BILL ANALYSIS
AB 229
Page 1
Date of Hearing: January 11, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 229 (Charles Calderon) - As Amended: January 4, 2010
Majority vote.
SUBJECT : Uniform Principal and Income Act (UPIA): trust
administration: income and payments.
SUMMARY : Makes a clarifying change to the recently amended
provisions of the UPIA relating to a marital deduction for
retirement plans. Specifically, this bill specifies that, when
a "separate fund" makes a distribution to a trust (which
qualifies for, or has elected to qualify for, the federal
marital tax deduction) but does not provide documentation
reflecting the "internal income" of that fund to the trustee and
the trustee cannot determine the value of the "separate fund,"
the internal income of the "separate fund" is deemed to equal
the product of the interest rate and the present value of the
expected future payments.
EXISTING FEDERAL LAW :
1)Allows a marital deduction from a decedent's gross estate for
property passing to a surviving spouse by will or trust, or by
a qualified terminable interest property (QTIP) marital trust.
The marital deduction is unlimited in amount. [Internal
Revenue Code (IRC) Section 2056].
2)Specifies that, when an Individual Retirement Account (IRA) or
other retirement arrangement (a plan) is payable to a marital
deduction trust, the plan is a separate property interest that
itself must qualify for the marital deduction. (Internal
Revenue Service Revenue Ruling 2006-26).
3)Imposes graduated tax rates on the ordinary income of trusts
and estates. (IRC Section 1). Applies the same formula to
the taxation of estates and non-grantor trusts as the one
applicable to individuals.
EXISTING STATE LAW :
AB 229
Page 2
1)Requires a trust to be administered with due regard to the
respective interests of defined income beneficiaries and
defined remainder beneficiaries. Permits trustees to make
allocations of payments received by the trust between income
and principal, as necessary, to provide the income beneficiary
with an appropriate level of income.
2)Requires a trustee, in order to obtain an estate tax marital
deduction for a trust, to allocate a prescribed amount of a
"payment" to income, in accordance with certain requirements.
3)Defines the term "payment" as a payment that a trustee may
receive over a fixed number of years or during the life of one
or more individuals because of services rendered or property
transferred to the payer in exchange for future payments, or a
payment that a trustee may receive pursuant to an income tax
advantaged contractual, custodial, or trust arrangement.
4)Defines "payment" to include any payment made to a trust from
a "separate fund," regardless of the reason for that payment.
5)Defines a "separate fund" as a private or commercial annuity,
an individual retirement account, or a pension,
profit-sharing, stock bonus, or stock ownership plan.
6)Requires the trustee of a trust that qualifies for, or has
elected to qualify for, the marital tax deduction to allocate
the internal income of each separate fund for the accounting
period as if the separate fund were a trust subject to the
UPIA, and allocate the balance to the principal.
7)Specifies the methods for determining the amount of a
"payment" from a "separate fund" that is required to be
allocated to income for purposes of qualifying for a marital
tax deduction under federal tax law.
FISCAL EFFECT : Neither the Franchise Tax Board (FTB) nor the
State Controller's Office analyzed this bill so there is no
official revenue estimate but staff estimates no revenue impact
from this proposal.
COMMENTS :
AB 229
Page 3
1)Background. In 2009, the Legislature passed, and the Governor
signed into law, AB 1545 (Committee on Revenue and Taxation),
Chapter 152, Statutes of 2009, which enacted technical changes
to the California UPIA to bring it into compliance with the
IRS's Revenue Ruling 2006-26 to ensure that a trust that
receives payments from investment plans, including retirement
plans, qualifies for the federal marital tax deduction. Under
that ruling, the income of a retirement plan (which is called
a 'separate fund') must be determined as if the fund itself
were a marital trust.
Prior to 2009, the UPIA approach for allocating the payment
received by a trust from a separate fund did not necessarily
correspond to the fund's internal income and did not satisfy
the IRS' safe harbor. AB 1545 remedied the problem by
requiring that distributions from a separate fund to a trust
that qualifies for the marital deduction under IRC Section
2056 be allocated to income of the trust to the extent of the
fund's income, determined as if the fund were a separate
trust. Under existing law, if the fund has provided
documentation to the trustee reflecting the fund's "internal
income," the trustee must allocate the internal income of the
fund as if the fund were a trust subject to the UPIA. The
trustee will require a distribution of that "internal income"
to the trust if the surviving spouse so requests. The payment
from the fund would then be allocated to income to the extent
of the "internal income" of the fund and the balance would be
allocated to the principal. If, however, no documentation is
available, the trustee needs to decide whether or not he/she
can determine the value of the separate fund. If the trustee
can determine that value, then the "internal income" of the
fund will be deemed to equal 4% of the fund's value, according
to the most recent statement. In the case that the trustee
cannot determine the fund's value, then the "internal income "
of the fund will be deemed to equal the product of the
interest rate and the present value of the expected future
payments, as specified by IRC Section 7520. For a more
comprehensive discussion of these issues, please refer to our
analysis of AB 1545.
2)The Purpose of this Bill . This bill is intended to correct
the ambiguity in Probate Code Section 16361 (PC Section
16361), relating to a determination of the "internal income"
of a separate fund, as specified. As currently written,
subdivision (g) of PC Section 16361 prescribes two alternative
AB 229
Page 4
formulas for determining the "internal income" of the fund in
the absence of the necessary documentation. The language of
that subdivision specifies the circumstances under which the
first formula - 4% of the fund's value - must be used by the
trustee. Specifically, it is required to be used when the
documentation from the fund is not available but the trustee
can determine the value of the fund. However, subdivision (g)
is silent as to when the second formula - the product of the
interest rate and the present value of the expected future
payments - must be utilized. Subdivision (g) simply states
that the second formula must be used when the fund payer does
not provide the documentation reflecting the internal income
of the fund. To clarify the original intent of AB 1545, this
bill specifies that the second formula should be used when, in
the absence of the documentation, the trustee cannot determine
the value of the separate fund.
REGISTERED SUPPORT / OPPOSITION :
Support
California Bankers Association
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098