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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 307

Author:(Maienschein)

As Amended Ver:August 24, 2017

Majority vote

Original Committee Reference: JUD.

SUMMARY: Revises how receipts are allocated between income and principal for purposes of trust allocation under the Uniform Principal and Income Act (UPAIA). Specifically, this bill:

1. Provides that a trustee shall allocate to income money received from an entity, and shall allocate to principal specified receipts from an entity.
2. Provides that 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 and trust must pay, as provided.
3. Provide that 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;
   2. If the primary activity of the entity is not an investment activity, 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, as provided;
   3. If the primary activity of the entity is to invest funds in another entity or in investment property that the entity owns for the purpose of realizing gain, 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 entity's business or investment needs;
   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; and
   7. The amount of money the entity has received from sources, as provided.
4. Provides that if a trustee is in doubt about the portion of a distribution that is a return of capital, the trustee must resolve the doubt by allocating to income the amount, if any, the trustee determines is not a return of capital and by allocating the balance of the distribution to principal.
5. Provides that a trustee must consider and 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 authoritative group. Provides that 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.
6. Requires a trustee, if he or she receives additional information about a distribution before making a distribution, to consider the additional information received and may make an adjustment to the initial determination. If the trustee receives additional information after a distribution has been made, the trustee is not required to change his or her decision.
7. Requires a trustee, in exercising discretion under this bill, to comply with general fiduciary duties, as provided.

The Senate amendments eliminate the bright-line test to determine allocation between principal and interest and instead create discretionary factors that a trustee may consider in determining how to make the allocation.

EXISTING LAW:

1. Establishes, through the UPAIA, rules for the management by a trustee of assets held by the trust for the benefit of the trust beneficiaries. (Probate Code Section 16320 et seq. Unless stated otherwise, all further statutory references are to that code.)
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. (Section 16335.)
3. Defines "capital asset" as defined by Section 1221 of the Internal Revenue Code, which in turn defines capital asset as property held by a taxpayer, but does not include, among other things, inventory, property subject to depreciation, a copyright, accounts or notes receivable acquired in the ordinary course of business, commodities, or supplies of a type regularly used in the ordinary course of business. (Section 16350(a)(2); 26 United States Code Section 1221.)
4. 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. (Section 16350(b).)
5. Requires a trustee to allocate to principal specified receipts from an entity. (Section 106350(c).)
6. 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 a trustee, in determining whether money is received in partial liquidation, 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. (Section 16350(d).)
7. Provides that a trustee is not liable for an allocation between principal and interest done in accordance with the stated provisions. (Section 16350(e).)

FISCAL EFFECT: None

COMMENTS: This bill marks the third time in the last five years when either the Trusts & Estates Section of the State Bar or the California Bankers Association have sought to clarify the law regarding the characterization of assets as either income or principal when the items held in trust are partially or totally liquidated. This bill eliminates a bright-line rule and instead provides discretionary factors that a trustee may consider in determining how to make the allocation.

The author states that "this legislative proposal is aimed at correcting an unintended drafting oversight in section 16350 resulting from the incorporation of the Federal tax code’s definition of 'capital asset.' Section 1221(a)(2) of the Internal Revenue Code expressly excludes depreciable property, such as real estate used in a trade or business. This omission at least when applied to Section 16350 was unintended. Many entities, such as limited partnerships or limited liability companies, hold depreciable real estate. Were real property to be sold inside an entity and the proceeds distributed to the trust, the receipt of such amounts should be allocated to principal just as it would were the real property owned directly by the trust. The proposed amendment corrects this deficiency . . . .'"

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.

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 of the trust, and principal to the remainder beneficiaries – and who will pay the taxes.

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. In 2013, 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. As a result of concerns over the drafting of that characterization, AB 296 (Wagner), Chapter 867, Statutes of 2014, revised on an urgency basis the characterization with respect to certain short-term capital gain distributions.

This bill represents yet another effort to ensure that money received from a total or partial liquidation of an asset is properly characterized as either income or principal. Currently, distributions from a business entity are considered income, unless an exception applies. This bill eliminates the bright-line test to determine allocation between principal and interest and instead creates discretionary factors that a trustee may consider in determining how to make the allocation.

Analysis Prepared by: Leora Gershenzon / JUD. / (916) 319-2334 FN: 0001515

 THIRD READING 

Bill No: AB 307

Author:

Amended: 8/24/17 in Senate

Vote:

SENATE JUDICIARY COMMITTEE: 7-0, 7/18/17

AYES: Jackson, Moorlach, Anderson, Hertzberg, Monning, Stern, Wieckowski

ASSEMBLY FLOOR: 76-0, 3/20/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: The Trusts and Estates Section of the State Bar of California

DIGEST:

This bill provides revised directions for how a trustee is required to allocate money to beneficiaries of an estate or trust as either principal or income. Provides that the directions include, among others, how a trustee is to determine that a distribution is a return of capital that is allocated as principal.

