BILL ANALYSIS �
AB 296
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 296 (Wagner)
As Amended June 15, 2014
2/3 vote. Urgency
----------------------------------------------------------------------
|ASSEMBLY: | |(May 20, 2013) |SENATE: |36-0 |(June 30, 2014) |
----------------------------------------------------------------------
(vote not relevant)
------------------------------------------------------------------------
|COMMITTEE VOTE: |9-0 |(August 12, 2014) |RECOMMENDATION: |concur |
|(Jud.) | | | | |
------------------------------------------------------------------------
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, which is allocated to principal, does not include money
received from a regulated investment company or a REIT if the
money distributed is a net short-term capital gain distribution.
2)Clarify that money received from a regulated investment company
or a REIT, which is allocated to principal if the money
distributed is a capital gain dividend for federal income tax
purposes, does not include money distributed as a net short-term
capital gain distribution.
3)Add an urgency clause, allowing this bill to take effect
immediately upon enactment.
EXISTING LAW :
AB 296
Page 2
1)Establishes, through 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.
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 (such as a corporation, partnership, limited liability
company, trust or real estate investment trust) as specified.
4)Requires a trustee to allocate to principal specified receipts
from an entity.
5)Clarifies that money received by a trust from an entity 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. 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.
6)Provides that a trustee is not liable for an allocation between
principal and interest done in accordance with the stated
provisions.
FISCAL EFFECT : None
COMMENTS : California adopted the 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.
AB 296
Page 3
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. 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 who
will pay the taxes, and when.
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.
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,
AB 296
Page 4
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."
This bill is urgency legislation that will take effect immediately.
The author states that it is necessary to enact this bill this
year before trustees follow the new partial liquidation guidelines
and mistakenly allocate this year's net short-term capital gain
distributions to principal instead of income.
Analysis Prepared by : Leora Gershenzon / JUD. / (916) 319-2334
FN: 0004528