Amended in Senate May 24, 2013

Amended in Assembly April 18, 2013

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 amended, Maienschein. Trusts and estates: allocations of receipts.

Existing law regulates the administration of trusts and the estates of decedents and 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, provided that the trustee satisfies specified requirements. 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 begin delete section, “entity” end delete begin insert section: end insert

begin insert (1) end insert begin insert   end insert begin insert “Entity” end insert 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.

begin insert

(2) “Capital asset” means a capital asset as defined in Section
1221 of the Internal Revenue Code.

end insert

(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 liquidation of the entity or in partial
liquidation of the entity, as defined in subdivision (d).

(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 (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 begin delete as defined in
Section 1221 of the Internal Revenue Code end delete . The following shall
apply to determine whether money is received in partial liquidation:

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

(2) A trustee may rely without investigation on other information
begin delete that is end delete actually known by the trustee regarding begin insert whether end insert the receipt
begin insert 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 end insert .

(3) With regard to each receipt from a distributing entity, if
within 30 days from the date of the receipt the distributing entity
provides no written statement to the trustee that the receipt is a
distribution attributable to the proceeds from a sale of a capital
asset by the distributing entity or by the distributing entity’s
subsidiary or affiliate and the trustee has no actual knowledge that
the receipt is a distribution attributable to the proceeds from a sale
of a capital asset by the distributing entity or by the distributing
entity’s subsidiary or affiliate, then the following shall apply:

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

(B) If begin insert , on the date of receipt, end insert 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:

(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.

(ii) In the case of an interest that is not a security regularly traded
on a public exchange or market, the trust’s proportionate share of
the value of the distributing entity as set forth in the most recent
appraisal begin insert , if any, end insert actually received by the trustee and prepared by
a professional appraiser with a valuation date within three years
of the date of the receipt. The trustee shall have no duty to
investigate the existence of the appraisal or 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.

(iii)  begin delete 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 end delete begin insert If the trust’s interest in the
distributing entity cannot be valued under clause (i) or end insert clause (ii),
the trust’s proportionate share of the distributing entity’s net assets begin insert ,
to be calculated as gross assets minus liabilities, end insert as shown in the
distributing entity’s yearend financial statements immediately
preceding the receipt.

(iv) If the trust’s interest in the distributing entity cannot be
valued under clause (i), (ii) begin insert , end insert 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.

(e) 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),
begin delete then end delete the trustee shall not be 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.

(f) (1) Notwithstanding anything to the contrary in subdivision
(d), if the receipt was allocated between December 2, 2004, and
July 18, 2005, 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,
exceeded 20 percent of the entity’s gross assets, but the amount
received by the trustee did 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 subdivision (d), 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.