Senate Floor Amendments of 8/24/17 provide a trustee with additional guidance as to the decision a trustee shall make when additional information is received and the trustee has already determined whether or not the amount is a return of capital. Specifically, a trustee shall now consider the additional information and make an adjustment to their determination if the trustee has not yet made a distribution to a trust beneficiary of any portion of that distribution from the entity at issue.

ANALYSIS:

Existing law:

1. Establishes, pursuant to 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. (Prob. Code Sec. 16320 et seq.)
2. Defines “capital asset” as defined by Section 1221 of the Internal Revenue Code, which, in turn, defines “capital asset” as property held by a taxpayer, but does not include, among other things, inventory, property subject to depreciation, a copyright, accounts or notes receivable. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)
3. Requires a trustee to allocate to income money received from an entity. (Prob. Code Sec. 16350(b).)
4. Requires a trustee to 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; and
   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. (Prob. Code Sec. 16350(c).)
5. 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. (Prob. Code Sec. 16350(d).)
6. 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 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. (Prob. Code Sec. 106350(e).)
7. 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 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. (Prob. Code Sec. 106350(f)(1).)
8. 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. (Prob. Code Sec. 106350(f)(2).)
9. 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, a business or activity, or an asset-backed security. (Prob. Code Sec. 16350(a)(1).)
10. Defines “capital asset” to mean property held by a taxpayer (whether or not connected with his or 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. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)

This bill:

1. Defines “entity” as meaning 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, business or activities, or an asset-backed security, as specified.
2. Provides that a trustee shall allocate to income money received from an entity, and 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, as provided; or
   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.
3. Provides that 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 on its share of taxable income of the entity, as provided.
4. Provides that a trustee may determine that money which represents gain upon the sale or other disposition of property, as provided, is a return of capital.
5. Provides that 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, 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:
      1. 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;
      2. 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; or
      3. 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; and
   7. the amount of money the entity has received from sources, as provided.
6. Provides that if a trustee is in doubt about the portion of a distribution that is a return of capital, the trustee must 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.
7. Provides that 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.
8. Provides that 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 determined whether or not the amount is a return of capital, the trustee:
   1. shall consider the additional information received about the distribution and may make an adjustment to their decision if the trustee has not yet made a distribution to a trust beneficiary of any portion of that distribution from the entity for which the trustee has made the determination of whether the amount is a return of capital; or
   2. if the trustee has made a distribution to a trust beneficiary of any portion of that distribution from the entity for which the trustee has made the determination of whether the amount is a return of capital, the trustee is not required to change that decision.

Comments

Purpose of this bill. AB 307 seeks to amend the Uniform Principal and Income Act by replacing the current approach for characterizing receipts from entities which relies on rigid definitions that yield unintended consequences to a multi-factor test that provides guidance to trustees in the exercise of their judgment on whether a receipt from an entity is in fact a return of capital.

Clarification of the UPAIA. In 1999, the Legislature adopted the new UPAIA (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 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 as 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, and when and how much.

This bill represents the third time in the past five years clarification was sought to the UPAIA through additional legislation. 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. AB 296 (Wagner, Chapter 687, Statutes of 2014) clarified that ambiguity and provided 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. As this bill was originally introduced, The Executive Committee of the Trusts and Estates Section of the State Bar (TEXCOM) was seeking to clarify the meaning of “capital asset.” Specifically, they were seeking to move away from the definition of the term in the Internal Revenue Code, which is what is currently provided for under existing law. After further consideration, the bill was amended to instead recast how a trustee is to determine whether a distribution is a return of capital that is allocated as principal. Specifically, it provides a series of considerations for a trustee to weigh when considering how to allocate receipts from an entity as between trust income or principal.

TEXCOM writes the following regarding these changes:

In place of this definitional scheme the bill substitutes a multi-factor test that provides guidance to trustees in their efforts to determine whether a receipt from an entity is a return of capital. The shift to a statutory scheme that provides guiding factors without constraining a trustee’s judgment by rigid definitions, and at the same time leaving the trustee accountable for the exercise of their judgment, is believed to be the approach that is likely to effectuate the intent and yield desired outcomes for this aspect of the Principal and Income Act.

In support, the California Bankers Association writes:

This measure is important in correcting a deficiency in the current law definition of “capital asset” which has created confusion for what is considered principal or income. This deficiency results in allocations that may ultimately be inconsistent with the intent of those establishing the trust. Instead, this measure offers discretion to the trustee while simultaneously providing greater clarity and direction when determining the nature of a distribution.

