BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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                                    THIRD READING


          Bill No:  AB 296
          Author:   Wagner (R)
          Amended:  6/15/14 in Senate
          Vote:     27 - Urgency


           SENATE JUDICIARY COMMITTEE  :  7-0, 6/24/14
          AYES:  Jackson, Anderson, Corbett, Lara, Leno, Monning, Vidak

           ASSEMBLY FLOOR  :  73-0, 5/20/13 - See last page for vote


           SUBJECT  :    Trusts

           SOURCE  :     California Bankers Association


           DIGEST  :    This bill provides that an allocation to principal of  
          money received in total or partial liquidation of an entity or  
          money received that is a capital gain dividend distribution, as  
          specified, does not include a net short-term capital gain  
          distribution from a regulated investment company or a real  
          estate investment trust.  This bill also clarifies an ambiguity  
          in the Uniform Principal and Income Act (UPAIA).

           ANALYSIS  :    

          Existing law:

          1.Establishes, under the UPAIA, rules for the management by a  
            trustee of assets held by the trust for the benefit of the  
            trust beneficiaries and provides guidelines for the allocation  
            of receipts to income or principal.
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          2.Requires the trustee, when allocating receipts and  
            disbursements to or between principal and income, to  
            administer the trust in accordance with the terms of the  
            trust, the power provided to the trustee under the trust, or,  
            if the trust does not otherwise provide, pursuant to the  
            UPAIA. 

          3.Requires a trustee to allocate to income money received from  
            an entity. 

          4.Requires a trustee to allocate to principal the following  
            receipts from an entity:

             A.   Property other than money;

             B.   Money received in one distribution or a series of  
               related distributions in exchange for part or all of a  
               trust's interest in the entity;

             C.   Money received in total liquidation of the entity or in  
               partial liquidation of the entity, as defined; and

             D.   Money received from an entity that is a regulated  
               investment company or a real estate investment trust if the  
               money distributed is a capital gain dividend for federal  
               income tax purposes.

          1.Provides that, when determining whether money received was in  
            partial liquidation of the entity; the money will be treated  
            as received in partial liquidation to the extent the amount  
            received from the distributing entity is attributable to the  
            proceeds from a sale by the distributing entity, or by the  
            distributing entity's subsidiary or affiliate, of a capital  
            asset.

          2.Prescribes guidelines to determine whether money is received  
            in partial liquidation.

          3.Provides that the value of the trust's interest in the  
            distributing entity is determined as follows:

             A.   In the case of an interest that is a security regularly  
               traded on a public exchange or market, the closing price of  

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               the security on the public exchange or market occurring on  
               the last business day before the date of the receipt;

             B.   In the case of an interest that is not a security  
               regularly traded on a public exchange or market, the  
               trust's proportionate share of the value of the  
               distributing entity as set forth in the most recent  
               appraisal, if any, actually received by the trustee and  
               prepared by a professional appraiser, as defined, with a  
               valuation date within three years of the date of the  
               receipt; the trustee has no duty to investigate the  
               existence of the appraisal or to obtain an appraisal nor  
               does the trustee have any liability for relying upon an  
               appraisal prepared by a professional appraiser;

             C.   If the trust's interest in the distributing entity  
               cannot be valued, as specified above, the trust's  
               proportionate share of the distributing entity's net  
               assets, to be calculated as gross assets minus liabilities,  
               as shown in the distributing entity's yearend financial  
               statements immediately preceding the receipt; or

             D.   If the trust's interest in the distributing entity  
               cannot be valued, as specified above, the federal cost  
               basis of the trust's interest in the distributing entity on  
               the date immediately before the date of the receipt. 

          1.Provides that, if a trustee allocates a receipt to principal  
            using the above guidelines, or allocates a receipt to income  
            because the receipt is not determined to be in partial  
            liquidation under the above guidelines, the trustee is not be  
            liable for any claim of improper allocation of the receipt  
            that is based on information that was not received or actually  
            known by the trustee as of the date of allocation. 

          2.Provides that, if the receipt was allocated between December  
            2, 2004, and July 18, 2005, a trustee shall not be liable for  
            allocating the receipt to income if the amount received by the  
            trustee, when considered together with the amount received by  
            all owners, collectively, exceeded 20% of the entity's gross  
            assets, but the amount received by the trustee did not exceed  
            20% of the entity's gross assets.

          3.Provides that money is not received in partial liquidation,  

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            nor may it be taken into account under the partial liquidation  
            guidelines, to the extent that it does not exceed the amount  
            of income tax that a trustee or beneficiary is required to pay  
            on taxable income of the entity that distributes the money.

          4.Defines "entity" to mean a corporation, partnership, limited  
            liability company, regulated investment company, real estate  
            investment trust, common trust fund, or any other organization  
            in which a trustee has an interest other than a trust or  
            decedent's estate to which Section 16351 applies, a business  
            or activity to which Section 16352 applies, or an asset-backed  
            security to which Section 16367 applies.

