California Income Taxation of Trusts and Estates

Richard S. Kinyon, Kim Marois & Sonja K. Johnson have published their article, California Income Taxation of Trusts and Estates, in the ACTEC Law Journal.  Their article begins as follows:

California’s income taxation of trusts has unpleasantly surprised many trust fiduciaries and beneficiaries. Its unique method of taxation, based on the residence of the trust’s fiduciaries and beneficiaries (and regardless of the residence of the settlor), may affect trustees and beneficiaries (as well as their lawyers and other advisors) far beyond the California borders.

For example, consider an irrevocable, non-grantor trust established by an Illinois resident that is administered by two co-trustees, one of whom is an Illinois resident and the other of whom is a California resident. All beneficiaries of the trust also reside in Illinois. Despite the predominately non-California connections, and even if the Illinois co- trustee is more actively involved in the administration of the trust, half of the trust’s undistributed net income is currently taxable by California.

Alternatively, consider another irrevocable, non-grantor trust, this time with a New York settlor. In this case, the trust is administered in New York by a New York resident serving as the sole trustee. However, the trust’s sole beneficiary is a California resident with a vested (i.e., non-contingent) interest in the trust property. Despite the trust’s New York origin and administration, all of the trust’s undistributed net income is currently taxable by California.

via American College of Trust and Estate Counsel | ACTEC Law Journal.

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.