Accordingly, this bill moves away from the definitions provided in the UPAIA and instead allows a trustee to make the determination whether capital is income or principal based on a series of considerations. This allows the trustee to ensure their decisions better align with the intent of the trust.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 7/20/17)

The Trusts and Estates Section of the State Bar of California (source)

California Bankers Association

OPPOSITION: (Verified 7/20/17)

None received

ASSEMBLY FLOOR: 76-0, 3/20/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Irwin, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Dahle, Holden, Jones-Sawyer, Ridley-Thomas

Prepared by:

8/29/17 10:29:26

**** END ****

 THIRD READING 

Bill No: AB 307

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 7-0, 7/18/17

AYES: Jackson, Moorlach, Anderson, Hertzberg, Monning, Stern, Wieckowski

ASSEMBLY FLOOR: 76-0, 3/20/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: The Trusts and Estates Section of the State Bar of California

DIGEST:

This bill provides revised directions for how a trustee is required to allocate money to beneficiaries of an estate or trust as either principal or income. Provides that the directions include, among others, how a trustee is to determine that a distribution is a return of capital that is allocated as principal.

ANALYSIS:

Existing law:

1. Establishes, pursuant to 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. (Prob. Code Sec. 16320 et seq.)
2. Defines “capital asset” as defined by Section 1221 of the Internal Revenue Code, which, in turn, defines “capital asset” as property held by a taxpayer, but does not include, among other things, inventory, property subject to depreciation, a copyright, accounts or notes receivable. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)
3. Requires a trustee to allocate to income money received from an entity. (Prob. Code Sec. 16350(b).)
4. Requires a trustee to 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; and
   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. (Prob. Code Sec. 16350(c).)
5. 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. (Prob. Code Sec. 16350(d).)
6. 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 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. (Prob. Code Sec. 106350(e).)
7. 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 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. (Prob. Code Sec. 106350(f)(1).)
8. 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. (Prob. Code Sec. 106350(f)(2).)
9. 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, a business or activity, or an asset-backed security. (Prob. Code Sec. 16350(a)(1).)
10. Defines “capital asset” to mean property held by a taxpayer (whether or not connected with his or 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. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)

This bill:

1. Defines “entity” as meaning 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, business or activities, or an asset-backed security, as specified.
2. Provides that a trustee shall allocate to income money received from an entity, and 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, as provided; or
   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.
3. Provides that 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 on its share of taxable income of the entity, as provided.
4. Provides that a trustee may determine that money which represents gain upon the sale or other disposition of property, as provided, is a return of capital.
5. Provides that 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, 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:
      1. 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;
      2. 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; or
      3. 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; and
   7. the amount of money the entity has received from sources, as provided.
6. Provides that if a trustee is in doubt about the portion of a distribution that is a return of capital, the trustee must 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.
7. Provides that 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.
8. Provides that 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 determined whether or not the amount is a return of capital, the trustee is not required to change their decision.

Comments

Purpose of this bill. AB 307 seeks to amend the Uniform Principal and Income Act by replacing the current approach for characterizing receipts from entities which relies on rigid definitions that yield unintended consequences to a multi-factor test that provides guidance to trustees in the exercise of their judgment on whether a receipt from an entity is in fact a return of capital.

Clarification of the UPAIA. In 1999, the Legislature adopted the new UPAIA (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 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 as 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, and when and how much.

This bill represents the third time in the past five years clarification was sought to the UPAIA through additional legislation. 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. AB 296 (Wagner, Chapter 687, Statutes of 2014) clarified that ambiguity and provided 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. As this bill was originally introduced, The Executive Committee of the Trusts and Estates Section of the State Bar (TEXCOM) was seeking to clarify the meaning of “capital asset.” Specifically, they were seeking to move away from the definition of the term in the Internal Revenue Code, which is what is currently provided for under existing law. After further consideration, the bill was amended to instead recast how a trustee is to determine whether a distribution is a return of capital that is allocated as principal. Specifically, it provides a series of considerations for a trustee to weigh when considering how to allocate receipts from an entity as between trust income or principal.

