BILL ANALYSIS �
AB 296
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 296 (Wagner)
As Amended June 15, 2014
2/3 vote. Urgency
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|ASSEMBLY: | |(May 20, 2013) |SENATE: |36-0 |(June 30, |
| | | | | |2014) |
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(vote not relevant)
Original Committee Reference: JUD.
SUMMARY : 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 (REIT).
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Clarify that money received in total or partial liquidation of
an entity, as defined, that a trustee is required to allocate
to principal does not include money received from an entity
that is a regulated investment company or a REIT if the money
distributed is a net short-term capital gain distribution.
2)Clarify that a trustee must allocate to principal money
received from an entity that is a regulated investment company
or a REIT if the money distributed is a capital gain dividend
for federal income tax purposes, but that does not include
money that is distributed as a net short-term capital gain
distribution.
EXISTING LAW :
1)Establishes, under the Uniform Principal and Income Act
(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.
2)Requires the trustee, when allocating receipts and
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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)Proscribes the specified guidelines to determine whether money
is received in partial liquidation. Provides that, when
determining whether money received was in partial liquidation
of an 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.
4)Provides that, if a trustee allocates a receipt to principal
using the specified 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.
5)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.
6)Provides that money is not received in partial liquidation,
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.
FISCAL EFFECT : None
COMMENTS : Upon recommendation of the California Law Revision
Commission (CLRC), the Legislature adopted the new Uniform
Principal and Income Act (UPAIA) in 1999 (AB 846 (Ackerman),
Chapter 145). 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
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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 that money determines who receives the
benefit of that money and when and who has to pay taxes on that
money. An allocation to income generally benefits the trust's
life beneficiaries, while an allocation to principal generally
benefits the remainder beneficiaries.
Current 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. Last
year's 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, the author argues that an ambiguity now exists with
respect to the characterization of a net short-term capital gain
distribution from a mutual fund or a 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. This bill clarifies that ambiguity
and provides that money received in total or partial liquidation
of an entity or money received that is a capital gain dividend,
as specified, does not include a net short-term capital gain
distribution.
A trustee is required to allocate money received from an entity
to income, unless the money falls under a specified exception.
For money received as a partial liquidation of an entity,
existing law requires the trustee to allocate the money to
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principal. Last year's clarification of partial liquidation
guidelines created an unintended ambiguity in the UPAIA about
whether a net short-term capital gain distribution received by
the trustee from a regulated investment company or REIT should
be allocated to principal or income. This bill clarifies that
the new partial liquidation guidelines do not apply to net
short-term capital gain distributions. Accordingly, these
distributions would be allocated to income.
The author notes that "of the 46 states and District of Columbia
that have enacted the UPAIA, 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 UPAIA. 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 UPAIA
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."
Analysis Prepared by : Leora Gershenzon / JUD. / (916)
319-2334
FN: 0004138