assistance, financial or otherwise, to which the principal claims to be entitled, under a statute or governmental regulation. (d) Prosecute, defend, submit to arbitration, settle, and propose or accept a compromise with respect to any benefits the principal may be entitled to receive. (e) Receive the financial proceeds of a claim of the type described in this section, conserve, invest, disburse, or use anything received for a lawful purpose. SEC. 9. Section 4462 of the Probate Code is amended to read: In a statutory form power of attorney, the language granting power with respect to retirement plan transactions empowers the agent to do all of the following: (a) Select payment options under any retirement plan in which the principal participates, including plans for selfemployed individuals. (b) Make voluntary contributions to those plans. (c) Exercise the investment powers available under any self-directed retirement plan. (d) Make rollovers of plan benefits into other retirement plans. (e) If authorized by the plan, borrow from, sell assets to, and purchase assets from the plan. (f) Waive the right of the principal to be a beneficiary of a joint or survivor annuity if the principal is a spouse who is not employed. SEC. 10. Section 4465 of the Probate Code is repealed. SEC. 11. Section 4465 is added to the Probate Code, to read: A statutory form power of attorney under this part does not empower the agent to take any of the actions specified in Section 4264 unless the statutory form power of attorney expressly grants that authority to the attorney-in-fact.

11 AB 1082 Page 1 BILL ANALYSIS Date of Hearing: May 10, 2011 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair AB 1082 (Gatto) - As Introduced: February 18, 2011 PROPOSED CONSENT (As Proposed to be Amended) SUBJECT : Powers of attorney: statutory form KEY ISSUE : Should the same protections that are granted to non-statutory form powers of attorney be granted to powers OF attorney created using the statutory form provided in the Probate Code? FISCAL STATUS : As currently in print this bill is keyed non-fiscal. SYNOPSIS Under current law, there are two basic methods to create a power of attorney. An individual can fill out a power of attorney based on a form provided in the Probate Code, or he or she can create some other writing that meets certain formalities. The current protections against fraud and abuse in each method differ in significant ways. While powers of attorney created without using the statutory form grant general authority to an agent, under that method, an agent needs express consent to perform various activities that could involve significant transfers or abuse of the principal's assets. Currently, these protections explicitly do not extend to powers of attorney created using the statutory form provided in the Probate Code. Powers of attorney created using a statutory form allow a principal to choose what specific areas the principal would like to grant authority. Within each of these areas, an agent is granted wide ranging powers. Many of these powers do not require express consent in the power of attorney document itself as would be required under non-statutory form powers of attorney. To protect against the potential fraud and abuse that might arise from this broader authority, this bill, supported by the Trusts and Estate Section of the State Bar, seeks to extend the same protections that apply in non-statutory power of attorney to statutory powers of attorney. SUMMARY : Seeks to expand the same enumerated protections that

12 AB 1082 Page 2 are extended to non-statutory form powers of attorney to statutory form powers of attorney. Specifically this bill : 1)Extends the provisions governing the authority of an attorney-in-fact (that currently apply to any power of attorney not created using the form provided in the Probate Code) to the statutory form power of attorney. Excludes provisions that grant non-statutory form agents general authority. 2)Revises certain powers of the attorney in fact that require express authority in the power of attorney document. 3)Provides that an attorney-in-fact under either a statutory form or non-statutory form power of attorney can modify, revoke, or terminate a trust as provided for in the trust document, only with express authority granted in the power of attorney instrument. 4)Specifies that the attorney-in-fact may reject, disclaim, release, or consent to a reduction or modification of a share in, or payment from, an estate, trust, or other fund, only with express consent by the principal. 5)Revises the attorney-in-fact's power under a statutory form power of attorney with regard to insurance, annuity, and retirement plan transactions and estate, trust and other beneficiary transactions, requiring express consent to change beneficiaries in these areas. 6)Revises the statutory form power of attorney to notify the principal that the power of attorney does not include all of the powers available under the Probate Code. 7)Provides that the authority of an attorney-in-fact's with respect to family maintenance is not dependent on any other grant of authority for the agent to make gifts on the principal's behalf, and is also not limited by any limitation placed on the agent's authority to make gifts on the principal's behalf. EXISTING LAW : 1)Provides that a power of attorney created without using the statutory form power of attorney grants the attorney-in-fact AB 1082