TEXCOM writes the following regarding these changes:

In short, this legislative proposal is aimed at correcting an unintended drafting oversight in section 16350 resulting from the incorporation of the Federal tax code’s definition of “capital asset.” Section 1221(a)(2) of the Internal Revenue Code expressly excludes depreciable property, such as real estate used in a trade or business. This omission at least when applied to Section 16350 was unintended. Many entities, such as limited partnerships or limited liability companies, hold depreciable real estate. Were real property to be sold inside an entity and the proceeds distributed to the trust, the receipt of such amounts should be allocated to principal just as it would were the real property owned directly by the trust. The proposed amendment corrects this deficiency by shifting away from rigid definitions of “partial liquidation” and “capital asset” which are inflexible and which in their current form yield unintended and improper outcomes. In place of this definitional scheme the bill substitutes a multi-factor test that provides guidance to trustees in their efforts to determine whether a receipt from an entity is a return of capital. The shift to a statutory scheme that provides guiding factors without constraining a trustee’s judgment by rigid definitions, and at the same time leaving the trustee accountable for the exercise of their judgment, is believed to be the approach that is likely to effectuate the intent and yield desired outcomes for this aspect of the Principal and Income Act.

In support, the California Bankers Association writes:

This measure is important in correcting a deficiency in the current law definition of “capital asset” which has created confusion for what is considered principal or income. This deficiency results in allocations that may ultimately be inconsistent with the intent of those establishing the trust. Instead, this measure offers discretion to the trustee while simultaneously providing greater clarity and direction when determining the nature of a distribution.

Accordingly, this bill moves away from the definitions provided in the UPAIA and instead allows a trustee to make the determination whether capital is income or principal based on a series of considerations. This allows the trustee to ensure their decisions better align with the intent of the trust.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 7/20/17)

The Trusts and Estates Section of the State Bar of California (source)

California Bankers Association

OPPOSITION: (Verified 7/20/17)

None received

ASSEMBLY FLOOR: 76-0, 3/20/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Irwin, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Dahle, Holden, Jones-Sawyer, Ridley-Thomas

Prepared by:

8/23/17 9:34:11

**** END ****

 CONSENT  

Bill No: AB 307

Author:

:

Vote:

SENATE JUDICIARY COMMITTEE: 7-0, 7/18/17

AYES: Jackson, Moorlach, Anderson, Hertzberg, Monning, Stern, Wieckowski

ASSEMBLY FLOOR: 76-0, 3/20/17 (Consent) - See last page for vote

SUBJECT:

SOURCE: The Trusts and Estates Section of the State Bar of California

DIGEST:

This bill provides revised directions for how a trustee is required to allocate money to beneficiaries of an estate or trust as either principal or income. Provides that the directions include, among others, how a trustee is to determine that a distribution is a return of capital that is allocated as principal.

ANALYSIS:

Existing law:

1. Establishes, pursuant to 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. (Prob. Code Sec. 16320 et seq.)
2. Defines “capital asset” as defined by Section 1221 of the Internal Revenue Code, which, in turn, defines “capital asset” as property held by a taxpayer, but does not include, among other things, inventory, property subject to depreciation, a copyright, accounts or notes receivable. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)
3. Requires a trustee to allocate to income money received from an entity. (Prob. Code Sec. 16350(b).)
4. Requires a trustee to 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; and
   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. (Prob. Code Sec. 16350(c).)
5. 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. (Prob. Code Sec. 16350(d).)
6. 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 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. (Prob. Code Sec. 106350(e).)
7. 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 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. (Prob. Code Sec. 106350(f)(1).)
8. 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. (Prob. Code Sec. 106350(f)(2).)
9. 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, a business or activity, or an asset-backed security. (Prob. Code Sec. 16350(a)(1).)
10. Defines “capital asset” to mean property held by a taxpayer (whether or not connected with his or 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. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)

This bill:

1. Defines “entity” as meaning 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, business or activities, or an asset-backed security, as specified.
2. Provides that a trustee shall allocate to income money received from an entity, and 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, as provided; or
   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.
3. Provides that 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 on its share of taxable income of the entity, as provided.
4. Provides that a trustee may determine that money which represents gain upon the sale or other disposition of property, as provided, is a return of capital.
5. Provides that 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, 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:
      1. 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;
      2. 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; or
      3. 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; and
   7. the amount of money the entity has received from sources, as provided.
6. Provides that if a trustee is in doubt about the portion of a distribution that is a return of capital, the trustee must 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.
7. Provides that 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.
8. Provides that 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 determined whether or not the amount is a return of capital, the trustee is not required to change their decision.

Comments

Purpose of this bill. AB 307 seeks to amend the Uniform Principal and Income Act by replacing the current approach for characterizing receipts from entities which relies on rigid definitions that yield unintended consequences to a multi-factor test that provides guidance to trustees in the exercise of their judgment on whether a receipt from an entity is in fact a return of capital.

Clarification of the UPAIA. In 1999, the Legislature adopted the new UPAIA (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 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 as 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, and when and how much.

