BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 672 HEARING: 6/5/13
AUTHOR: Harkey FISCAL: Yes
VERSION: 2/21/13 TAX LEVY: No
CONSULTANT: Grinnell
TAX ADMINISISTRATION: TAX CLEARANCE CERTIFICATES
Eliminates the tax clearance certificate process in probate
cases.
Background and Existing Law
Taxpayers form estates or trusts to transfer property from
one party to another. An estate or trust is a legal entity
entirely separate from both the grantor, who gives his or
her assets to the estate or trust, and the beneficiaries,
who then receive them in addition to any income generated
from the assets distributed by the fiduciary before the
estate or trust ends. Trusts are managed by fiduciary
trustees, and generally exist until he or she distributes
all the trust's assets and pays all its debts, if possible.
In the case of an estate or trust formed to transfer
property after the death of the grantor, known as the
decedent, property received by the beneficiary is not
taxable income to the beneficiary; however, income earned
from the assets during the period of administration or
settlement of the estate or trust is subject to tax either
to the estate, unless distributed in the year the income is
received, in which case the income is taxable to the
beneficiary. Income distributed must be reported on the
beneficiary's income tax return and can be deducted by the
estate.
Generally, probate proceedings are instituted in the county
of residence of a decedent, or the county where a decedent
owned real property. The Probate Court appoints a personal
representative to administer a decedent's estate and notify
possible creditors, including state agencies, such as the
Franchise Tax Board (FTB), who may be owed personal income
taxes by the decedent incurred during his or her life.
AB 672 -- 2/21/13 -- Page 2
In 2007, the Legislature required a personal representative
of an estate to notify FTB of the probate proceedings no
later than 90 days after the date when
Letters of Administration are first issued for the estate
by the court (AB 361, Ma). Upon receiving the notice, FTB
may file a claim in the probate proceedings to collect the
tax from the proceeds of the estate's distributable assets.
If no notice or written request is submitted, and the
estate has been distributed, FTB may file a claim, at any
time, against any beneficiary of the estate that received
the property.
In addition to the above, FTB must provide a tax clearance
certificate showing that the estate's and the decedent's
Personal Income Taxes, additions, penalties, and interest
have been fully paid or secured by a bond before the court
accepts the final account of the fiduciary, so long as the
value of the estate exceeds the amount FTB sets in
regulation, currently $1,000,000, or where the estate makes
aggregate distributions to nonresident beneficiaries of
more than $250,000. Tax agencies issue tax clearance
certificates in many contexts as written confirmation that
a taxpayer has or will pay a past due tax obligation. FTB
must provide the certificate or notify its requestor of the
amount of tax due within 30 days. The certificate does not
relieve the estate of liability for other due and unpaid
amounts at the time it's issued, or for any liabilities
that become due in the future. FTB may charge specialized
tax services fees of $100 for processing tax clearance
certificate requests. Additionally, trusts may only deduct
income distributed to nonresident beneficiaries when FTB
has issued the certificate.
Proposed Law
Assembly Bill 672 deletes the following requirements
regarding tax clearance certificates in probate cases:
Disallowing a trust's income distributed deduction
claimed for a distribution made to a nonresident
beneficiary when the fiduciary hasn't obtained the
certificate,
Removing the prohibition against a Probate Court
allowing the fiduciary's final account without a tax
clearance certificate,
AB 672 -- 2/21/13 -- Page 3
Requiring FTB to issue a tax clearance certificate,
or provide the amount due, within 30 days of request,
Clarifying language that FTB's issuing the tax
clearance certificate does not erase the decedent's
tax due, and
Erasing FTB's authority to charge specialized tax
service fees for processing tax clearance
certificates.
State Revenue Impact
According to FTB, AB 672 would result in revenue losses of
$3,000 in 2013-14, $6,000 in 2014-15, and $7,000 in
2015-16.
Comments
1. Purpose of the bill . According to the author, "Probate
is already a challenging and lengthy ordeal. This bill
would eliminate a burdensome process that is part of
probate that is not necessary to prevent assets under
probate control from being distributed to nonresident
beneficiaries before state income tax liabilities are
paid."
2. Is removing the requirement justified ? According to
FTB, AB 672 would "eliminate a burdensome process that is
unnecessary to prevent assets under probate control from
being distributed to nonresident beneficiaries before state
income tax liabilities are paid." The certificate process
only applies to relatively large estates in probate where
the decedent or fiduciary didn't timely pay tax, the best
fiduciaries could miss the requirement because of its
location in the Revenue and Taxation Code instead of the
Probate Code, and the law prohibits a court from resolving
the estate until FTB issues the certificate. Should AB 672
be enacted, FTB would continue to safeguard the state's
interest in collecting taxes due by filing claims in
probate court when notified under the AB 361 process, which
FTB is confident will allow for collection of tax.
3. Origins . According to the Assembly Revenue and
Taxation Committee, "the tax clearance requirement was
enacted in 1935 to prevent assets, which are under the
AB 672 -- 2/21/13 -- Page 4
control of the Probate Court of California, from being
distributed out of state before all state income taxes owed
by the estate have been paid or secured. Thus, existing
law prohibits a probate court from accepting a final
accounting from a fiduciary of an estate, unless the
fiduciary obtains a tax clearance certificate from the FTB.
According to the FTB, an average of 500 estates request
tax clearance certificates each year. Of those estates, an
average of 440 estates required a tax clearance
certificate, resulting in an average collection amount of
$10,000 per year."
4. Technicals . Committee staff recommends that the
measure should specify that the repeal of the denial of the
deduction for the beneficiary commences in a specific
taxable year to prevent the measure from absolving
taxpayers that failed to follow the law in place at the
time.
Assembly Actions
Assembly Revenue and Taxation9-0
Assembly Appropriations 17-0
Assembly Floor 76-0
Support and Opposition (05/30/13)
Support : Franchise Tax Board, California Taxpayers
Association
Opposition : None received.