BILL ANALYSIS �
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|SENATE RULES COMMITTEE | AB 296|
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THIRD READING
Bill No: AB 296
Author: Wagner (R)
Amended: 6/15/14 in Senate
Vote: 27 - Urgency
SENATE JUDICIARY COMMITTEE : 7-0, 6/24/14
AYES: Jackson, Anderson, Corbett, Lara, Leno, Monning, Vidak
ASSEMBLY FLOOR : 73-0, 5/20/13 - See last page for vote
SUBJECT : Trusts
SOURCE : California Bankers Association
DIGEST : This bill provides that an allocation to principal of
money received in total or partial liquidation of an entity or
money received that is a capital gain dividend distribution, as
specified, does not include a net short-term capital gain
distribution from a regulated investment company or a real
estate investment trust. This bill also clarifies an ambiguity
in the Uniform Principal and Income Act (UPAIA).
ANALYSIS :
Existing law:
1.Establishes, under the UPAIA, 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.
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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.
4.Requires a trustee to allocate to principal the following
receipts from an entity:
A. Property other than money;
B. 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;
C. Money received in total liquidation of the entity or in
partial liquidation of the entity, as defined; and
D. 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.
1.Provides that, when determining whether money received was in
partial liquidation of the entity; the money will 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.
2.Prescribes guidelines to determine whether money is received
in partial liquidation.
3.Provides that the value of the trust's interest in the
distributing entity is determined as follows:
A. In the case of an interest that is a security regularly
traded on a public exchange or market, the closing price of
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the security on the public exchange or market occurring on
the last business day before the date of the receipt;
B. 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, if any, actually received by the trustee and
prepared by a professional appraiser, as defined, with a
valuation date within three years of the date of the
receipt; the trustee has no duty to investigate the
existence of the appraisal or to obtain an appraisal nor
does the trustee have any liability for relying upon an
appraisal prepared by a professional appraiser;
C. If the trust's interest in the distributing entity
cannot be valued, as specified above, the trust's
proportionate share of the distributing entity's net
assets, to be calculated as gross assets minus liabilities,
as shown in the distributing entity's yearend financial
statements immediately preceding the receipt; or
D. If the trust's interest in the distributing entity
cannot be valued, as specified above, 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, if a trustee allocates a receipt to principal
using the above guidelines, or allocates a receipt to income
because the receipt is not determined to be in partial
liquidation under the above guidelines, the trustee is 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.
2.Provides that, 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% of the entity's gross
assets, but the amount received by the trustee did not exceed
20% of the entity's gross assets.
3.Provides that money is not received in partial liquidation,
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nor may it be taken into account under the partial liquidation
guidelines, 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.
4.Defines "entity" to mean 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.
5.Defines "capital asset" to mean property held by a taxpayer
(whether or not connected with his/her 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.Clarifies that money received in total liquidation of the
entity or in partial liquidation of the entity does not
include money received from an entity that is a regulated
investment company or a real estate investment trust if the
money distributed is a net short-term capital gain
distribution.
2.Clarifies that 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 does not include money received
from an entity that is a regulated investment company or a
real estate investment trust if the money distributed is a net
short-term capital gain distribution.
Background
Upon recommendation of the California Law Revision Commission,
the Legislature adopted the new UPAIA in 1999 (AB 846, Ackerman,
Chapter 145). The UPAIA, together with the Uniform Prudent
Investor Act, reconstituted the manner by which trusts are
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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 between
principal and income beneficiaries.
Under the UPAIA, a trustee is required to allocate money
received from an entity 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 of the money determines the 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.
Existing law requires a trustee to allocate money received from
an entity to income, unless the money qualifies for a statutory
exception, in which case the trustee must allocate the money to
principal. Those exceptions include, among other things, money
received in total or partial liquidation of the entity. AB 1029
(Maienschein, Chapter 105, Statutes of 2013), among other
things, clarified how the characterization of money received
from a partial liquidation of an entity is to be determined and
allocated by the trustee.
However, an ambiguity now exists with respect to the
characterization of a net short-term capital gain distribution
from a mutual fund or a real estate investment trust (REIT),
which is allocable to income, but which may be incorrectly
characterized as principal if the trustee believes the money
qualifies as either money received in total liquidation of the
entity or in partial liquidation of the entity or as money
received from an entity that is a regulated investment company
(i.e., mutual fund) or an REIT if the money distributed is a
capital gain dividend for federal income tax purposes.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 6/26/14)
California Bankers Association (source)
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ARGUMENTS IN SUPPORT : According to the Senate Judiciary
Committee analysis of 6/24/14, the author notes that "of the 46
states and District of Columbia that have enacted the UPIA, only
Florida has changed the allocation rule for distributions to
require that such distributions be allocated to principal." As
a result, the failure to correct this ambiguity regarding a net
short-term capital gain distribution will result in California's
allocation rule to be inconsistent with the allocation rule of
all but one of the states that have enacted the UPIA. The
author also notes that, in most cases, a trust instrument will
require that the trust's net income be distributed to the income
beneficiaries, who have the expectation, based on the UPIA model
laws enacted by California, that these distributions will
continue to be allocated to income. As such, the author asserts
that "to now allocate distributions to principal and deny income
beneficiaries those funds will, in some cases, cause undue
hardship for the income beneficiaries."
ASSEMBLY FLOOR : 73-0, 5/20/13
AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Bigelow, Bloom,
Blumenfield, Bocanegra, Bonilla, Bonta, Bradford, Brown,
Buchanan, Ian Calderon, Campos, Chau, Ch�vez, Chesbro, Conway,
Cooley, Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox,
Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gordon, Gorell,
Grove, Hagman, Harkey, Roger Hern�ndez, Jones, Levine, Linder,
Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mitchell,
Morrell, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan,
Patterson, Perea, V. Manuel P�rez, Quirk, Quirk-Silva, Rendon,
Salas, Skinner, Stone, Ting, Wagner, Waldron, Weber,
Wieckowski, Wilk, Williams, Yamada, John A. P�rez
NO VOTE RECORDED: Gray, Hall, Holden, Jones-Sawyer, Logue,
Vacancy, Vacancy
AL:e 6/26/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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