This bill represents the third time in the past five years clarification was sought to the UPAIA through additional legislation. 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. AB 296 (Wagner, Chapter 687, Statutes of 2014) clarified that ambiguity and provided 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. As this bill was originally introduced, The Executive Committee of the Trusts and Estates Section of the State Bar (TEXCOM) was seeking to clarify the meaning of “capital asset.” Specifically, they were seeking to move away from the definition of the term in the Internal Revenue Code, which is what is currently provided for under existing law. After further consideration, the bill was amended to instead recast how a trustee is to determine whether a distribution is a return of capital that is allocated as principal. Specifically, it provides a series of considerations for a trustee to weigh when considering how to allocate receipts from an entity as between trust income or principal.

TEXCOM writes the following regarding these changes:

In short, this legislative proposal is aimed at correcting an unintended drafting oversight in section 16350 resulting from the incorporation of the Federal tax code’s definition of “capital asset.” Section 1221(a)(2) of the Internal Revenue Code expressly excludes depreciable property, such as real estate used in a trade or business. This omission at least when applied to Section 16350 was unintended. Many entities, such as limited partnerships or limited liability companies, hold depreciable real estate. Were real property to be sold inside an entity and the proceeds distributed to the trust, the receipt of such amounts should be allocated to principal just as it would were the real property owned directly by the trust. The proposed amendment corrects this deficiency by shifting away from rigid definitions of “partial liquidation” and “capital asset” which are inflexible and which in their current form yield unintended and improper outcomes. In place of this definitional scheme the bill substitutes a multi-factor test that provides guidance to trustees in their efforts to determine whether a receipt from an entity is a return of capital. The shift to a statutory scheme that provides guiding factors without constraining a trustee’s judgment by rigid definitions, and at the same time leaving the trustee accountable for the exercise of their judgment, is believed to be the approach that is likely to effectuate the intent and yield desired outcomes for this aspect of the Principal and Income Act.

In support, the California Bankers Association writes:

This measure is important in correcting a deficiency in the current law definition of “capital asset” which has created confusion for what is considered principal or income. This deficiency results in allocations that may ultimately be inconsistent with the intent of those establishing the trust. Instead, this measure offers discretion to the trustee while simultaneously providing greater clarity and direction when determining the nature of a distribution.

Accordingly, this bill moves away from the definitions provided in the UPAIA and instead allows a trustee to make the determination whether capital is income or principal based on a series of considerations. This allows the trustee to ensure their decisions better align with the intent of the trust.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

SUPPORT: (Verified 7/20/17)

The Trusts and Estates Section of the State Bar of California (source)

California Bankers Association

OPPOSITION: (Verified 7/20/17)

None received

ASSEMBLY FLOOR: 76-0, 3/20/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gomez, Gonzalez Fletcher, Gray, Grayson, Harper, Irwin, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: Dahle, Holden, Jones-Sawyer, Ridley-Thomas

Prepared by: Marisa Shea / JUD. / (916) 651-4113

8/17/17 11:22:08

**** END ****

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2017-2018 Regular Session

Bill No: AB 307 (Author:Maienschein)

Version: July 10, 2017

Hearing Date: July 18, 2017

Fiscal: No

Urgency: No

Consultant: MS

SUBJECT

Allocation of principal or income.

DESCRIPTION

Existing law, the Uniform Principal and Income Act, generally directs trustees regarding 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 as 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 Internal Revenue Code’s definition.

This 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.

BACKGROUND

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, Ch. 145, Stats. 1999). 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 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 as 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, Ch. 105, Stats. 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.

In 2014, AB 296 (Wagner, Ch. 687, Stats. 2014) clarified yet another ambiguity resulting from the adoption of the UPAIA. The ambiguity was said to exist 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. AB 296 clarified that ambiguity and provided 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.

Now, this bill would remove the existing provisions found in Probate Code Section 16350, and instead 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 Executive Committee of the Trusts and Estates Section of the State Bar (TEXCOM) is again seeking these modifications, this time based upon a Nevada Statute. It seems that despite the efforts made in AB 1029 and AB 296, TEXCOM feels this Nevada statute presents a better model than the current reliance on the UPAIA.

Specifically, this bill would repeal, revise, and recast Section 16350 of the Probate Code, providing new directions for how a trustee is required to allocate money to beneficiaries of an estate or trust as either principal or income.

CHANGES TO EXISTING LAW

Existing law, the Uniform Principal and Income Act (UPAIA), establishes 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. (Prob. Code Sec. 16320 et seq.)

Existing law 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. (Prob. Code Sec. 16335.)

Existing law defines “capital asset” as defined by Section 1221 of the Internal Revenue Code, which in turn defines capital asset as property held by a taxpayer, but does not include, among other things, inventory, property subject to depreciation, a copyright, accounts or notes receivable. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)

Existing law requires a trustee to allocate to income money received from an entity. (Prob. Code Sec. 16350(b).)

