BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                AB 296
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        CONCURRENCE IN SENATE AMENDMENTS
        AB 296 (Wagner)
        As Amended June 15, 2014
        2/3 vote.  Urgency
         
         
         ---------------------------------------------------------------------- 
        |ASSEMBLY: |     |(May 20, 2013)  |SENATE: |36-0 |(June 30, 2014)      |
         ---------------------------------------------------------------------- 
             (vote not relevant)


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        |COMMITTEE VOTE:  |9-0  |(August 12, 2014)   |RECOMMENDATION: |concur    |
        |(Jud.)           |     |                    |                |          |
         ------------------------------------------------------------------------ 

        Original Committee Reference:    JUD.  

         SUMMARY  :  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 (REIT).

         The Senate amendments  delete the Assembly version of this bill, and  
        instead:

        1)Clarify that money received in total or partial liquidation of an  
          entity, which is allocated to principal, does not include money  
          received from a regulated investment company or a REIT if the  
          money distributed is a net short-term capital gain distribution.

        2)Clarify that money received from a regulated investment company  
          or a REIT, which is allocated to principal if the money  
          distributed is a capital gain dividend for federal income tax  
          purposes, does not include money distributed as a net short-term  
          capital gain distribution.

        3)Add an urgency clause, allowing this bill to take effect  
          immediately upon enactment.

         EXISTING LAW  :









                                                                AB 296
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        1)Establishes, through the Uniform Principal and Income Act  
          (UPAIA), rules for the management by a trustee of assets held by  
          the trust for the benefit of the trust beneficiaries.  

        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 (such as a corporation, partnership, limited liability  
          company, trust or real estate investment trust) as specified.  

        4)Requires a trustee to allocate to principal specified receipts  
          from an entity.  

        5)Clarifies that money received by a trust from an entity is  
          received in partial liquidation of the entity (and thus treated  
          as principal and not income) to the extent the money is  
          attributable to sale of a capital asset.  Permits, in determining  
          whether money is received in partial liquidation, a trustee to  
          rely, without investigation, on a written statement from the  
          distributing entity.  Also allows a trustee to rely, again  
          without investigation, on other information known by the trustee.  
            

        6)Provides that a trustee is not liable for an allocation between  
          principal and interest done in accordance with the stated  
          provisions.    
         
        FISCAL EFFECT  :  None
         
        COMMENTS  :  California adopted the UPAIA in 2000.  (AB 846  
        (Ackerman), Chapter 145, Statutes of 1999.)  The UPAIA, together  
        with the Uniform Prudent Investor Act, reconstituted the manner by  
        which trusts are administered for the benefit of their  
        beneficiaries.  At the time it was adopted, the UPAIA was said to  
        deal conservatively with the tension between modern investment  
        theory and the traditional income allocation, and to help a trustee  
        who has made a prudent, modern portfolio-based investment decision  
        that has the initial effect of skewing return from all the assets  
        under management, by giving the trustee the power to reallocate the  
        portfolio return suitably as between principal and income  
        beneficiaries.








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        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.  Whether money is  
        characterized as principal or income determines who will get the  
        benefit of the distribution - income to the income or life  
        beneficiaries, principal to the remainder beneficiaries - and who  
        will pay the taxes, and when. 

        Current 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.  Last  
        year's 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, the author argues that an ambiguity now exists with  
        respect to the characterization of a net short-term capital gain  
        distribution from a mutual fund or a 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.  This bill clarifies that ambiguity and provides that  
        money received in total or partial liquidation of an entity or  
        money received that is a capital gain dividend, as specified, does  
        not include a net short-term capital gain distribution.
         
         The author notes that "of the 46 states and District of Columbia  
        that have enacted the UPAIA, 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 UPAIA.  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 UPAIA model laws enacted by California,  








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        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."

        This bill is urgency legislation that will take effect immediately.  
         The author states that it is necessary to enact this bill this  
        year before trustees follow the new partial liquidation guidelines  
        and mistakenly allocate this year's net short-term capital gain  
        distributions to principal instead of income.  
         

        Analysis Prepared by  :    Leora Gershenzon / JUD. / (916) 319-2334 


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