          5.Defines "capital asset" to mean property held by a taxpayer  
            (whether or not connected with his/her trade or business).   
            However, capital asset does not include certain business  
            property, such as inventory, goods for sale to customers,  
            property subject to the allowance for depreciation, accounts  
            or notes receivable acquired for services rendered or from the  
            sale of property, or supplies.

          This bill:

          1.Clarifies that money received in total liquidation of the  
            entity or in partial liquidation of the entity does not  
            include money received from an entity that is a regulated  
            investment company or a real estate investment trust if the  
            money distributed is a net short-term capital gain  
            distribution.

          2.Clarifies that money received from an entity that is a  
            regulated investment company or a real estate investment trust  
            if the money distributed is a capital gain dividend for  
            federal income tax purposes does not include money received  
            from an entity that is a regulated investment company or a  
            real estate investment trust if the money distributed is a net  
            short-term capital gain distribution.

           Background
           
          Upon recommendation of the California Law Revision Commission,  
          the Legislature adopted the new UPAIA in 1999 (AB 846, Ackerman,  
          Chapter 145).  The UPAIA, together with the Uniform Prudent  
          Investor Act, reconstituted the manner by which trusts are  

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          administered for the benefit of their beneficiaries and helps  
          trustees who have made a prudent, modern portfolio-based  
          investment decision that has the initial effect of skewing  
          return from all the assets under management, by giving trustees  
          the power to reallocate the portfolio return suitably between  
          principal and income beneficiaries.

          Under the UPAIA, a trustee is required to allocate money  
          received from an entity either to principal (property owned by  
          the trust) or income (money earned by the trust's principal)  
          based upon the characterization of the money received.  The  
          characterization of the money determines the corresponding  
          allocation of the money to income, which would benefit life  
          beneficiaries, or to principal, which would benefit remainder  
          beneficiaries, and when, and who will pay the taxes, when and  
          how much.

          Existing law requires a trustee to allocate money received from  
          an entity to income, unless the money qualifies for a statutory  
          exception, in which case the trustee must allocate the money to  
          principal.  Those exceptions include, among other things, money  
          received in total or partial liquidation of the entity.  AB 1029  
          (Maienschein, Chapter 105, Statutes of 2013), among other  
          things, clarified how the characterization of money received  
          from a partial liquidation of an entity is to be determined and  
          allocated by the trustee.

          However, an ambiguity now exists with respect to the  
          characterization of a net short-term capital gain distribution  
          from a mutual fund or a real estate investment trust (REIT),  
          which is allocable to income, but which may be incorrectly  
          characterized as principal if the trustee believes the money  
          qualifies as either money received in total liquidation of the  
          entity or in partial liquidation of the entity or as money  
          received from an entity that is a regulated investment company  
          (i.e., mutual fund) or an REIT if the money distributed is a  
          capital gain dividend for federal income tax purposes.

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

           SUPPORT  :   (Verified  6/26/14)

          California Bankers Association (source)

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           ARGUMENTS IN SUPPORT  :    According to the Senate Judiciary  
          Committee analysis of 6/24/14, the author notes that "of the 46  
          states and District of Columbia that have enacted the UPIA, only  
          Florida has changed the allocation rule for distributions to  
          require that such distributions be allocated to principal."  As  
          a result, the failure to correct this ambiguity regarding a net  
          short-term capital gain distribution will result in California's  
          allocation rule to be inconsistent with the allocation rule of  
          all but one of the states that have enacted the UPIA.  The  
          author also notes that, in most cases, a trust instrument will  
          require that the trust's net income be distributed to the income  
          beneficiaries, who have the expectation, based on the UPIA model  
          laws enacted by California, that these distributions will  
          continue to be allocated to income.  As such, the author asserts  
          that "to now allocate distributions to principal and deny income  
          beneficiaries those funds will, in some cases, cause undue  
          hardship for the income beneficiaries."

           ASSEMBLY FLOOR  :  73-0, 5/20/13
          AYES:  Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom,  
            Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown,  
            Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway,  
            Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,  
            Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gordon, Gorell,  
            Grove, Hagman, Harkey, Roger Hernández, Jones, Levine, Linder,  
            Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mitchell,  
            Morrell, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan,  
            Patterson, Perea, V. Manuel Pérez, Quirk, Quirk-Silva, Rendon,  
            Salas, Skinner, Stone, Ting, Wagner, Waldron, Weber,  
            Wieckowski, Wilk, Williams, Yamada, John A. Pérez
          NO VOTE RECORDED:  Gray, Hall, Holden, Jones-Sawyer, Logue,  
            Vacancy, Vacancy


          AL:e  6/26/14   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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