Existing law requires a trustee to allocate to principal the following receipts from an entity:

• property other than money;
• 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;
• money received in total liquidation of the entity or in partial liquidation of the entity, as defined; and
• 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. (Prob. Code Sec. 16350(c).)

Existing law 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. (Prob. Code Sec. 16350(d).)

Existing law proscribes the following guidelines to determine whether money is received in partial liquidation:

• a trustee may rely without investigation on a written statement made by the distributing entity regarding the receipt;
• 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;
• 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 apply:
  • the trustee has no duty to investigate whether the receipt from the distributing entity is in partial liquidation of the entity; and
  • 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 is deemed to be received in partial liquidation of the distributing entity, and the trustee is required to allocate all of the receipt to principal. (Prob. Code Sec. 106350(d).)

Existing law provides that the value of the trust’s interest in the distributing entity is determined as follows:

• 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;
• 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;
• 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 year-end financial statements immediately preceding the receipt; or
• 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. (Prob. Code Sec. 106350(d)(3)(B).)

Existing law 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 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. (Prob. Code Sec. 106350(e).)

Existing law 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 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. (Prob. Code Sec. 106350(f)(1).)

Existing law also 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. (Prob. Code Sec. 106350(f)(2).)

Existing law 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, a business or activity, or an asset-backed security. (Prob. Code Sec. 16350(a)(1).)

Existing law defines “capital asset” to mean property held by a taxpayer (whether or not connected with his or 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. (Prob. Code Sec. 16350(a)(2); 26 U.S.C. Sec. 1221.)

This bill would define “entity” as meaning 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, business or activities, or an asset-backed security, as specified.

This bill would provide that a trustee shall allocate to income money received from an entity, and shall allocate to principal the following receipts from an entity:

• property other than money;
• 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;
• money received in a distribution if and to the extent that the trustee determines that the distribution is a return of capital, as provided; or
• 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.

This bill would provide that 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 on its share of taxable income of the entity, as provided.

This bill would provide that a trustee may determine that money which represents gain upon the sale or other disposition of property, as provided, is a return of capital.

This bill would provide that 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:

• 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;
• if the primary activity of the entity is not an investment activity, 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:
  • 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;
  • 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; or
  • the sale of one or more investment assets, including, but not limited to, money representing any gain realized on such a sale;
• 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;
• 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;
• 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;
• 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; and
• the amount of money the entity has received from sources, as provided.

This bill would provide that if a trustee is in doubt about the portion of a distribution that is a return of capital, the trustee must 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.

This bill would provide that 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.

This bill would provide that 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 determined whether or not the amount is a return of capital, the trustee is not required to change their decision.

COMMENT

1. Stated need for this bill

According to the Author:

AB 307 seeks to amend the Uniform Principal and Income Act by replacing the current approach for characterizing receipts from entities which relies on rigid definitions that yield unintended consequences to a multi-factor test that provides guidance to trustees in the exercise of their judgment on whether a receipt from an entity is in fact a return of capital.

1. Clarification of the Uniform Principal and Income Act

In 1999, the Legislature adopted the new Uniform Principal and Income Act (UPAIA) (AB 846 (Ackerman, Ch. 145, Stats. 1999)). 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 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 as 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, and when and how much.

This bill represents that third time in the past five years clarification was sought to the UPAIA through additional legislation. AB 1029 (Maienschein, Ch. 105, Stats. 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. AB 296 (Wagner, Ch. 687, Stats. 2014) clarified that ambiguity and provided 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. As this bill was originally introduced, TEXCOM was seeking to clarify the meaning of “capital asset.” Specifically, they were seeking to move away from the definition of the term in the Internal Revenue Code, which is what is currently provided for under existing law. After further consideration, the bill was amended to instead recast how a trustee is to determine whether a distribution is a return of capital that is allocated as principal. Specifically, it would provide a series of considerations for a trustee to weigh when considering how to allocate receipts from an entity as between trust income or principal.

TEXCOM writes the following regarding these changes:

In short, this legislative proposal is aimed at correcting an unintended drafting oversight in section 16350 resulting from the incorporation of the Federal tax code’s definition of “capital asset.” Section 1221(a)(2) of the Internal Revenue Code expressly excludes depreciable property, such as real estate used in a trade or business. This omission at least when applied to Section 16350 was unintended. Many entities, such as limited partnerships or limited liability companies, hold depreciable real estate. Were real property to be sold inside an entity and the proceeds distributed to the trust, the receipt of such amounts should be allocated to principal just as it would were the real property owned directly by the trust. The proposed amendment corrects this deficiency by shifting away from rigid definitions of “partial liquidation” and “capital asset” which are inflexible and which in their current form yield unintended and improper outcomes. In place of this definitional scheme the bill substitutes a multi-factor test that provides guidance to trustees in their efforts to determine whether a receipt from an entity is a return of capital. The shift to a statutory scheme that provides guiding factors without constraining a trustee’s judgment by rigid definitions, and at the same time leaving the trustee accountable for the exercise of their judgment, is believed to be the approach that is likely to effectuate the intent and yield desired outcomes for this aspect of the Principal and Income Act.

