Distributions from Entities under CA UPAIA Sec. 350 Amended to Increase Clarity (8/13/13)

The California Legislature has amended Sec. 350 of the Uniform Principal and Income Act (UPAIA) to give greater clarity to the allocation between principal and income of distributions from entities. Whether the characterization of distributed funds is characterized as principal or income determines who will get the benefit of the distribution - the income beneficiary or the remainder beneficiary.

The prior section held that money received in full or partial liquidation was allocated to principal for purposes of determining fiduciary accounting income, but if the total amount received by all owners from a distribution or a series of related distributions by an entity was greater than 20% of the entity's gross assets, the distribution was "deemed" to be in partial liquidation and allocated to principal. The criticism has been since the inception of the revised rules the the 20% rule can lead to inconsistent and arguably unfair results.

The Bill responds to the holding in Hasso v Hasso and while not changing the results in that case, it does impact future cases and situations. It clarifies how the partial liquidation exception is to be determined and information on which the trustee may rely regarding that determination. It also changes the 20% threshold to 10%.