USA – CALIFORNIA Trends and Developments Contributed by: Jennifer Jordan McCall, Paul Fraidenburgh, Alexandria Marx and Maria Williams, Pillsbury Winthrop Shaw Pittman LLP
California AB 1521 – probate notice requirements AB 1521 was chaptered on 1 October 2025 and its Probate Code Section 9202 changes apply to estates for which letters are first issued on or after 1 Janu - ary 2026. The bill adds a probate notice requirement to the Director of the California Department of Child Support Services when the personal representative or estate attorney knows or has reason to believe the decedent had a child support obligation. California SB 822 – unclaimed property and digital financial assets SB 822 was chaptered on 11 October 2025 and clari - fies that digital financial assets are intangible prop - erty subject to California’s Unclaimed Property Law. It prescribes notice requirements before digital financial assets escheat, rules for transferring those assets to the Controller, custody standards, and claimant rights to receive the digital asset or net sale proceeds if con - verted. This is relevant to estate administration and fiduciaries because digital financial assets can be property distributable to beneficiaries, estates, heirs, trusts, or custodial funds. Tax Tax planning – family limited partnerships and IRC Section 2036 ( a ) The Fifth Circuit’s decision in Estate of Fields v Com- missioner of Internal Revenue , No 25-60403, 2026 WL 1642415 (5th Cir. 8 June 2026) is the most conse - quential 2026 ruling for family limited partnership (FLP) estate planning. The court affirmed the Tax Court’s holding that the full value of assets transferred to a family limited partnership must be included in the decedent’s gross estate under IRC Section 2036 (a) where the transfer lacked a substantial non-tax pur - pose. The facts were particularly unfavourable: the decedent’s agent formed AM Fields LP and trans - ferred approximately USD17 million of assets into it within a single month, and the decedent died only ten days after the funding was complete. The Fifth Circuit applied the well-established three-part test for Section 2036 (a) inclusion – (i) a pre-death transfer; (ii) retained interest relinquished only at death; and (iii) absence of a bona fide sale for adequate and full con - sideration – and held that the bona fide sale exception requires objective evidence of a real, actual, or genu - ine non-tax motivation. The court rejected all three
of the estate’s proffered non-tax justifications (POA limitations, asset consolidation, and elder abuse pro - tection) as post-hoc rationalisations rather than actual motivations, and affirmed a 20% accuracy-related penalty because a USD6 million reduction in report - able assets should have struck a reasonable person as too good to be true. Relatedly, in Otay Project LP v Commissioner of Inter- nal Revenue , T.C. Memo. 2026-21 (2026), the Tax Court disallowed basis deductions and partnership adjust - ments arising from a complex restructuring of tiered limited partnerships on two independent grounds: first, the partnership incorrectly calculated its section 743 (b) basis adjustment by failing to account for the partner’s negative capital account and obligation to restore deficit balances; and second, alternatively, the restructuring lacked economic substance and con - stituted a sham transaction engineered principally to create an inside-outside basis disparity without any business purpose other than tax avoidance. Together, these decisions reinforce that FLP structures formed or restructured close to death, or primarily for tax-reduction purposes, face significant risk of IRS challenge and judicial disallowance. Tax planning – limited partnerself - employment tax exception In a landmark ruling with broad implications for private equity, hedge funds, and family limited partnerships, the Fifth Circuit in Sirius Solutions , L . L . L . P . v Com- missioner of Internal Revenue , 165 F.4th 374 (2026) vacated the Tax Court’s decision and held that a lim - ited partner within the meaning of IRC Section 1402 (a) (13) is simply a partner in a state-law limited partner - ship who has limited liability – not merely a passive investor. The IRS had argued, and the Tax Court had accepted under Soroban Capital Partners LP v Com- missioner that the limited partner exception applies only to partners who function as passive investors and does not extend to partners who actively provide ser - vices to the partnership. The Fifth Circuit rejected this passive investor rule as inconsistent with the statutory text, contemporaneous dictionary definitions, and the IRS’s own 40-year history of defining limited partner by reference to limited liability alone. The court fur - ther noted that the guaranteed payments clause in
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