Taxation of Trusts

While many states tie the income tax liability of a trust to its settlor’s residence, California’s poor economy has the Franchise Tax Board (FTB) aggressively pursuing taxes on large trusts it deems “connected” to the state.

To determine if California can tax a trust, the FTB employs a unique analysis that considers:

• The source of the trust’s income
• The residence of the trust’s beneficiaries
• The residence of its trustees

California’s rules for taxing trusts are complex and unconventional. Under state law, a trust is taxable if it has even one fiduciary or non-contingent beneficiary that is a California resident. In addition, if accumulated income is distributed to a contingent resident beneficiary, it is also subject to California’s throwback rule that prorates income over the period of accumulation with a six-year limit.

A trust judged to have a California connection is required to file an income tax return in California if:

• It has net income from all sources in excess of $100.
• It has gross income from all sources in excess of $10,000, regardless of the amount of net income.

Penalties for not reporting income tax to California are severe, and failure to file state tax returns keeps the statute of limitations open for audit indefinitely.

Many trust recipients are oblivious to owing California taxes due to the state’s complex and unique rules for taxing trusts. If you have been contacted by the FTB about unpaid taxes tied to a trust, you need a knowledgeable and experienced law firm like Brown, PC to help navigate through the bureaucracy and red tape. We represent clients in Los Angeles and throughout California. Please contact the firm online or by calling 424-252-1100 to discuss you state tax matter with one of our attorneys.