BILL ANALYSIS Ó AB 672 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 672 (Harkey) As Amended June 11, 2013 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |76-0 |(April 18, |SENATE: |38-0 |(August 15, | | | |2013) | | |2013) | ----------------------------------------------------------------- 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. AB 672 Page 2 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. AB 672 Page 3 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 AB 672 Page 4 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 AB 672 Page 5 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 AB 672 Page 6 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