This is a free issue of the California Trust & Estates Quarterly VOLUME 31, ISSUE 2, 2025

Table of Contents:

Editorial Board
Chairs of Section Subcommittees
Inside This Issue
Letter From the Chair
Letter From the Editor
Litigation Alert
MCLE Self-study Article Confusion In the Wording and Application of the Laws Governing the Entities and Individuals Conducting the Business of Acting As a Fiduciary Suggests a Need For Improvement
MCLE Self-study Article Some Additional Issues [and Solutions?] Relating To the California Income Taxation of Estates and Trusts
MCLE Self-study Article When, Why and How To Leave Retirement Accounts To Charity
Tax Alert

EDITORIAL BOARD

OFFICERS

SECTION CHAIR

Michael Rosen-Prinz
Los Angeles
(310) 282-2330
mrp@loeb.com

SECTION VICE-CHAIR/TREASURER

Judith Hehir
Novato
(415) 788-5748
judith@jphehirlaw.com

EDITORS

EDITOR-IN-CHIEF

Nicholas J. Van Brunt
Los Angeles
(213) 617-5472
nvanbrunt@sheppardmullin.com

EXECUTIVE EDITORS

Matthew Owens
San Diego
(858) 876-3558
mowens@sheppardmullin.com

Ryan Szczepanik
San Francisco
(415) 951-4162
ryan.szczepanik@bny.com

MANAGING EDITORS

Lisa Roper
San Diego
(858) 755-3000
lroper@hcesq.com

Kristin Yokomoto
Costa Mesa
(714) 966-8826
kyokomoto@bakerlaw.com

Laura K. Zeigler
Los Angeles
(213) 330-8576
zeigler@bessemer.com

STAFF ISSUE EDITORS

Katy Fluet
Menlo Park
(650) 815-7674
kfluet@mwe.com

Erika Gasaway
San Jose
(408) 299-1370
erika.gasaway@lathropgpm.com

Kevin Bryce Jackson
Los Angeles
(310) 228-5780
Kevin.Jackson@withersworldwide.com

Daniel Kim
Sacramento
(916) 244-0027
daniel@dktrustlaw.com

VOLUNTEER ISSUE EDITORS

Aaron Hegji
Las Vegas

Hengameh Kishani
Danville

Mara Mahana
San Francisco

Ben Schwefel
Irvine

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CHAIRS OF SECTION SUBCOMMITTEES

The Trusts and Estates Section Executive Committee accomplishes much of its work by its subcommittees. The following are the chairs of the subcommittees of the Executive Committee for 2024-2025. Comments and suggestions concerning matters in their respective substantive areas can be directed to the chair of the subcommittee.

CALIFORNIA LAW REVISION COMMISSION (CLRC)

Ryan Szczepanik
(415) 951-4162

EDUCATION

Jeff Loew
(650) 397-8700

ESTATE PLANNING

Cynthia Catalino
(310) 979-3366

ETHICS

Judith Tang
(510) 622-7628

INCAPACITY

Ryka Farotte
(213) 633-0448

LEGISLATION

Gretchen Shaffer
(619) 744-2268

Abby Feinman
(310) 788-4722

LITIGATION

Erin Norcia
(408) 998-9500

LONG RANGE PLANNING

Judith Hehir
(415) 788-5748

MEMBERSHIP & ENGAGEMENT

Matt Owens
(858) 876-3558

Kristin Yokomoto
(714) 966-8826

NOMINATING

Kristen Caverly
(858) 755-3000

PMHAC

Ryan Szczepanik
(415) 951-4162

QUARTERLY

Nicholas J. Van Brunt
(213) 617-5472

TRUST & ESTATE ADMINISTRATION

Dan Spector
(415) 995-5013

UNIFORM LAWS

Judith Tang
(510) 622-7628

Published Quarterly by the Trusts and Estates Section of the California Lawyers Association

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered and is made available with the understanding that the publisher is not engaged in rendering legal or other professional advice. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

A goal of the Quarterly is to foster the free flow of ideas regarding trust and estate law. Accordingly, individual authors may offer their own opinions about or interpretations of the law. The views of the authors do not necessarily reflect the views of the editors, the California Lawyers Association, or its Trusts and Estates Section.

Please direct any inquiries regarding republication of any article in the Quarterly to the Editor-in-Chief. Such permission is generally granted on the condition that initial publication attribution be given to the Quarterly.

