CBA Publications >> CBA Regulatory Compliance Bulletin >> Vol 2005 No.7
November 7, 2005

Vol 2005 No.7 November 7, 2005

Uniform Principal & Income Act Amended

At CBA's behest, the California legislature acted quickly to restore clarity to the Uniform Principal and Income Act following the court decision, Estate of Betty Gross Thomas (2004) 124 Cal.App.4th 711. That case involved a large distribution of an underlying trust asset that the court ruled should be allocated to the income beneficiaries of the estate. Probate Code Section 16350 states that money received in total or partial liquidation of an equity must be allocated by the trustee to the principal beneficiaries.

Under Probate Code Section 16350(d)(1), money is deemed to be received in partial liquidation if the total amount in a distribution or series of related distributions by an entity is greater than 20% of the entity's gross assets. In the Thomas case, the court interpreted this language to apply only when the total amount of money received by the trustee exceeds 20%.

The significance of this decision was amplified because it roughly coincided with a decision by the Microsoft Corporation to issue an extraordinary $32 billion dividend in December last year, resulting in a large distribution of cash all across America, including into many trusts.

SB 296 is intended to reverse the court's interpretation of Section 16350 by providing that money is received by a trust in partial liquidation of an entity if the total amount of money received by all owners exceeds the 20% threshold. The focus thus is on the size of the distribution by the entity as opposed to the amount received by a trustee.

The bill also protects trustees that may have allocated such amounts to income beneficiaries after issuance of the case. Revised Section 16350(d)(1) provides that if a distribution was received between December 2, 2004 and July 18, 2005 (the operative date of the bill), a trustee will not be liable for allocating the receipt to income if the amount received, when considered together with the amount received by all owners exceeds 20% of the entity's gross assets, but the amount received by the trustee does not exceed 20%.

SB 296 is an urgency bill and became effective when signed on July 18, 2005. If you have any questions, you may direct them to Kevin Gould at kgould@calbankers.com or Leland Chan at lchan@calbankers.com.