Section 685 of the Internal Revenue Code, relating to treatment of funeral trusts, is modified as follows:

(a) Section 685(a) of the Internal Revenue Code is modified to read: In the case of a qualified funeral trust—

(1) Subparts B, C, D, and E of Subchapter J of Chapter 1 of Subtitle A of the Internal Revenue Code shall not apply.

(2) No credit for personal exemption shall be allowed under Section 17054 or Section 17733.

(b) Section 685(b) of the Internal Revenue Code is modified as follows:

(1) An election under Section 685(b)(5) of the Internal Revenue Code for federal purposes shall be treated for purposes of this part as an election made by the trustee of the qualified funeral trust under Section 685(b)(5) of the Internal Revenue Code for state purposes and a separate election under paragraph (3) of subdivision (e) of Section 17024.5 shall not be allowed.

(2) If the trustee of a qualified funeral trust fails to make an election under Section 685(b)(5) of the Internal Revenue Code for federal purposes with respect to a qualified funeral trust, that trust shall be treated for purposes of this part as owned under Subpart E of the Internal Revenue Code by the purchasers of the contracts described in Section 685(b)(1) of the Internal Revenue Code, an election under Section 685(b)(5) of the Internal Revenue Code for state purposes with respect to that trust shall not be allowed, and a separate election under paragraph (3) of subdivision (e) of Section 17024.5 shall not be allowed with respect to that trust.

(c) Section 685(d) of the Internal Revenue Code is modified to read: Subdivision (e) of Section 17041 shall be applied to each qualified funeral trust by treating each beneficiary’s interest in each qualified funeral trust as a separate trust.

(d) The Franchise Tax Board may, by forms and instructions, provide rules for simplified reporting of all trusts having a single trustee consistent with the rules prescribed by the Secretary of the Treasury under Section 685 of the Internal Revenue Code.

(e) This section shall apply to taxable years ending after August 5, 1997.

(f) The amendments made to this section by the act adding this subdivision shall apply to taxable years beginning on or after January 1, 1998.

(Amended (as added by Stats. 1998, Ch. 7) by Stats. 1998, Ch. 322, Sec. 35. Effective August 20, 1998.)