BILL ANALYSIS Ó
AB 672
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 672 (Harkey)
As Amended June 11, 2013
Majority vote
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|ASSEMBLY: |76-0 |(April 18, |SENATE: |38-0 |(August 15, |
| | |2013) | | |2013) |
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Original Committee Reference: REV. & TAX.
SUMMARY : Eliminates the requirement for a fiduciary of a
specified estate to obtain a tax clearance certificate from the
Franchise Tax Board (FTB) to allow the final account of the
fiduciary by the probate court. Specifically, this bill :
1)Repeals the tax clearance certificate requirement that applies
to an estate with more than $1 million in assets if the fair
market value of the assets distributable to one or more
nonresident beneficiaries exceeds $250,000.
2)Deletes the provisions authorizing the FTB to provide the tax
clearance certificates and any related expedited services.
3)Clarifies that a deduction relating to amounts attributable
and taxable to nonresident beneficiaries where the fiduciary
failed to obtain a tax clearance certificate is not allowable
only for taxable years beginning before January 1, 2014.
4)Makes other conforming changes to certain provisions related
to the tax administration of estates.
The Senate Amendments:
1)Clarify that the provisions denying deductions with respect to
amounts attributable and taxable to nonresident beneficiaries,
where the fiduciary failed to obtain a tax clearance
certificate, are effective only for taxable years beginning
after January 1, 2014.
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2)Revise the repeal date of those provisions relating to the
denial of the deductions from January 1, 2014, to December 1,
2018.
EXISTING LAW :
1)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, if the estate has more
than $1 million in assets at the date of the decedent's death
and the fair market value of the assets distributable to one
or more nonresident beneficiaries exceeds $250,000. (Revenue
and Taxation Code (R&TC) Section 19513.)
2)Authorizes the FTB to prescribe regulations setting the
minimum value of the assets of the estate at the death of the
decedent and the minimum value of the assets distributable to
one or more nonresidents, which will require the estate to
obtain a tax clearance certificate from the FTB. (R&TC
Section 19513(b).)
3)Provides that, within 30 days after receiving a request for a
certificate, the FTB must either issue the certificate or
notify the person requesting the certificate of the amount of
tax, interest, and/or penalties that shall be paid or the
amount of bond, deposit, or other security that shall be
furnished as a condition of issuance of the certificate.
(R&TC Section 19514.)
4)Specifies that the certificate does not relieve the estate or
the fiduciary for any amounts of tax, interest and/or
penalties that are due and unpaid at the time the certificate
is issued or which may become due from the decedent or estate
after the issuance of the certificate.
5)Provides that a claim by a public entity against an estate
must be filed within the time provided or is barred. (Probate
Code (PC) Section 9200.)
6)Denies deductions with respect to amounts attributable and
taxable to nonresident beneficiaries of an estate if the
fiduciary fails to obtain a tax clearance certificate.
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7)Requires notice of administration of decedent's estate be
provided to the FTB. Specifically, requires a general
personal representative or attorney of a decedent's estate to
give notice of the administration of the estate to the FTB not
later than 90 days after the date letters of administration
are first issued.
8)Requires the FTB to mail notice assessing taxes and commence
any proceeding in court within 18 months after written request
is filed (after the tax return is made) by the fiduciary of
the estate or trust. (R&TC Section 19517.)
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual revenue loss of $3,000 in fiscal year (FY)
2013-14, $6,000 in FY 2014-15, and $7,000 in FY 2015-16.
COMMENTS :
1)Author's Statement . The author states that, "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)Arguments in Support . The proponents of this bill argue that
the tax clearance certificate requirement "places a burden on
the estate and the probate court system." They note that in
certain situations "where estates are not aware of the tax
clearance certificate, or where estates only become aware
later in the process that the estate meets the threshold
requirements for tax clearance, the requirement can create a
significant delay often requiring the postponement of judicial
proceedings," which increases the administrative costs of
probate for both the court and the estate.