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INSIDE THIS ISSUE

WHEN, WHY AND HOW TO LEAVE RETIREMENT ACCOUNTS TO CHARITY
By Bryan Kirk, Esq.
This article examines the tax-efficient strategies for leaving retirement accounts to charity, emphasizing why traditional IRAs are typically the optimal asset for charitable bequests following recent SECURE Act changes. It discusses the practical and legal challenges estate planners may face and provides solutions for maximizing benefits to both charitable and family beneficiaries. The article also explores specific considerations for Roth IRAs, surviving spouses, and charitable remainder trusts, offering guidance for effectively integrating charitable intent into estate plans.
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SOME ADDITIONAL ISSUES [AND SOLUTIONS?] RELATING TO THE CALIFORNIA INCOME TAXATION OF ESTATES AND TRUSTS
By Paul N. Frimmer, Esq
This article explores emerging complexities and unresolved issues in the California income taxation of estates and trusts, with particular focus on recent judicial and legislative developments, including the impact of Senate Bill No. 131 and the anti-ING trust rules. The author analyzes evolving interpretations of non-contingent beneficiaries, taxation of trust distributions, decanting, and the treatment of post-death revocable trust administration, applying legal reasoning to ambiguities not clearly addressed by statute or regulation. Through practical examples and a review of legislative history, the article offers thoughtful guidance and highlights continuing areas of uncertainty in California fiduciary income tax law.
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CONFUSION IN THE WORDING AND APPLICATION OF THE LAWS GOVERNING THE ENTITIES AND INDIVIDUALS CONDUCTING THE BUSINESS OF ACTING AS A FIDUCIARY SUGGESTS A NEED FOR IMPROVEMENT
By Ralph E. Hughes, Esq
This article examines the evolving and often conflicting statutory landscape governing which individuals and entities may lawfully serve as fiduciaries in California. The author highlights ambiguities and risks resulting from inconsistent laws, and provides examples from cases that illustrate the widespread confusion. The article calls for legislative reform to create clear, consistent, and even-handed rules that balance regulatory oversight with practical needs for beneficiary protection and business continuity in fiduciary practice.
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FROM THE CHAIR
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FROM THE EDITOR-IN-CHIEF
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LITIGATION ALERT
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TAX ALERT
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LETTER FROM THE CHAIR

Written by Michael Rosen-Prinz^*

Things slow down for TEXCOM over the summer. Accordingly, this issue’s column collects a few updates and thoughts that are top of mind this late July evening.

First, I am proud and pleased to share with our readers that TEXCOM’s Education Subcommittee has prepared and released a comprehensive five-part, 17.5-hour webinar series The Exam and You -Estate Planning Through Administration and Litigation, designed to help lawyers preparing for the Certified Legal Specialist Examination in Estate Planning, Trust and Probate law. Organized by Kristin Yokomoto, the webinar series features TEXCOM members speaking on all of the major topics covered by the Exam. Based on early results the webinar series is a huge hit and will almost certainly continue to be updated for future years of the Exam. Good luck to all the test-takers!

Next, a quick preview of one of California’s newest trust laws: On July 14, 2025, Governor Gavin Newsom signed into law Assembly Bill 565, which introduced virtual representation to California by completely revising the previously very confusing Probate Code section 15804. The new law, effective January 1, 2026, will allow a beneficiary who is a minor, incapacitated, unborn, or unknown person to be represented by another similarly situated beneficiary, or by someone who holds a fiduciary duty to that beneficiary. The practical effect is that decantings, trust modifications, or other trust procedures requiring notice to, or consent of, all trust beneficiaries or all descendants of a settlor, which previously required a court order or consent of a guardian ad litem to address the rights of minor or unborn individuals, may be accomplished out of court, as long as an unconflicted qualifying individual can provide representation.

The CLA Trusts and Estates Section and the California Bankers Association co-sponsored this bill and worked with its author, Assemblymember Diane Dixon, to shepherd it through the California Assembly and Senate, where it passed every committee and floor vote unanimously. This could not have been done without the skillful guidance of CLA’s Chief Governmental Affairs Officer, Saul Bercovitch, and CLA’s lobbyist, Meegen Murray of the Wideman Group.

Over the past decade, TEXCOM has helped California modernized its body of trust laws, including the enactment of statutes enabling decanting, directed trusts, the most modern principal and income act, and now, come January, we will be the 48th state to adopt virtual representation.⁰¹ What should we do next? Abolish the rule against perpetuities? California Private Trust Companies? Statutory authorization of protectors? Notice of proposed action procedures? Drop me a line and I’ll make sure I pass your suggestion along to the appropriate TEXCOM subcommittee.