Under the current version of section 16350, distributions in partial liquidation are defined as amounts that are “attributable to the proceeds from a sale by the distributing entity . . . of a capital asset.” Probate Code sec. 16350(d). In section 16350(a)(2) “capital asset” is defined as a “capital asset as defined in Section 1221 of the Internal Revenue Code.” While this use of the Internal Revenue Code definition is sufficient for certain transactions, the use of this definition effectively incorporated a significant and unintended exception. Under Section 1221(a)(2) of the Internal Revenue Code “capital asset” does not include “property, used in this trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business.”

Many individuals and trusts are owners or co-owners of entities, such as limited partnerships and limited liability companies that hold depreciable real property. Ownership by an entity is deemed preferable because the entity provides centralized management, limited liability to the owners, and control over transfer of interests. The owners do not intend the “capital” within a limited partnership or limited liability company – specifically, real property - to be deemed “income” when the property is sold and the proceeds distributable from a tax perspective. If the trust or the individual owned the real property, the receipt of proceeds from sale of real property would be considered principal. The fact that a limited partnership or limited liability company owns the real property should not convert an asset held as principal into income in the event there is a liquidation of the interest. The use of section 1221 of the Internal Revenue Code as a definition of “capital asset” unfortunately incorporates a carve out that in many cases swallows the rule and is not consistent with the ordinary intention and understanding of trustors who establish trusts. This bill improves the law by moving away from the current rigid definitions of capital asset and partial liquidation, which fails to accomplish the outcome intended when the statute was previously amended. The current version of the bill instead provides the trustee of a trust with multiple factors to consider in determining whether a distribution constitutes return of capital.

In support, the California Bankers Association writes:

This measure is important in correcting a deficiency in the current law definition of “capital asset” which has created confusion for what is considered principal or income. This deficiency results in allocations that may ultimately be inconsistent with the intent of those establishing the trust. Instead, this measure offers discretion to the trustee while simultaneously providing greater clarity and direction when determining the nature of a distribution.

Accordingly, this bill moves away from the definitions provided in the UPAIA and instead allows a trustee to make the determination whether capital is income or principal based on a series of considerations. This allows the trustee to ensure their decisions better align with the intent of the trust.

Support: California Bankers Association

Opposition: None Known

HISTORY

Source: The Trusts and Estates Section of the State Bar of California

Related Pending Legislation: None Known

Prior Legislation:

AB 296 (Wagner Ch. 687, Stats. 2014) See Background.

AB 1029 (Maienschein, Ch. 105, Stats. 2013) See Background.

SB 296 (Campbell, Ch. 51, Stats. 2005) clarified that money is received in partial liquidation if the total amount of money and property received by all owners, collectively, in a distribution or series of related distributions is greater than 20 percent of the entity’s gross assets.

AB 846 (Ackerman, Ch. 145, Stats. 1999) See Background.

Prior Vote:

Assembly Floor (Ayes 76, Noes 0)

Assembly Judiciary Committee (Ayes 11, Noes 0)

**************

Date of Hearing: March 14, 2017

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair

ABPCA Bill Id:AB 307

Author:(Maienschein) – As Introduced Ver:February 6, 2017

PROPOSED CONSENT

SUBJECT: TRUST DISTRIBUTION: ALLOCATIONS OF INCOME AND PRINCIPAL

KEY ISSUE: SHOULD THE LAW BE CLARIFIED, YET AGAIN, TO ENSURE THAT CAPITAL ASSETS ARE PROPERLY CHARACTERIZED AS PRINCIPAL RATHER THAN INCOME FOR PURPOSES OF MAKING A TRUST ALLOCATION?

SYNOPSIS

Under the Uniform Principal and Income Act (UPAIA), which California adopted in 2000, 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. In 2013, through AB 1029 (Maienschein), Chap. 105, Stats. 2013, and again in 2014, through AB 296 (Wagner), Chap. 867, Stats. 2014, the Legislature clarified how the characterization of money received from a partial liquidation of an entity is to be determined and allocated by the trustee. This non-controversial bill, sponsored by the Trusts & Estates Section of the State Bar, once again clarifies how to distribute assets between income and principal by revising the definition of "capital asset." The current definition is based on an Internal Revenue Code provision, set in statute by AB 1029, 2013. This bill seeks to define capital assets as property with an estimated life of one year or greater, other than inventory. There is no reported opposition to this bill.

