BILL ANALYSIS Ó
AB 1029
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 1029 (Maienschein)
As Amended May 24, 2013
Majority vote
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|ASSEMBLY: |77-0 |(April 29, |SENATE: |36-0 |(July 1, 2013) |
| | |2013) | | | |
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Original Committee Reference: JUD.
SUMMARY : Clarifies how a distribution to a trust is allocated
between income and principal. Specifically, this bill :
1)Clarifies that money received by a trust from an entity (such
as a corporation, partnership, limited liability company,
trust or real estate investment trust) is received in partial
liquidation of the entity (and thus treated as principal and
not income) to the extent the money is attributable to sale of
a capital asset.
2)Permits, in determining whether money is received in partial
liquidation, a trustee to rely, without investigation, on a
written statement from the distributing entity. Also allows a
trustee to rely, again without investigation, on other
information known by the trustee.
3)Provides, if no written information is received from the
distributing entity, as provided, and the trustee has no
actual knowledge, that the trustee has no duty to investigate
whether the money received is in partial liquidation of the
entity. Provides that if, on the date of receipt, a receipt
is in excess of 10% of the trust's net interest in the entity,
as defined, the receipt is deemed to be in partial liquidation
of the entity. Provides rules for determining the value of
the trust's interest in the distributing entity to determine
if a receipt is in excess of 10% of the trust's interest in
the entity.
4)Provides that a trustee is not liable for an allocation
between principal and interest done in accordance with the
provisions of this bill.
The Senate amendments are technical and clarifying.
AB 1029
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EXISTING LAW :
1)Establishes, through the Uniform Principal and Income Act,
rules for the management by a trustee of assets held by the
trust for the benefit of the trust beneficiaries.
2)Provides that money received in total or partial liquidation
of an entity shall be allocated by the trustee to principal.
Provides that if the total amount of money received by all
owners from a distribution or a series of related
distributions by an entity is greater than 20% of the entity's
gross assets, it is received in partial liquidation of the
entity and must be allocated to principal.
3)Permits a trustee to rely on a statement made by a
distributing entity that indicates that the distribution is in
partial liquidation of the entity, as provided.
FISCAL EFFECT : None
COMMENTS : California adopted the Uniform Principal and Income
Act (UPAIA) in 2000. (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. At the time it was
adopted, the UPAIA was said to deal conservatively with the
tension between modern investment theory and the traditional
income allocation, and to help a trustee who has made a prudent,
modern portfolio-based investment decision that has the initial
effect of skewing return from all the assets under management,
by giving the trustee the power to reallocate the portfolio
return suitably as between principal and income beneficiaries.
This bill, sponsored by the Trusts and Estates Section of the
State Bar, deals with the characterization of money, whether
principal or interest, received by a trust from an entity (such
as a corporation or partnership). Whether money is
characterized as principal or income determines who will get the
benefit of the distribution - income to the income or life
beneficiaries, principal to the remainder beneficiaries - and
when, and who, will pay the taxes.
Current law provides that money received by a trust is deemed to
be in partial liquidation of an entity - and thus allocated to
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principal and the remainder beneficiaries - if either 1) the
distributing entity indicates that the distribution is in
partial liquidation, or 2) the total amount of money received by
all owners from a distribution or a series of related
distributions is greater than 20% of the entity's gross assets.
According to the author, these rules "can lead to inconsistent
and arguably unfair results."
The need for this bill is best exemplified, according to the
sponsor, by a 2007 case. In Hasso v. Hasso (2007) 148
Cal.App.4th 329, an entity distributed millions of dollars to a
trust and advised that the distribution represented return of
capital and that most of the distribution would result in
capital gains. However, this characterization did not
specifically mention that the distribution was the result of a
"partial liquidation." Thus, the appellate court concluded that
under the first test as to whether a distribution was in partial
liquidation, the distribution did not qualify as a partial
distribution. The appellate court then determined that the
entity's distribution to all owners was not more than 20% of its
gross assets. This was particularly true since the distributing
entity was very highly leveraged. Thus while the distribution
might represent more than 20% of the entity's net value, it was
not more than 20% of its gross value. As a result, the
distribution was treated as income and went entirely to the
income beneficiary and not the remainder beneficiaries.
While not changing the results in this case, this bill would
change the result in future cases in two ways. First, it would
loosen the language regarding what a business entity has to call
a distribution from the precise language of "partial
liquidation" to "a written statement made by the distributing
entity regarding the receipt." This would help ensure that even
if the exact words "partial liquidation" are not used, money can
still be characterized as that if it truly is. Second the bill
changes the standard from 20% of the entity's gross value to 10%
of the trust's net interest in the entity. The author and
sponsor believe that this new test better captures distributions
that constitute a return of the trust's underlying investment in
the business entity.
The bill also allows the trustee to rely on information actually
known to the trustee concerning characterization of a
distribution. While the trustee has no duty to investigate,
this provision allows the trustee to rely on actual knowledge in
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making the characterization. Since the trustee is a fiduciary,
the trustee retains his or her fiduciary duty to make reasonable
decisions for the trust beneficiaries and not to rely on
unreasonable information when making the characterization.
This bill specifically states that a trustee is not liable for
any claim of improper allocation between principal and interest
if the trustee, at the time of allocation, allocates a receipt
to principal in accordance with the terms of the bill, or
allocates a receipt to income because it is not determined to be
in partial liquidation under the bill. This provision
reasonably protects trustees who correctly follow the statutory
scheme.
Analysis Prepared by : Leora Gershenzon / JUD. / (916)
319-2334
FN: 0001103