Finally, it’s been a frequent topic of TEXCOM discussion: Should the CLA Trusts and Estates Section consider hosting more in-person events

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(and, because we currently host NO in-person events—maybe the question is should we host ANY in-person events!).

Until the COVID-19 pandemic in 2020, TEXCOM regularly hosted and actively participated in live seminars and events. We put on the Financial Elder Abuse Seminar in person both in Northern and Southern California, oversaw a full slate of programming at the CLA Annual Meeting, and organized a traveling series of trust and estate educational programs known as the Fall Roadshow. In Spring of 2020, when the world shut down, we moved online, just like everyone else. What we found was that CLA Trusts and Estates Section members were just as happy to attend webinars as they were live seminars, and because our webinars are on demand and reasonably priced (maintaining our commitment to the State Bar to continue to provide affordable CLE for California lawyers), they have been even more popular than our in-person events ever were. Webinars offer cost savings and accessibility, allowing practitioners to stay current on case law, tax regulations, and estate planning strategies without leaving their offices. In addition, when conferences offer a virtual attendance option, there are some benefits to attending remotely. To start, it is always convenient. You don’t have to wake up early, and it will never conflict with any other obligation. Regardless of when the presentation is recorded, you can watch it at your leisure. If you have to stop for a few minutes or a few days, you can pause and then resume again when it suits you. Similarly, if you miss anything the speaker says, the viewing platform will almost always let you rewind the video and listen to that part again. There is no geographic limitation on attending a virtual presentation and accordingly no travel time. You don’t have to dress formally (or at all!) to attend. It’s often economical—although some conferences that offer both in-person and virtual options will offer a slight discount for virtual attendance, most virtual CLE is inexpensive.

However, many of us believe there is something special about attending a conference in person rather than online. Those younger than me might say it just hits different, or (and I can feel my teenage children cringe as I type this) if you know, you know. Even though there might not be enough power outlets, and the banquet lunch inevitably features the chef’s special rubber chicken, attending live events provides other benefits. For example, you will have a chance to interact with other human beings, whether it is just shaking hands with your seatmate or having a causal conversation at a coffee break. I can remember as a young associate attending local trust and estate conferences with my department and feeling proud to sit together and be introduced as a member of the team to other lawyers in the community. Also, for me, I pay better attention and retain more information if I attend a live presentation. It might be that I am too ashamed to blatantly ignore someone speaking 20 feet in front of me by writing emails, but I am much less likely to multi-task at conferences than if I am in my office watching a webinar on my monitor.

TEXCOM is definitely not going to shift any resources away from our excellent and popular webinars, but we have recently started working with the Executive Committee of CLA’s Tax Section to provide support, speakers, and trusts and estates-related topics for their Spring Estate and Gift Tax Conference in San Francisco, as well as the Annual Meeting of the Tax Bar and Tax Policy Conference in Anaheim. Depending on how our participation is received, this might be the first step towards a CLA Trusts and Estates Section conference in the future. Please let us know if this is something you would like to see one day!

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Notes:

^*. Loeb & Loeb LLP, Los Angeles, California

^01. Your move, Oklahoma and Louisiana!

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LETTER FROM THE EDITOR

Written by Nicholas J. Van Brunt^*

Hello, Readers of the Quarterly.

We are fortunate to practice in an area that is not going anywhere anytime soon. We advise and advocate for our clients at the intersection of two certainties: death and taxes. This issue provides both practical and theoretical considerations for how we might represent our clients in that space and how the laws should govern the professionals appointed in many cases to manage the hard-earned wealth of many of our clients.

For all but the wealthiest Americans, retirement benefits comprise a significant portion of their wealth. Yet when it comes to gifting these benefits to the beneficiaries of a client’s estate, significant tax consequences often abound. In When, Why, and How to Leave Retirement Amounts to Charity, Bryan Kirk sets forth tips for the estate planner whose clients have both charitable intent and a desire to leave some of their estate to family or other non-charities. For these clients, it will often make sense to leave traditional retirement accounts to charity and it may even make sense to leave a retirement account to a charitable remainder trust. The article addresses and provides potential solutions to the challenges that the estate planner may encounter in advising clients as to the disposition of retirement accounts to charity, particularly in a post-SECURE Act world.

