BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1029|
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THIRD READING
Bill No: AB 1029
Author: Maienschein (R)
Amended: 5/24/13 in Senate
Vote: 21
SENATE JUDICIARY COMMITTEE : 6-0, 6/4/13
AYES: Evans, Anderson, Corbett, Jackson, Leno, Monning
NO VOTE RECORDED: Walters
ASSEMBLY FLOOR : 77-0, 4/29/13 - See last page for vote
SUBJECT : Trusts and estates: allocations of receipts
SOURCE : Trusts and Estates Section of the State Bar of
California
DIGEST : This bill revises and recasts the requirements by
which a trustee is to determine whether money received from a
distributing entity is to be treated as a partial liquidation.
This bill provides 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 also makes various technical
changes.
ANALYSIS :
Existing law:
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1.The Uniform Principal and Income Act (UPAIA), establishes
rules for the management by a trustee of assets held by the
trust for the benefit of the trust beneficiaries and provides
guidelines for the allocation of receipts to income or
principal.
2.Requires the trustee, when allocating receipts and
disbursements to or between principal and income, to
administer the trust in accordance with the terms of the
trust, the power provided to the trustee under the trust, or,
if the trust does not otherwise provide, pursuant to the
UPAIA.
3.Requires a trustee to allocate to income money received from
an entity unless the money received may be characterized as
one of the following:
Property other than money;
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;
Money received in total or partial liquidation of the
entity; or
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.
If the money falls under one of the above exceptions, then the
trustee is required to allocate the money to principal.
1.Defines money received in partial liquidation to mean money
received to the extent that the entity, at or near the time of
a distribution, indicates that it is a distribution in partial
liquidation or 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 shown by the entity's yearend
financial statements immediately preceding the initial
receipt. However, money is not received in partial
liquidation, nor may it be taken into account under this
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provision, 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.
2.Provides that if the receipt was allocated between December 2,
2004 and July 18, 2005, the trustee is not 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, exceeds 20% of the entity's gross
assets, but the amount received by the trustee does not exceed
20% of the entity's gross assets.
3.Authorizes the trustee to 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.
Existing federal law defines "capital asset" to mean property
held by a taxpayer (whether or not connected with his trade or
business). However, capital asset does not include certain
business property, such as inventory, goods for sale to
customers, property subject to the allowance for depreciation,
accounts or notes receivable acquired for services rendered or
from the sale of property, or supplies.
This bill:
1.Deletes the existing definition of money received in partial
liquidation of an entity and instead provides that money will
be treated as received in partial liquidation to the extent
the amount received from the distributing entity is
attributable to proceeds from a sale by the distributing
entity, or by the distributing entity's subsidiary or
affiliate, of a capital asset.
2.Defines "capital asset" to mean a capital asset defined by the
above federal law.
3.Authorizes the trustee, when determining whether money is
received in partial liquidation, to rely without investigation
on a written statement made by the distributing entity
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regarding the receipt, or on other information actually known
by the trustee regarding whether the receipt is attributable
to the proceeds from a sale by the distributing entity,
subsidiary, or affiliate, of a capital asset.
4.Provides that if, within 30 days from the date of the receipt,
the distributing entity does not provide a 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, 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,
then the trustee is not required to investigate whether the
receipt from the distributing entity is in partial liquidation
of the entity. However, if on the date of receipt, the
receipt from the distributing entity is in excess of 10% of
the value of the trust's interest in the distributing entity,
then the receipt is deemed to be received in partial
liquidation of the distributing entity, and the trustee is
required to allocate all of the receipt to principal.
5.Requires the trustee, if applicable, to apply one of the
following methods to determine the value of the trust's
interest in the distributing entity:
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;
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 actually received by the trustee and prepared by
a professional appraiser with a valuation date within three
years of the date of the receipt;
If the trust's interest in the distributing entity
cannot otherwise be valued, the trust's proportionate share
of the distributing entity's net assets (gross assets minus
liabilities) as shown in the distributing entity's yearend
financial statements immediately preceding the receipt; or
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If the trust's interest in the distributing entity
cannot be valued pursuant to the above provisions, the
federal cost basis of the trust's interest in the
distributing entity on the date immediately before the date
of the receipt.
1.Provides that the trustee has 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.
2.Defines "professional appraiser" to mean an appraiser who has
earned an appraisal designation for valuing the type of
property subject to the appraisal from a recognized
professional appraiser organization.
3.Provides that if a trustee allocates a receipt to principal in
accordance with the above procedures for determining a partial
liquidation or allocates a receipt to income because the
receipt is not determined to be in partial liquidation, then
the 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.
4.Makes technical and conforming revisions to the above
provisions.
Background
Upon recommendation of the California Law Revision Commission,
the Legislature adopted the new UPAIA in 1999 (AB 846 (Ackerman,
Chapter 145, Statutes of 1999)). The UPAIA, together with the
Uniform Prudent Investor Act, reconstituted the manner by which
trusts are administered for the benefit of their beneficiaries
and helps trustees who have made a prudent, modern
portfolio-based investment decision that has the initial effect
of skewing return from all the assets under management, by
giving trustees the power to reallocate the portfolio return
suitably as between principal and income beneficiaries.
Under the UPAIA, a trustee is required to allocate money
received from an entity (i.e., corporation, partnership, limited
liability company, regulated investment company, real estate
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investment trust, or common trust fund) either to principal
(property owned by the trust) or income (money earned by the
trust's principal) based upon the characterization of the money
received. The characterization and corresponding allocation of
the money to income, which would benefit life beneficiaries, or
to principal, which would benefit remainder beneficiaries, and
when, and who will pay the taxes, when and how much.
Prior Legislation
SB 296 (Campbell, Chapter 51, Statutes of 2005) clarified that
money is received in partial liquidation 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.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 6/4/13)
Trusts and Estates Section of the State Bar of California
(source)
ARGUMENTS IN SUPPORT : According to the author:
This bill would bring greater clarity and fairness to the
categorization of amounts received from business entities
as between principal and income. This bill seeks to
achieve this by permitting the trustee to act on facts
concerning distributions actually known to the trustee, and
by providing an improved bright line test that would
operate in the absence of the trustee having any
information about the character of a receipt. This bill
would also provide protection from liability to trustees
who rely on [Probate Code] Section 16350 to make
allocations of income and principal.
The Trusts and Estates Section of the State Bar of California,
states that the intent of this bill is to encourage trustees to
allocate money received from the entity rather than holding on
to the distribution, waiting for a year or more for information
to be sent to the trustee upon which the trustee may utilize as
specified under existing law.
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ASSEMBLY FLOOR : 77-0, 4/29/13
AYES: Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom,
Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown,
Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway,
Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,
Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gordon, Gorell,
Gray, Grove, Hagman, Hall, Harkey, Roger Hernández, Holden,
Jones, Jones-Sawyer, Levine, Linder, Logue, Maienschein,
Mansoor, Medina, Melendez, Mitchell, Morrell, Mullin,
Muratsuchi, Nazarian, Nestande, Olsen, Pan, Patterson, Perea,
V. Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner,
Stone, Ting, Torres, Wagner, Waldron, Weber, Wieckowski, Wilk,
Williams, Yamada, John A. Pérez
NO VOTE RECORDED: Atkins, Lowenthal, Vacancy
AL:nl 6/5/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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