California Legislature—2013–14 Regular Session

Assembly Bill No. 1029

Introduced by Assembly Member Maienschein

February 22, 2013

An act to amend Section 16350 of the Probate Code, relating to trusts and estates.

LEGISLATIVE COUNSEL’S DIGEST

AB 1029, as introduced, Maienschein. Trusts and estates: allocations of receipts.

Existing law regulates the administration of trusts and the estates of decedents and, in this regard, establishes the Uniform Principal and Income Act. Existing law defines “income” in this regard and prescribes rules for determining the character of money received from an entity. Existing law generally requires that money received from an entity be allocated to income, but provides that money received in total or partial liquidation of the entity is allocated to principal. Existing law establishes rules for determining whether money is received in partial liquidation, including if the total amount of money and property received by all owners, collectively, in a distribution or series of related distributions is greater than 20% of the entity’s gross assets, as specified.

This bill would revise and recast the requirements by which a trustee is to determine whether money received from a distributing entity is be treated as a partial liquidation. The bill would provide that a trustee is not 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, as specified. The bill would also make various technical changes.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 16350 of the Probate Code is amended
to read:

16350.  

(a) For the purposes of this section, “entity” means 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.

(b) Except as otherwise provided in this section, a trustee shall
allocate to income money received from an entity.

(c) A trustee shall allocate to principal the following receipts
from an entity:

(1) Property other than money.

(2) 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.

(3) Money received in total or partial liquidation of the entity.

(4) 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.

(d) For purposes of paragraph (3) of subdivision begin delete (c): end delete

begin delete (1) end delete begin delete   end delete begin delete Money is received in partial liquidation (A) to the extent
that the entity, at or near the time of a distribution, indicates that
it is a distribution in partial liquidation, or (B) if the total amount
of money and property received by all owners, collectively, in a
distribution or series of related distributions is greater than 20
percent of the entity’s gross assets, as shown by the entity’s yearend
financial statements immediately preceding the initial receipt. If
that receipt is allocated end delete begin insert (c), money shall 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 as defined in Section 1221 of the Internal
Revenue Code. The following shall apply to determine whether
money is received in partial liquidation: end insert

begin insert

(1) A trustee may rely without investigation on a written
statement made by the distributing entity regarding the source of
the receipt.

end insert begin insert

(2) A trustee may rely without investigation on any other
information that is actually known by the trustee regarding the
source of the receipt.

end insert begin insert

(3) With regard to each receipt from a distributing entity, if
within 30 days from the date of receipt the distributing entity
provides no written statement to the trustee regarding the source
of the receipt and the trustee has no actual knowledge regarding
the source of the receipt, then the following shall apply:

end insert begin insert

(A) The trustee shall have no duty to inquire or investigate
whether the receipt from the distributing entity is in partial
liquidation of the entity.

end insert begin insert

(B) If the receipt from the distributing entity is in excess of 10
percent of the value of the trust’s interest in the distributing entity,
then the receipt shall be deemed to be received in partial
liquidation of the distributing entity, and the trustee shall allocate
all of the receipt to principal. For purposes of this subparagraph,
the value of the trust’s interest in the distributing entity shall be
determined as follows:

end insert begin insert

(i) In the case of an interest that is a security regularly traded
on a public exchange or market, the closing price of the security
on the public exchange or market occurring on the last business
day before the date of the receipt.

end insert begin insert

(ii) In the case of an interest that is not a security regularly
traded on a public exchange or market, the value as set forth in
the most recent appraisal prepared by a professional appraiser
of the trust’s interest in the distributing entity with a valuation
date within three years of the date of the receipt, if the appraised
value is actually known to the trustee without any duty of the trustee
to investigate the existence of the appraisal. The trustee shall have
no duty to obtain an appraisal nor shall the trustee have any
liability for relying upon an appraisal prepared by a professional
appraiser. The term “professional appraiser” shall refer to an
appraiser who has earned an appraisal designation for valuing
the type of property subject to the appraisal from a recognized
professional appraiser organization.

end insert begin insert

(iii) In the case of an interest that is not a security regularly
traded on a public exchange or market and for which there is no
appraisal meeting the requirements of clause (ii), the value of the
trust’s interest in the distributing entity shall be the trust’s
proportionate share of the distributing entity’s net assets as shown
in the distributing entity’s yearend financial statements immediately
preceding the receipt.

end insert begin insert

(iv) If the trust’s interest in the distributing entity cannot be
valued under clause (i), (ii) or (iii), the federal cost basis of the
trust’s interest in the distributing entity on the date immediately
before the date of the receipt.

end insert begin insert

(e) For purposes of subdivision (d), a written statement or other
information “regarding the source of the receipt” refers to a
written statement or other information indicating whether or not
the receipt 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 as defined in Section 1221 of the Internal
Revenue Code.

end insert begin insert

(f) (1) If, within 60 days of the date of the receipt, a trustee
allocates a receipt to principal in accordance with subdivision
(d), or allocates a receipt to income because the receipt is not
determined to be in partial liquidation under subdivision (d), based
on information received or actually known by the trustee on the
date that is 30 days after the date of the receipt, the trustee shall
not be liable for any claim of improper allocation of a receipt
which is based on information that was not received or actually
known by the trustee within 30 days of the date of the receipt.

end insert begin insert

(2) If a trustee allocates a receipt to principal in accordance
with subdivision (d), or allocates a receipt to income because the
receipt is not determined to be in partial liquidation under
subdivision (d), more than 60 days after the date of receipt, and
on the date of allocating the receipt the trustee has neither received
information nor has any actual knowledge, without any duty to
investigate, of the source of the receipt, then the trustee shall not
be liable for any claim of improper allocation of the receipt which
is based on information that was not received or actually known
by the trustee as of the date of allocation.

end insert

begin insert (g) end insert begin insert   end insert begin insert (1) end insert begin insert   end insert begin insert Notwithstanding anything to the contrary in subdivision
(d), if the receipt was allocated end insert between December 2, 2004, and
begin delete the operative date of the act adding this sentence end delete begin insert July 18, 2005 end insert , 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, begin delete exceeds end delete begin insert exceeded end insert 20
percent of the entity’s gross assets, but the amount received by the
trustee begin delete does end delete begin insert did end insert not exceed 20 percent of the entity’s gross assets.

(2) Money is not received in partial liquidation, nor may it be
taken into account under begin delete clause (B) of paragraph (1) end delete begin insert subdivision
(d) end insert , 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.

begin delete

(e) A trustee may rely on a statement made by an entity about
the source or character of a distribution if the statement is made
at or near the time of distribution by the entity’s board of directors
or other person or group of persons authorized to exercise powers
to pay money or transfer property comparable to those of a
corporation’s board of directors.

end delete