Next, we are fortunate as readers to once again benefit from Paul Frimmer’s deep dive into some of his current questions concerning estates and trusts and the impact of California income tax law upon them. In Some Additional Issues [And Solutions?] Relating to the California Income Taxation of Estates and Trusts, Mr. Frimmer examines the current state of California tax law in several ways, including the contours of taxation of accumulated income in a trust in California, the circumstances in which a revocable trust is treated as an “estate” for purposes of Revenue and Taxation Code section 17742, the California income-tax impact of decanting a California trust into another jurisdiction, situations where trusts receive both California source and non-California source income, and a follow-up discussion on the recent anti-ING legislation that was discussed at length in Issue 31-1 by Kirsten Wolff and Paige Voorhees.⁰¹

It is not uncommon for private professional fiduciaries to maintain a corporate form to run their businesses. Yet the law does not provide for the appointment of these entities as fiduciaries. This is just one of several ambiguities and inconsistencies in the laws regulating who can serve as a professional fiduciary in California. In his aptly-titled Confusion in the Wording and Application of the Laws Governing the Entities and Individuals Conducting the Business of Acting as a Fiduciary Suggests A Need for Improvement, we are fortunate to have Ralph Hughes return as a contributor to the Quarterly with an exhaustive discussion of the legislative history of the law governing

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professional fiduciaries, and discussions of situations where courts are probably appointing fiduciaries in a manner that is outside of what the law provides, and how professional fiduciaries who desire to practice through an entity are stymied by the current law (which may be in the process of being amended at the time this letter is being drafted).⁰²

As always, we also seek to inform our readership of recent developments in litigation and tax law. This time, the Litigation Alert is provided by Michael Brophy, Craig Weinstein, Courtney Sorensen, and Sara May of Withers Worldwide LLP, and the Tax Alert by Jenny Hill Bratt, John Crisp, Darian Hackney, Justin Hepworth, Allison Hirsh, Jacob Kwitek, Mariah Lohse, Austin Prewitt, and Corey Steady of Sheppard Mullin Richter & Hampton LLP. As always, we thank our friends at both firms for taking the time to keep us all updated on these important developments.

Would you like to contribute to the Quarterly as an author or an editor? Let us know! Please feel free to reach out to me via email at nvanbrunt@sheppardmullin.com or to any of our editorial staff identified in the front cover of this publication.

I would be remiss not to thank our advertisers who provide critical support to the work of our Section. Please take note of the advertisements as you peruse this publication.

Thanks, as always, for your readership and please enjoy this issue of the Quarterly!

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Notes:

^*. Sheppard Mullin Richter & Hampton LLP, Los Angeles, California

^01. See Wolff & Voorhees, The EndING for California Residents? California Taxation of Incomplete Gift Nongrantor Trusts, 31 Calif. Trusts and Estates Q. 1 (2025).

^02. Assem. Bill 586 (2025-26 Reg. Sess.) Professional Fiduciaries.

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LITIGATION ALERT

Written by Michael S. Brophy, Esq., Craig S. Weinstein, Esq., Courtney A., Sorensen, Esq., Sara Z. May, Esq.^*

I. DAUGHTER NOT REQUIRED TO REBUT PRESUMPTION OF FATHER’S CAPACITY IN ORDER TO HAVE STANDING TO PURSUE ELDER ABUSE RESTRAINING ORDER ON HIS BEHALF, AND SUBSTANTIAL EVIDENCE SUPPORED FINDING ATTORNEY COMITTED ELDER ABUSE

Herren v. George S. (2025) 109 Cal.App.5th 410

The First District Court of Appeal held that a daughter, who was also the trustee and attorney-in-fact for her father, was able to petition on behalf of her father for an elder abuse restraining order against the father’s attorney, and that substantial evidence supported a finding that the father’s attorney committed financial elder abuse by exerting undue influence to obtain a property right from the father.

A father’s doctors determined in 2023 that he lacked capacity to make financial and medical decisions. His daughter filed a petition on behalf of her father for a protective order against the defendant, an attorney who had met with the father alone in 2024 and secured the father’s agreement to pay a $100,000 retainer. An expert in gerio-psychology testified at the evidentiary hearing that the father was diagnosed with “[m]ajor neurocognitive disorder, multifactorial, Alzheimer’s and Lewy Body with behavioral challenges,” which is a “severe dementia.” The attorney had been a trust and estate lawyer for twelve years. She met with the father at his request in person and privately for about 90 minutes. She claimed he appeared to be in good health during their meeting. After a contested hearing, the trial court issued a restraining order prohibiting the attorney from abusing and contacting the father. The attorney appealed.

