Bill Text

Bill Information

PDF |Add To My Favorites |Track Bill | print page

AB-307 Allocation of principal or income.(2017-2018)

SHARE THIS:share this bill in Facebookshare this bill in Twitter
Date Published: 06/19/2017 09:00 PM
AB307:v98#DOCUMENT

Amended  IN  Senate  June 19, 2017

CALIFORNIA LEGISLATURE— 2017–2018 REGULAR SESSION

Assembly Bill No. 307


Introduced by Assembly Member Maienschein

February 06, 2017


An act to amend repeal and add Section 16350 of the Probate Code, relating to estates and trusts.


LEGISLATIVE COUNSEL'S DIGEST


AB 307, as amended, Maienschein. Allocation of principal income: sale of capital asset. or income.
The Uniform Principal and Income Act, among other things, generally directs a trustee how to allocate money to beneficiaries of an estate or trust as either principal or income. The act requires that money received from certain types of business entities be allocated to income, but provides that money received in total or partial liquidation of one of these entities be allocated to principal. Money is received in partial liquidation to the extent the amount is attributable to the proceeds from the sale of a capital asset. The act defines the term “capital asset” based on the definition of the term in the Internal Revenue Code.

This bill would instead define the term “capital asset” as property with an estimated life of one year or greater, other than inventory.

The bill would delete these provisions and provide revised directions for how a trustee is required to allocate money to beneficiaries of an estate or trust as either principal or income. The directions would include, among others, how a trustee is to determine that a distribution is a return of capital that is allocated as principal.
Vote: MAJORITY   Appropriation: NO   Fiscal Committee: NO   Local Program: NO  

The people of the State of California do enact as follows:


SECTION 1.

 Section 16350 of the Probate Code is repealed.
16350.

(a)For the purposes of this section:

(1)“Entity” means 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.

(2)“Capital asset” means a capital asset as defined in Section 1221 of the Internal Revenue Code.

(b)Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.

(c)A trustee shall allocate to principal the following receipts from an entity:

(1)Property other than money.

(2)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.

(3)Money received in total liquidation of the entity or in partial liquidation of the entity, as defined in subdivision (d), except for 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.

(4)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. A capital gain dividend shall not include money received as a net short-term capital gain distribution from a regulated investment company or real estate investment trust.

(d)For purposes of paragraph (3) of subdivision (c), money shall 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. The following shall apply to determine whether money is received in partial liquidation:

(1)A trustee may rely without investigation on a written statement made by the distributing entity regarding the receipt.

(2)A trustee may rely without investigation on other information actually known by the trustee regarding whether the receipt 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.

(3)With regard to each receipt from a distributing entity, if within 30 days from the date of the receipt the distributing entity provides no written statement to the trustee that the receipt is a distribution attributable to the proceeds from a sale of a capital asset by the distributing entity or by the distributing entity’s subsidiary or affiliate and the trustee has no actual knowledge that the receipt is a distribution attributable to the proceeds from a sale of a capital asset by the distributing entity or by the distributing entity’s subsidiary or affiliate, then the following shall apply:

(A)The trustee shall have no duty to investigate whether the receipt from the distributing entity is in partial liquidation of the entity.

(B)If, on the date of receipt, the receipt from the distributing entity is in excess of 10 percent of the value of the trust’s interest in the distributing entity, then the receipt shall be deemed to be received in partial liquidation of the distributing entity, and the trustee shall allocate all of the receipt to principal. For purposes of this subparagraph, the value of the trust’s interest in the distributing entity shall be determined as follows:

(i)In the case of an interest that is a security regularly traded on a public exchange or market, the closing price of the security on the public exchange or market occurring on the last business day before the date of the receipt.

(ii)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 with a valuation date within three years of the date of the receipt. The trustee shall have no duty to investigate the existence of the appraisal or to obtain an appraisal nor shall the trustee have any liability for relying upon an appraisal prepared by a professional appraiser. The term “professional appraiser” shall refer to an appraiser who has earned an appraisal designation for valuing the type of property subject to the appraisal from a recognized professional appraiser organization.