3)Background . While the state inheritance tax in California was
repealed by the voters in 1982, a final decedent income tax
return is still required to be filed to account for the
decedent's final tax year. In addition, if any income is
generated by the estate prior to distribution to its
beneficiaries, a fiduciary income tax return is required to be
filed for the estate. The Probate Court oversees the payment
of probate estate debts and the distribution of the estate
assets (although not all estates are subject to probate
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administration). Generally, probate proceedings are
instituted in the county of residence of a decedent, or the
county where the decedent owned real property.
4)The Tax Clearance Certificate Requirement . The tax clearance
requirement was enacted in 1935 to prevent assets, which are
under the 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. However,
this requirement to obtain a tax clearance certificate applies
to an estate only if the value of its assets at the death of
the decedent and the value of the assets distributable to
nonresidents exceed the amounts prescribed by regulations
promulgated by the FTB. Currently, those amounts are set at
$1 million and $250,000. Consequently, a personal
representative of an estate must request a tax clearance
certificate from the FTB only if the estate has more than $1
million in assets at the date of the decedent's death and the
fair market value of the assets distributable to one or more
nonresident beneficiaries exceeds $250,000. Within 30 days
after receiving a request for a certificate, the FTB must
either issue the certificate or notify the person requesting
the certificate of the amount of tax, interest, and/or
penalties that must be paid or the amount of bond, deposit, or
other security that must be furnished as a condition of
issuance of the certificate.
A tax clearance certificate provides that all taxes, additions
to tax, penalties, and/or interest imposed by the Personal
Income Tax Law upon the estate or decedent have been paid and
that all other amounts that may become due in the future are
secured by bond, deposit, or otherwise. The certificate does
not relieve the estate or the fiduciary for any due and unpaid
amounts. In the absence of the certificate, the California
Probate Court is prohibited from allowing the final account of
an estate. 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.
5)Notice Requirement to the FTB . The personal representative
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appointed by the court to administer a decedent's estate is
required to exert diligent efforts to identify creditors of
the decedent and provide every reasonably ascertainable
creditor with a Notice of Administration of a Decedent's
Estate (PC Section 9050). The notice to creditors must be
provided within four months of the date the personal
representative first receives Letters of Administration from
the court, or within 30 days of the date the representative
first obtained knowledge of the creditor and his or her claim.
(PC Section 9051.)
In 2008, the Legislature passed AB 361 (Ma), Chapter 105,
Statutes of 2007, to require a personal representative of an
estate to notify the 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. This notification
requirement gives the FTB an opportunity to file a Creditor's
Claim in the probate proceedings to protect the state's tax
liability interest in the estate's distributable assets.
Thus, the FTB may file a claim for outstanding tax liabilities
against an estate in probate court within 18 months of
receiving written notice. In the case where no notice or
written request is submitted to the FTB and the estate has
been distributed, the FTB may file a claim, at any time,
against any beneficiary of the estate that received the
property.
6)Is the Tax Clearance Certificate Requirement Outdated and
Unnecessary ? According to the sponsor, the tax clearance
certificate is a burdensome and unnecessary process. The FTB
states that it is burdensome because it may significantly
delay probate proceedings in cases where estates are either
not aware of the tax clearance requirement or become aware of
the requirement later in the process when it is determined
that the estate's assets meet the $1 million threshold and the
aggregate distributions to nonresidents are in excess of
$250,000.
The FTB also asserts that the existing notice requirement,
outside of the tax clearance requirement, provides the agency
with the opportunity to file a timely claim in probate courts
to protect the state's interest in tax liabilities, without
compromising the FTB's ability to collect delinquent taxes
from specified estates. Apparently, since the notice
requirement became operative, the compliance rate for all
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estates has reached 99% within 12 months of the close of the
taxable year. The 99% compliance rate has been steady for
taxable years 2008, 2009, and 2010.
Furthermore, the repeal of the tax clearance certificate
requirement would allow the FTB to redirect resources to other
revenue generating activities and would relieve the California
Superior Court, Probate Division, from requiring a tax
clearance certificate to allow a final account of specified
estates.
The Legislature may wish to consider whether the repeal of the
tax clearance certificate requirement would increase
noncompliance among estates with nonresident beneficiaries.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001335