BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 229 (Calderon)
As Amended January 4, 2010
Hearing Date: June 10, 2010
Fiscal: No
Urgency: No
TW:jd
SUBJECT
Uniform Principal and Income Act: Trust Administration: Income
and Payments
DESCRIPTION
This bill, sponsored by the California Bankers Association,
would clarify that, when a separate fund payer does not provide
the value of the internal income of the separate fund to the
trustee and the trustee cannot otherwise 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.
BACKGROUND
The Uniform Principal and Income Act of 1997, which prescribes
accounting rules regarding the net income of a trust, granted
powers to trustees to adjust between principal and income to the
extent the trustee considers necessary if the trustee invests
and manages trust assets. AB 846 (Ackerman, Chapter 145,
Statutes of 1999) updated California law bringing it into
conformity with the Uniform Principal and Income Act of 1997, as
suggested by the California Law Revision Commission (California
UPIA). One provision of the California UPIA authorizes a
trustee to make a qualified terminable interest property (QTIP)
election for a marital trust that is named as the beneficiary of
an individual retirement account (IRA). A trustee would make
this type of election to ensure that a trust receiving payments
from an investment plan qualifies for the marital tax deduction.
(more)
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One particular problem of the California UPIA was the 90
percent/10 percent allocation rule to distributions from
individual retirement plans and accounts. The rule provided
that, unless otherwise specified in the trust document, 90
percent of an IRA distribution was allocated to principal and 10
percent to income, which allocated much less to income than the
settlor of the trust presumably intended. AB 2347 (Harman,
Chapter 569, Statutes of 2006) remedied this problem by
adjusting the allocation between income and principal for
distributions received from individual retirement plans and
accounts when the trust is the beneficiary of the individual
account.
In 2006, another problem with IRA distribution rules under the
Uniform Principal and Income Act of 1997 was addressed. The
Internal Revenue Service clarified circumstances under which the
surviving spouse was considered to have a qualifying income
interest for life in an IRA where a marital trust is designated
as the IRA beneficiary for purposes of electing to have the IRA
treated as a QTIP. (See Rev. Rul. 2006-26.)
In order to prevent a challenge by the IRS regarding QTIP
elections for a marital trust that is named as the beneficiary
of an IRA, AB 1545 (Committee on Revenue and Taxation, Chapter
152, Statutes of 2009) was enacted. Among other things, AB 1545
prescribed methods for determining the value of the internal
income of a separate fund (i.e., IRA) when the separate fund
payer fails to provide such documentation.
This bill would further clarify the method by which a trustee
must determine the internal income value of the separate fund in
the event the separate fund payer does not provide the value in
order to qualify a trust for a marital tax deduction.
CHANGES TO EXISTING LAW
Existing federal law requires a trustee to pay the taxes on the
trust's share of taxable income from income or principal
receipts. (IRC Sec. 2001.)
Existing federal law provides for a marital tax deduction. (IRC
Sec. 2056.)
Existing state law governs the distribution of income,
principal, and interest under a trust and the allocation of
distributions to beneficiaries by a trustee or of payments
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received by a trust. (Prob. Code Sec. 16320 et seq.)
Existing state law provides that a "separate fund" includes a
private or commercial annuity, an individual retirement account,
and a pension, profit-sharing, stock bonus, or stock ownership
plan. (Prob. Code Sec. 16361(a)(2).)
Existing state law requires a trustee to determine the "internal
income" of each separate fund for the accounting period, as if
the separate fund were a trust subject to the California UPIA,
except as provided, and requires the trustee to allocate the
balance to the principal. (Prob. Code Sec. 16361(c).)
Existing state law provides for the allocation of a separate
fund payment to a trust qualifying for a marital deduction.
(Prob. Code Sec. 16361(d).)
Existing state law provides a method of determining the value of
the internal income of a separate fund in the event the separate
fund payer does not provide the internal income value of the
separate fund. (Prob. Code Sec. 16361 (g).)
This bill would clarify the existing provisions for determining
the value of a separate fund "payment" that is required to be
allocated to income for purposes of qualifying for a marital tax
deduction under federal tax law.
COMMENT
1. Stated need for the bill
The author writes:
This bill is intended to correct 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 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
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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.
The sponsor of this bill, the California Bankers Association,
states that banks often act as trustees for many trusts. This
bill would clarify the method for trustees to allocate funds
received from a separate fund when the value of the internal
income is not provided by the separate fund payer and the
trustee otherwise cannot determine the value. This
clarification is necessary so that trustees are not later
charged with tax liabilities for choosing the wrong method of
determining the internal income.
2. Clarification of statute to direct the trustee of the method
to determine the value of a separate fund
This bill would further clarify the method by which a trustee
must determine the internal income value of the separate fund in
the event the separate fund payer does not provide the value in
order to qualify a trust for a marital tax deduction. Probate
Code Section 16361 provides a method by which a trustee can
determine the value of a separate fund for purposes of
distributing a payment from the separate fund as follows:
(g) If the separate fund payer does not provide documentation
reflecting the internal income of the separate fund to the
trustee, but the trustee can determine the value of the
separate fund, the internal income of the separate fund is
deemed to equal 4 percent of the fund's value, according to
the most recent statement of value preceding the beginning of
the accounting period. If the separate fund payer does not
provide documentation reflecting the internal income of the
separate fund to the trustee, the internal income of the fund
is deemed to equal the product of the interest rate and the
present value of the expected future payments, as determined
under Section 7520 of the internal Revenue Code for the month
preceding the account period for which the computation is
made.
The first sentence of this subsection provides for the instance
when the separate fund payer does not provide documentation of
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the internal income value, but the trustee can determine the
value. The next sentence in this statute suggests a method by
which the trustee could determine the value of a separate fund
when the separate fund payer does not provide documentation of
the internal income value and the trustee cannot determine the
value. However, the text of this provision does not
specifically state this. This bill would add the necessary
language to clarify the second sentence of Probate Code Section
16361(g) so that a trustee has clear instruction that, in the
event the separate fund payer does not provide the value of the
internal income of the separate fund and the trustee cannot
otherwise determine the internal income value, the trustee will
add the interest rate to the present value of the expected
future payments to determine the internal income value of the
separate fund.
Support : None Known
Opposition : None Known
HISTORY
Source : California Bankers Association
Related Pending Legislation : None Known
Prior Legislation : See Background.
Prior Vote :
Committee on Revenue and Taxation (Ayes 8, Noes 0)
Assembly Floor (Ayes 71, Noes 0)
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