13 Page 3 (the agent) "all the authority to act that a person having the capacity to contract may carry out" on behalf of the principal (the person granting an agent the power to act on their behalf). These powers only extend so far as they have not been limited in the power of attorney to certain "actions, subjects, or purposes." (Probate Code Section 4261; all references are to this code unless otherwise indicated.) 2)Provides that an agent acting under a non-statutory power of attorney is not authorized to undertake the following actions unless expressly authorized in the power of attorney: a) Create, modify, or revoke a trust. b) Fund with the principal's property a trust not created by the principal or a person authorized to create a trust on behalf of the principal. c) Make or revoke a gift of the principal's property in trust or otherwise. d) Exercise the right to make a disclaimer on behalf of the principal. e) Create or change survivorship interests in the principal's property or in property in which the principal may have an interest. f) Designate or change the designation of beneficiaries to receive any property, benefit, or contract right on the principal's death. g) Make a loan to the attorney-in-fact. (Section 4264.) 3)Provides that the provisions listed in #2 above do not apply to powers of attorney created using the statutory form power of attorney. (Section 4260.) 4)Establishes a form that can be used to create a power-of-attorney that allows a principal to initial each area where the principal would like to grant authority to an agent to act on his or her behalf. (Section 4401.) 5)Provides within the powers enumerated in the statutory power of attorney form, the attorney-in-fact has broad powers to act including: a) The power to contract in any way with anyone to accomplish the purpose of a transaction. b) Execute legal documents the agent "considers desirable to accomplish a purpose of a transaction."

14 AB 1082 Page 4 c) Or "Ýi]n general, do any other lawful act with respect to the subject." (Section 4450.) 6)Provides that an attorney-in-fact can designate or change the beneficiaries to an insurance policy, an annuity contract, or a retirement plan. (Sections 4457, 4462.) COMMENTS : A power of attorney is an authorization in writing that grants an agent specified powers to act on behalf of the principal (i.e. the person who because of age or infirmity allows someone else to act on their behalf). (People v. Ranger Ins. Co (1994), 31 Cal.App.4th 13, 21); Section 4022.) The person to whom authority is granted to act on behalf of someone else is called the attorney-in-fact, or the agent of the principal. California law provides for two methods of creating a power of attorney. A power of attorney can be created by filling out a simple statutory form provided in the Probate Code (see Section 4401), or it can be created in a writing meeting certain formal requirements. (See Section 4121.) Under current law, different levels of protection against fraud and abuse apply to each method of creating a power of attorney. Although a power of attorney created without the statutory form grants the attorney-in-fact broad powers to act on behalf of the principal, there are important limitations to these powers. For example, unless the non-statutory form power of attorney expressly allows the agent to create or modify a revocable trust, make or revoke a gift of the principal's property, designate or change the beneficiaries to receive property or benefits, or make a loan to the attorney-in-fact, the agent is granted no power to do so. This serves to limit the ability of the attorney-in-fact to act in situations when the potential for abuse and potential to transfer significant amounts of the principal's assets are especially high. By statute, these same protections do not apply to a power of attorney created using the statutory form. On the statutory power-of-attorney form several specific powers are provided in a list. The principal who is creating the power of attorney then initials which powers he or she would like to grant to the attorney-in-fact (i.e. real property transactions, stock and bond transactions, tax matters, estate, trust and other beneficiary transactions etc.). Once these powers have been initialed on the statutory form, the agent has a broad range of powers to act within each area that has been initialed. For

15 AB 1082 Page 5 example, they may contract with any person under that power, execute various legal forms to carry out the powers that are granted, reimburse themselves for expenditures made in exercising those powers, or "in general, do any other lawful act with respect to the subject." (Section 4450.) As already mentioned, agents acting under a statutory form are also granted significant other powers, such as the power to change the beneficiary on a life insurance, retirement, or annuity plan. Many of these powers could not be granted under a non-statutory power of attorney without express consent, and for the many principals creating a power of attorney without an attorney, it may not be clear to them that they are granting such powers. This bill extends the same protections that now apply to non-statutory powers of attorney to those created by filling out the statutory form. The bill alters the enumerated powers that can now be granted under a statutory form power-of-attorney to protect against potential abuses and significant asset transfers. For example, AB 1082 amends the powers of an agent acting under the powers of estate, trust, and beneficiary transactions category on the statutory form so that an agent would need express consent by the principal to reject, disclaim, release, or consent to a reduction or modification or reduction in a trust or other fund of the principal. Express consent would also be needed to create a trust. The bill also reigns in the powers now granted to agents under the statutory form power of attorney to change beneficiaries in insurance, annuity, and retirement plans of the principal. It also makes clear that no gifts can be made from the principal's assets without the express consent of the principal in the power of attorney form. To notify the principal that the powers being granted in the statutory form power of attorney are being limited, this bill also changes the language in the statutory form. This bill simplifies the provisions applying to both statutory and non-statutory powers of attorney by applying the same core protections to each type of power of attorney. It also remedies the potential for abuse that exists towards laypersons using statutory powers of attorney without the aid of an attorney. This approach is supported by various organizations and bar associations across the country. The Author Believes This Bill is Necessary to Protect the Wishes and Property of the Principal : According to the author of this bill, the purpose of AB 1082 is to "provide the same protections

