BILL ANALYSIS �
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THIRD READING
Bill No: AB 1172
Author: Bocanegra (D)
Amended: 6/17/14 in Senate
Vote: 21
SENATE GOVERNANCE & FINANCE COMMITTEE : 7-0, 6/25/14
AYES: Wolk, Knight, Beall, DeSaulnier, Hernandez, Liu, Walters
SENATE APPROPRIATIONS COMMITTEE : 6-0, 8/14/14
AYES: De Le�n, Gaines, Hill, Lara, Padilla, Steinberg
NO VOTE RECORDED: Walters
ASSEMBLY FLOOR : 73-0, 1/27/14 - See last page for vote
SUBJECT : Income taxes: charitable remainder trusts
SOURCE : Author
DIGEST : This bill provides that any Unrelated Business
Taxable Income (UBTI) generated by a charitable remainder trusts
(CRT) shall be subject to the personal income tax, and deletes
previous law that conformed to pre-2006 federal law that revoked
the CRT's tax-exempt status if it generated UBTI. This bill
takes effect in the 2014 taxable year.
ANALYSIS : California law does not automatically conform to
changes to federal tax law, except under specified
circumstances. Instead, the Legislature must affirmatively
conform to federal changes. Conformity legislation is
introduced either as individual tax bills to conform to specific
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federal changes, like the Regulated Investment Company
Modernization Act (AB 1423, Perea, Chapter 490, Statutes of
2011), or as one omnibus bill that provides that state law
conforms to federal law as of a specified date, currently
January 1, 2009 (SB 401, Wolk, Chapter 14, Statutes of 2010).
This bill provides that any UBTI generated by a CRT shall be
subject to the personal income tax, and deletes previous law
that conformed to pre-2006 federal law that revoked the CRT's
tax-exempt status if it generated UBTI. This bill takes effect
in the 2014 taxable year.
Background
CRTs are vehicles that enable taxpayers to avoid taxes while
benefitting charities. To create a CRT, taxpayers transfer
assets or cash to an irrevocable trust on behalf of specified
charitable beneficiaries, which can be changed if the trust so
provides. Taxpayers and any other designated beneficiary can
receive income from the trust within certain limits for a
specified period or until death, with any remainder transferred
to the charity or charities named in the trust agreement. The
charitable remainder must exceed 10% of the assets' value.
Generally, CRTs are either annuity trusts, where the trust pays
a fixed dollar amount each year of at least five percent of the
assets' value to the noncharity beneficiary, or a unitrust,
which must pay a fixed percentage of the assets' value each
year.
The tax benefits of creating a CRT are significant: first, the
taxpayer receives a charitable deduction against the income tax
in the year of the donation equal to the value of the assets,
less any income they allocate from the trust to themselves. The
taxpayer can carry over the deduction to future years. Second,
any appreciated assets donated to the trust are not subject to
capital gains taxes that will normally apply had the taxpayer
sold them. Third, any earnings or gains from the assets in the
trust are tax-exempt. Lastly, when the taxpayer transfers the
assets, they are no longer part of his or her estate, and
therefore not subject to estate taxes.
California largely conforms to federal law for CRTs, with one
notable exception. Occasionally, CRTs generate UBTI, which is
income derived from a trade or business not substantially
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related to its exempt purpose. For CRTs, UBTI is usually
derived from investments made in pass-through entities, such as
limited partnerships and limited liability companies, which
produce gains from debt-financed income-producing real estate or
hedge fund investments. This rule ensured that CRTs did not
have a competitive tax advantage over other taxable investment
vehicles by enabling them to generate UBTI tax-free.
Before 2006, any CRT generating UBTI lost its designation,
thereby revoking its tax-exempt status, all of its income in
that taxable year subject to tax, not just the UBTI. While the
CRT may deduct any distributions to beneficiaries required in
the trust agreement, CRTs that may have unknowingly generated
UBTI in previous taxable years face a considerable tax bill if
those tax liabilities are detected in audit. In response,
Congress enacted the Tax Relief and Health Care Act of 2006,
which provided that any UBTI generated by a CRT is subject to a
100% excise tax payable out of the CRT's principal, instead of
disqualification and taxing all the CRT's income less payouts.
California does not conform to this change, having specifically
excluded it as part of its last general conformity bill, SB 401
(Wolk, 2010).
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee, the Franchise
Tax Board (FTB) indicates that this bill results in estimated
revenue losses (General Fund) of $450,000 in 2014-15, $300,000
in 2015-16, and $300,000 in 2016-17. This bill will not
significantly impact FTB's administrative costs.
SUPPORT : (Verified 8/15/14)
California Banker Association
California Taxpayers Association
ARGUMENTS IN SUPPORT : According to the author, "Under current
law, a Charitable Remainder Trust (CRT) with Unrelated Business
Taxable Income (UBTI) is treated differently under the federal
and California tax laws. Under federal law, such a CRT is
subject to the 100% excise tax on its UBTI, but it retains its
tax-exempt status. The tax-exempt status means the trust's
other types of income will be exempted from the federal income
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tax. In contrast, under California law, which was the federal
law prior to 2007, the CRT will lose its tax-exempt status and
all of its income, including UBTI, will be subject to income tax
in California. AB 1172 is needed to conform California law to
the federal tax treatment of CRTs that have UBTI, in order to
allow such trusts to retain their tax-exempt status for
California tax purposes."
ASSEMBLY FLOOR : 73-0, 1/27/14
AYES: Achadjian, Alejo, Allen, Atkins, Bigelow, Bloom,
Bocanegra, Bonta, Bradford, Brown, Buchanan, Ian Calderon,
Campos, Chau, Ch�vez, Chesbro, Conway, Cooley, Dababneh,
Dahle, Daly, Dickinson, Donnelly, Eggman, Fong, Fox, Frazier,
Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell,
Gray, Grove, Hagman, Hall, Harkey, Roger Hern�ndez, Holden,
Jones, Jones-Sawyer, Levine, Linder, Lowenthal, Maienschein,
Mansoor, Medina, Melendez, Morrell, Mullin, Muratsuchi,
Nazarian, Olsen, Pan, Patterson, Perea, Quirk-Silva,
Ridley-Thomas, Rodriguez, Salas, Skinner, Stone, Ting, Wagner,
Waldron, Weber, Wieckowski, Wilk, Williams, Yamada, John A.
P�rez
NO VOTE RECORDED: Ammiano, Bonilla, Logue, Nestande, V. Manuel
P�rez, Quirk, Rendon
AB:d 8/16/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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