Is an irrevocable trust taxed in California? This is actually a quite complex question. Generally speaking, California taxes trusts based on “California income.” If the trustees and/or beneficiaries reside in California, then California will tax the proportionate income within the trust based upon the allocated income portion of the trust associated with the resident beneficiaries or trustees. The California Franchise Tax Board or FTB has released previous guidelines that state “California taxes the trust on that portion of the annual income which the trust holds for eventual distribution to the California resident beneficiary.”
One key issue isn’t where the Grantor(s) [the person(s) who establish the trust] resided prior to their death, or even where the assets in question are stored. The central issue relates to the physical and primary business or residential address of the trustee(s) and/or beneficiaries. For example, if a California parent left a child financial assets such as bank accounts and investments within a trust, and the child resides out of state, there is generally no resulting California tax burden. However, if the assets within the trust are not distributed to the beneficiaries, the trust usually would be taxed by the State of California.
When the trustee(s) or beneficiaries are mixed (some are California residents and some are not) California will usually tax the trust based upon an allocation of the relative income associated with those who are California residents. These calculations can be quite complex, and California’s residential guidelines (whether or not a person can claim that they do or do not reside within California) are quite fluid.
Each situation is unique, and this is why Allen Barron is uniquely qualified to provide sound advice and tax counsel. Our estate planning and tax attorneys work together to carefully craft family trusts, A-B trusts and disclaimer trusts to ensure the minimum tax benefit to the Grantor(s) [the person(s) who establish the trust] and the beneficiaries of the trust itself. Is an irrevocable trust taxed in California? Often yes, but only in relation to the income associated with California generally speaking. We invite you to contact the experienced tax and estate planning trust attorneys at Allen Barron for a free and substantive consultation regarding your unique circumstances at 866-631-3470.