(iii)If the trust’s interest in the distributing entity cannot be valued under clause (i) or clause (ii), 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.

(iv)If the trust’s interest in the distributing entity cannot be valued under clause (i), (ii), or (iii), the federal cost basis of the trust’s interest in the distributing entity on the date immediately before the date of the receipt.

(e)If a trustee allocates a receipt to principal in accordance with subdivision (d), or allocates a receipt to income because the receipt is not determined to be in partial liquidation under subdivision (d), the trustee shall 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.

(f)(1)Notwithstanding anything to the contrary in subdivision (d), 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 percent of the entity’s gross assets, but the amount received by the trustee did not exceed 20 percent of the entity’s gross assets.

(2)Money is not received in partial liquidation, nor may it be taken into account under subdivision (d), 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.

SEC. 2.

 Section 16350 is added to the Probate Code, to read:

16350.
 (a) As used in this section, “entity” shall 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 estate to which Section 16351 applies, a business or activities to which Section 16352 applies, or an asset-backed security to which Section 16367 applies.
(b) Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.
(c) A trustee shall allocate to principal the following receipts from an entity:
(1) Property other than money.
(2) 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.
(3) Money received in a distribution if and to the extent that the trustee determines that the distribution is a return of capital.
(4) 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.
(d) A trustee may determine that money is received as a return of capital if and to the extent that the money received exceeds the total amount of income tax that the beneficiaries must pay on their respective shares of the taxable income of the entity and the trust must pay from income under Article 4 (commencing with Section 16345), Article 5.1 (commencing with Section 16350), Article 5.2 (commencing with Section 16355), and Article 5.3 (commencing with Section 16360), inclusive, on its share of the taxable income of the entity. A trustee may determine that money which represents gain upon the sale or other disposition of property described in subdivision (e) is a return of capital.
(e) In determining if and to what extent a distribution is a return of capital, a trustee may rely upon and determine the weight to be given to any information concerning the source of the money from which the distribution is made which is reasonably available to the trustee, including, but not limited to, information concerning any of the following:
(1) The amount of the distribution in question compared to the amount of the entity’s regular, periodic distributions, if any, during the year in which the distribution is made and in prior years.
(2) If the primary activity of the entity is not an investment activity described in paragraph (3), the amount of money the entity has received from the conduct of its normal business activities compared to the amount of money the entity has received from all other sources, including, but not limited to, any of the following:
(A) The sale of all or part of a business conducted by the entity or by another entity in which it owns an interest, directly or indirectly, including, but not limited to, money representing any gain realized on such a sale.
(B) The sale of one or more business assets that are not sold to customers in the normal course of the entity’s business, including, but not limited to, money representing any gain realized on such a sale.
(C) The sale of one or more investment assets, including, but not limited to, money representing any gain realized on such a sale.
(3) If the primary activity of the entity is to invest funds in another entity or in investment property that the entity owns directly for the purpose of realizing gain on the disposition of all or a part of an investment, the amount of money that the entity has received from the sale of all or part of one or more of those investments, including, but not limited to, money representing any gain realized on a disposition.
(4) The amount of money the entity has accumulated, to the extent that the governing body of the entity has decided the money is no longer needed for the business or investment needs of the entity.
(5) The amount of income tax, if any, that each beneficiary has paid on the undistributed income of the entity before the year of the distribution and the amount of income tax on the undistributed income of the entity that the trust has paid from the income or principal of the trust.
(6) The amount of money the entity has borrowed, whether or not repayment of the loan is secured to any extent by one or more of the entity’s assets.
(7) The amount of money the entity has received from the sources described in Sections 16358, 16362, 16363, and 16364.
(8) The amount of money the entity has received from a source not described in this subdivision.
(f) If a trustee is in doubt about the portion of a distribution that is a return of capital, the trustee shall resolve the doubt by allocating to income the amount, if any, the trustee believes is clearly not a return of capital and by allocating the balance of the distribution to principal.
(g) A trustee may rely upon, without independent investigation, the financial statements of an entity and any other information provided by an entity about the character of a distribution or the source of funds from which the distribution is made if the information is provided at or near the time of distribution by the entity’s board of directors or other person or group of persons authorized to exercise powers to pay money or transfer property comparable to those of a corporation’s board of directors. The trustee is not bound by any statement made or implied by the entity about the extent to which a distribution is or is not a return of capital. If the trustee receives additional information about the distribution after the trustee has decided the amount that is a return of capital, the trustee is not required to change that decision.