16 AB 1082 Page 6 in a statutory form power of attorney" that already extend to "all other powers of attorney under California law." This would ensure that "certain potentially abusive powers to dispose of the principal's property during lifetime or at death are not given to an agent" without an express grant of those powers in the power of attorney. The author contends that the difference in levels of protection between a statutory form power of attorney and other forms of powers of attorney creates two problems. First "Ýi]n some cases, the statutory form power of attorney expressly includes powers that could not be given to an agent using a non-statutory form power of attorney unless the powers were spelled out in the power of attorney document itself." For example, some sections in the Probate Code could be read to allow an agent to designate or change a beneficiary on an insurance policy, annuity or retirement plan, a power prohibited in non-statutory powers of attorney unless express consent is given by the principal. (See Sections 4457 (d), (j) and 4462(b).) Second, the author contends that: Even where the statutory form does not expressly give the agent the power to dispose of the principal's property, the powers that are granted to an agent under the statutory form power of attorney are so broad that they might be used to carry out significant transfers. This includes Section 4450(b) that allows agents to "contract in any manner with any person" in relation to whatever categories of transactions that a principal has authorized on the statutory power-of-attorney form. According to the author, it is also "not clear whether an agent under the statutory form document could make a loan to himself or herself from the principal's property." Because the statutory form power of attorney is most often used without the help of a lawyer, the author contends that the use of statutory form powers of attorney without legal advice creates a greater potential for abuse. Without the aid of an attorney, the principal may "unintentionally grant his or her agent broader powers than the principal realizes or intends." Therefore, protections should be included under the statutory form powers of attorney so that a principal does not give

17 AB 1082 Page 7 significant estate planning powers to an agent unless the principal specifically makes clear that he or she intends to do so. The author also notes that the National Conference of Commissioners on Uniform State Laws (NCCUSL) has adopted the same types of protections granted to non-statutory powers of attorney in California (Section 4264) but also extended these protections to statutory form powers of attorney as well as powers of attorney in general. These protections are reflected in the Uniform Power of Attorney Act, drafted in 2006, as well as laws in other states, including, Kansas, Missouri and Washington. A Growing Consensus Understand the Need to Protect Seniors From Misuse of the Power of Attorney : In preparation of the Uniform Power of Attorney Act, a nationwide survey was conducted by the Joint Editorial Board for Uniform Trust and Estate Acts to determine what provisions should be included in laws governing powers of attorney. The survey polled the elder state law sections of all state bar associations as well as several professional organizations that specialize in elder and estate law across the country. Of those polled, more than seventy percent reached a consensus that a power of attorney statute should require gift making authority to be expressly stated in the power of attorney, and include safeguards against abuse by the agent. It was based on these findings that the NCCUSL drafted the Uniform Power of Attorney Act in 2006, including enhanced protection for both statutory and non-statutory form powers of attorney. (See Prefatory Note, The Uniform Power of Attorney Act (2006), NCCUSL, available at Author's Amendment : In order to ensure that individuals using the statutory form understand that if they want to add certain powers to their agents they must separately list those powers, the author rightly proposes to amend the statutory form as follows: On page 4, first paragraph, delete "The powers granted by this document do not include all powers that are available under the Probate Code" and insert: The powers listed in this document do not include all powers that are available under the Probate Code. Additional powers available under the

18 AB 1082 Page 8 Probate Code may be added by specifically listing them under the Special Instructions section of this document ARGUMENTS IN SUPPORT : In support of this bill the Trust and Estates Section of the State Bar of California writes: This bill would extend important protections that are already provided for under California's power of attorney law to statutory form powers of attorney?california law allows an individual to use a power of attorney to grant very broad authority to an agent to act on the principal's behalf. However, California Probate Code 4264 lists certain actions that are so important, or so subject to possible abuse, that they cannot be authorized in a power of attorney unless they are specifically spelled out in the power of attorney document. These restrictions generally involve the ability to dispose of the principal's property, such as the ability to make a gift, to disclaim assets, to make or change a beneficiary designation (such as on a life insurance or annuity policy or a retirement plan) or to change survivorship interests in the principal's property, or to make, amend or revoke a trust?. These types of actions are especially susceptible to abuse, if the agent uses these powers to benefit himself or herself?. Probate Code 4264 requires that those powers be expressly stated in the power of attorney so that the principal will have an opportunity to consider and make an informed decision about whether to give the agent the power to take those particular actions? These important protections under California law do not presently apply to statutory form powers of attorney. There is no reason why individuals who use the statutory form power of attorney should not be given then same protections that apply to any other person who grants a power of attorney in California. Indeed, because the statutory form power of attorney is most often used by lay persons without legal advice, it is particularly important that the simplified statutory form not grant very broad powers to an agent without the principal's knowledge or informed consent. An individual signing a per-printed statutory power of attorney form would have no way of knowing just from reading the form that checking the boxes for particular powers, or checking "all of the above," might give the agent the power to make gifts to the agent

19 AB 1082 Page 9 or others, or the power to change the beneficiary designations for the principal's life insurance or IRA. ÝThe Trusts and Estates Section of the State Bar of California] therefore supports AB 1082 and believes that its enactment will provide important additional safeguards for all Californians, including those who choose to use the simplified statutory form power of attorney to plan for incapacity and carry out their personal and financial goals. REGISTERED SUPPORT / OPPOSITION : Support Trust and Estates Section of the State Bar of California Opposition None on file Analysis Prepared by : Drew Liebert and Travis Brooks / JUD. / (916)