SUMMARY: Revises the definition of "capital asset" under the Uniform Principal and Income Act (UPAIA) for purposes of trust allocation between principal and income. Specifically, this bill redefines a "capital asset" as property with an estimated life of one year or greater, other than inventory, for the purpose of allocation of trust assets.

EXISTING LAW:

1. Establishes, through the UPAIA, rules for the management by a trustee of assets held by the trust for the benefit of the trust beneficiaries. (Probate Code Section 16320 et seq. Unless stated otherwise, all further statutory references are to that code.)
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. (Section 16335.)
3. Defines "capital asset" as defined by Section 1221 of the Internal Revenue Code, which in turn defines capital asset as property held by a taxpayer, but does not include, among other things, inventory, property subject to depreciation, a copyright, accounts or notes receivable acquired in the ordinary course of business, commodities, or supplies of a type regularly used in the ordinary course of business. (Section 16350 (a)(2); 26 U.S.C. Section 1221.)
4. 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. (Section 16350 (b).)
5. Requires a trustee to allocate to principal specified receipts from an entity. (Section 106350 (c).)
6. 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 a trustee, in determining whether money is received in partial liquidation, 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. (Section 16350 (d).)
7. Provides that a trustee is not liable for an allocation between principal and interest done in accordance with the stated provisions. (Section 16350 (e).)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: This bill marks the third time in the last five years when either the Trusts & Estates Section of the State Bar or the California Bankers Association have sought to clarify the law regarding the characterization of assets as either income or principal when the items held in trust are partially or totally liquidated. This bill revises the definition of "capital assets" as used in that context.

The author states that "this legislative proposal is aimed at correcting an unintended drafting oversight in section 16350 resulting from the incorporation of the Federal tax code’s definition of 'capital asset.' Section 1221(a)(2) of the Internal Revenue Code expressly excludes depreciable property, such as real estate used in a trade or business. This omission at least when applied to Section 16350 was unintended. Many entities, such as limited partnerships or limited liability companies, hold depreciable real estate. Were real property to be sold inside an entity and the proceeds distributed to the trust, the receipt of such amounts should be allocated to principal just as it would were the real property owned directly by the trust. The proposed amendment corrects this deficiency in the current definition of 'capital asset' by defining a capital asset as 'property with an estimated life of one year or greater, other than inventory.'"

California adopted the UPAIA in 2000. (AB 846 (Ackerman), Chap. 145, Stats. 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.

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 of the trust, and principal to the remainder beneficiaries – and who will pay the taxes.

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. In 2013, AB 1029 (Maienschein), Chap. 105, Stats. 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. As a result of concerns over the drafting of that characterization, AB 296 (Wagner), Chap. 867, Stats. 2014, revised on an urgency basis the characterization with respect to certain short-term capital gain distributions.

This bill represents yet another effort to ensure that money received from a total or partial liquidation of an asset is properly characterized as either income or principal. Currently, distributions from a business entity are considered income, unless an exception applies.  One of these exceptions is the proceeds from the sale of a business entity’s capital assets. In that instance, those distributions are considered principal.  Currently, "capital assets" are defined as set forth in Section 1221 of the Internal Revenue Code. That section provides that a capital asset is property held by a taxpayer, but then generally excludes specific items, including inventory and depreciable property. However, the federal definition does not capture certain kinds of property used in a person’s trade or business commonly distributed to trusts (e.g., proceeds from the sale of depreciable real property).  This narrow definition, note the author and sponsor, has created confusion on what is considered income or principal, and may be inconsistent with the intent of those who create trusts.  This bill updates this definition, and redefines a capital asset as property with an estimated life of one year or greater, other than inventory.

ARGUMENTS IN SUPPORT: In support of the bill, the Trusts & Estates Section of the State Bar writes:

The use of section 1221 of the Internal Revenue Code as a definition of “capital asset,” which was added to the statute in recent years in connection with efforts to improve section 16350, also effectively incorporates certain exclusions from the definition of a “capital asset.” While these exclusions are appropriate in the tax context, the impact of these exclusions in the allocation of trust receipts creates results that are counter to the ordinary intentions and expectations of the usual settlor creating a trust. A definition of “capital asset” that is more consistent with the usual operation of trusts is one recognized by accountants and others within the financial community as “property with an estimated life of one year or greater, other than inventory.”

REGISTERED SUPPORT / OPPOSITION:

Support

Trust & Estates Section of the State Bar (sponsor)

Opposition

None on file

Analysis Prepared by: Leora Gershenzon / JUD. / (916) 319-2334