SECTION 1.Section 16350 of the Probate Code is amended to read:
16350.

(a)For the purposes of this section:

(1)“Entity” means 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.

(2)“Capital asset” means property with an estimated life of one year or greater, other than inventory.

(b)Except as otherwise provided in this section, a trustee shall allocate to income money received from an entity.

(c)A trustee shall allocate to principal the following receipts from an entity:

(1)Property other than money.

(2)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.

(3)Money received in total liquidation of the entity or in partial liquidation of the entity, as defined in subdivision (d), except for 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.

(4)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. A capital gain dividend shall not include money received as a net short-term capital gain distribution from a regulated investment company or real estate investment trust.

(d)For purposes of paragraph (3) of subdivision (c), money shall 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. The following shall apply to determine whether money is received in partial liquidation:

(1)A trustee may rely without investigation on a written statement made by the distributing entity regarding the receipt.

(2)A trustee may rely without investigation on other information actually known by the trustee regarding whether the receipt 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.

(3)With regard to each receipt from a distributing entity, if within 30 days from the date of the receipt the distributing entity provides no written statement to the trustee that the receipt is a distribution attributable to the proceeds from a sale of a capital asset by the distributing entity or by the distributing entity’s subsidiary or affiliate and the trustee has no actual knowledge that the receipt is a distribution attributable to the proceeds from a sale of a capital asset by the distributing entity or by the distributing entity’s subsidiary or affiliate, then the following shall apply:

(A)The trustee shall have no duty to investigate whether the receipt from the distributing entity is in partial liquidation of the entity.

(B)If, on the date of receipt, the receipt from the distributing entity is in excess of 10 percent of the value of the trust’s interest in the distributing entity, then the receipt shall be deemed to be received in partial liquidation of the distributing entity, and the trustee shall allocate all of the receipt to principal. For purposes of this subparagraph, the value of the trust’s interest in the distributing entity shall be determined as follows:

(i)In the case of an interest that is a security regularly traded on a public exchange or market, the closing price of the security on the public exchange or market occurring on the last business day before the date of the receipt.

(ii)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 with a valuation date within three years of the date of the receipt. The trustee shall have no duty to investigate the existence of the appraisal or to obtain an appraisal nor shall the trustee have any liability for relying upon an appraisal prepared by a professional appraiser. The term “professional appraiser” shall refer to an appraiser who has earned an appraisal designation for valuing the type of property subject to the appraisal from a recognized professional appraiser organization.

(iii)If the trust’s interest in the distributing entity cannot be valued under clause (i) or clause (ii), 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.

(iv)If the trust’s interest in the distributing entity cannot be valued under clause (i), (ii), or (iii), the federal cost basis of the trust’s interest in the distributing entity on the date immediately before the date of the receipt.

(e)If a trustee allocates a receipt to principal in accordance with subdivision (d), or allocates a receipt to income because the receipt is not determined to be in partial liquidation under subdivision (d), the trustee shall 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.

(f)(1)Notwithstanding anything to the contrary in subdivision (d), 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 percent of the entity’s gross assets, but the amount received by the trustee did not exceed 20 percent of the entity’s gross assets.

(2)Money is not received in partial liquidation, nor may it be taken into account under subdivision (d), 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.