BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 229| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 229 Author: Charles Calderon (D) Amended: 1/4/10 in Assembly Vote: 21 SENATE JUDICIARY COMMITTEE : 5-0, 6/15/10 AYES: Corbett, Harman, Hancock, Leno, Walters ASSEMBLY FLOOR : 71-0, 1/19/10 (Consent) - See last page for vote SUBJECT : Uniform Principal and Income Act: trust administration: income payment SOURCE : California Bankers Association DIGEST : This bill clarifies that when a separate fund payer does not provide the value of the internal income of the separate fund to the trustee and the trustee cannot otherwise determine the value of the separate fund, the internal income of the separate fund is deemed to equal the product of the interest rate and the present value of the expected future payments. ANALYSIS : Existing federal law requires a trustee to pay the taxes on the trust's share of taxable income from income or principal receipts. (IRC Sec. 2001.) Existing federal law provides for a marital tax deduction. CONTINUED AB 229 Page 2 (IRC Sec. 2056.) Existing state law governs the distribution of income, principal, and interest under a trust and the allocation of distributions to beneficiaries by a trustee or of payments received by a trust. (Prob. Code Sec. 16320 et seq.) Existing state law provides that a "separate fund" includes a private or commercial annuity, an individual retirement account, and a pension, profit-sharing, stock bonus, or stock ownership plan. (Prob. Code Sec. 16361(a)(2).) Existing state law requires a trustee to determine the "internal income" of each separate fund for the accounting period, as if the separate fund were a trust subject to the California UPIA, except as provided, and requires the trustee to allocate the balance to the principal. (Prob. Code Sec. 16361(c).) Existing state law provides for the allocation of a separate fund payment to a trust qualifying for a marital deduction. (Prob. Code Sec. 16361(d).) Existing state law provides a method of determining the value of the internal income of a separate fund in the event the separate fund payer does not provide the internal income value of the separate fund. (Prob. Code Sec. 16361 (g).) This bill clarifies the existing provisions for determining the value of a separate fund "payment" that is required to be allocated to income for purposes of qualifying for a marital tax deduction under federal tax law. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No SUPPORT : (Verified 6/17/10) California Bankers Association (source) ARGUMENTS IN SUPPORT : The author's office writes, "This bill is intended to correct ambiguity in Probate Code Section 16361 (PC Section 16361), relating to a AB 229 Page 3 determination of the "internal income" of a separate fund, as specified. As currently written, subdivision (g) of PC Section 16361 prescribes two alternative formulas for determining the "internal income" of the fund in the absence of the necessary documentation. The language of that subdivision specifies the circumstances under which the first formula - 4% of the fund's value must be used by the trustee. Specifically, it is required to be used when the documentation from the fund is not available but the trustee can determine the value of the fund. However, subdivision (g) is silent as to when the second formula - the product of the interest rate and the present value of the expected future payments - must be utilized. Subdivision (g) simply states that the second formula must be used when the fund payer does not provide the documentation reflecting the internal income of the fund. To clarify the original intent of AB 1545, this bill specifies that the second formula should be used when, in the absence of the documentation, the trustee cannot determine the value of the separate fund." The sponsor of this bill, the California Bankers Association, states that banks often act as trustees for many trusts. This bill clarifies the method for trustees to allocate funds received from a separate fund when the value of the internal income is not provided by the separate fund payer and the trustee otherwise cannot determine the value. This clarification is necessary so that trustees are not later charged with tax liabilities for choosing the wrong method of determining the internal income. ASSEMBLY FLOOR : AYES: Adams, Ammiano, Anderson, Arambula, Beall, Bill Berryhill, Tom Berryhill, Blakeslee, Block, Blumenfield, Bradford, Buchanan, Caballero, Chesbro, Conway, Cook, Coto, De La Torre, De Leon, DeVore, Emmerson, Eng, Evans, Feuer, Fletcher, Fong, Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick, Gilmore, Hagman, Harkey, Hayashi, Hernandez, Hill, Huber, Huffman, Jeffries, Jones, Knight, Lieu, Logue, Ma, Mendoza, Miller, Monning, Nava, Nestande, Niello, Nielsen, John A. Perez, V. Manuel Perez, Portantino, Ruskin, Salas, Saldana, Silva, Skinner, Smyth, Solorio, Audra Strickland, Swanson, AB 229 Page 4 Torlakson, Torres, Torrico, Tran, Villines, Yamada NO VOTE RECORDED: Brownley, Charles Calderon, Carter, Davis, Hall, Bonnie Lowenthal, Bass RJG:do 6/17/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****