The Court of Appeal affirmed. The appellate court determined that (i) the daughter was not required to rebut a presumption of the father’s capacity in order to have standing to bring a restraining order request on behalf of the father, and (ii) there was substantial evidence of undue influence. In finding substantial evidence of undue influence, the court considered the four factors to establish undue influence. First, the father was vulnerable to undue influence because he was unstable, weak, elderly, and was experiencing mental decline. Second, the attorney exercised apparent authority in her role as an attorney, because the father knew her to be a legal professional. Third, there was evidence the attorney influenced the father because she knew the father had a trust and that the daughter was a co-trustee of the trust, yet she met with the father while his daughter was out of town. The attorney also knew the father had been found to lack capacity to make financial and medical decisions by two medical professionals. Additionally, when the attorney showed up for the meeting, the father claimed not to know her or her name, and did not indicate that he wanted to meet with her. The father’s caretaker protested the meeting but the attorney demanded to meet with the father privately, out of the presence of his caretaker. Fourth, and finally, the result was inequitable because of the divergence between the attorney’s contentions regarding her hiring and the father’s intent as expressed in his trust and DPOA before his treating doctor authored the letter that he lacked capacity.

II. A RESPONDENT MAY FILE A DEMURRER TO A PETITION BROUGHT UNDER THE PROBATE CODE AT ANY TIME PRIOR TO THE INITIAL HEARING ON THAT PETITION

Goebner v. Superior Court (McDonald) (2025) 110 Cal. App.5th 1105

The First District Court of Appeal held that a respondent may file a demurrer at the time of or prior to the initial hearing on a petition brought under the Probate Code, notwithstanding Code of Civil Procedure section 430.40, which requires a demurrer to be filed within 30 days of service of a complaint.

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A grandson filed a petition contesting amendments to his grandmother’s trust, including an amendment that named the respondent as successor trustee. More than four months after the grandson served his petition, and just two days before the initial hearing on the petition, the successor trustee filed a demurrer seeking to dismiss the petition. The trial court overruled the demurrer on the grounds that it was untimely pursuant to Code of Civil Procedure section 430.40, which requires a demurrer to be filed within 30 days after service of the complaint. The successor trustee petitioned for a writ of mandate to vacate the order dismissing the demurrer, and the Court of Appeal agreed to hear the matter.

The Court of Appeal issued a writ of mandate, determined that the demurrer was timely, and issued an ordered directing the trial court to consider the demurrer on its merits. Considering a matter of first impression, the Court of Appeal analyzed the interplay between procedural rules in the Code of Civil Procedure and the Probate Code. Probate Code section 1000 provides, in relevant part, “Except to the extent that [the Probate Code] provides applicable rules, the rules of practice applicable to civil actions . . . apply to, and constitute the rules of practice in, proceedings under [the Probate Code].” While Code of Civil Procedure section 430.40 requires that a demurrer be filed within 30 days of service of the complaint, Probate Code section 1043 contains language that directly addresses the timing for filing a response or objection to a petition. Specifically, Probate Code section 1043 provides that an interested person may appear and make a response or objection in writing at or before the hearing. Although the Probate Code does not expressly define “objections” to include demurrers, the Court of Appeal looked to the Code of Civil Procedure in concluding that a demurrer is a form of an objection. Accordingly, Probate Code section 1043 governs the timing within which a responding party may file a written objection, permitting a respondent to file a demurrer at or before the initial hearing on a petition filed pursuant to the Probate Code.

III. POTENTIAL HEIRS DO NOT HAVE STANDING TO BRING A PARTITION ACTION PENDING THE OUTCOME OF A CONTESTED PROBATE PROCEEDING

Amundson v. Catello (2025) 111 Cal.App.5th 817

The Fourth District Court of Appeal held intestate heirs of a contested probate do not have standing, pending resolution of the distribution of the assets of an estate, to bring an action for partition of a decedent’s property that was co-owned with a third party.

A decedent co-owned a piece of real property. In 2005, a deed was recorded which indicated the decedent and the co-owner owned the property in fee simple, as joint tenants with a right of survivorship. When property is titled this way, each owner owns an equal, undivided share of the entire property that automatically passes to the surviving owner upon the death of the first joint tenant. In September 2020, the decedent recorded a quitclaim deed to herself that, if valid, would sever the joint tenancy and instead create a tenancy in common with no right of survivorship. The decedent’s interest in property held in that manner would pass via the decedent’s estate. The decedent died a few weeks after she recorded the 2020 deed. The decedent’s siblings and the co-owner filed competing petitions for administration of the estate, and a personal representative was appointed over the decedent’s intestate estate. Two years later, the co-owner filed a petition to administer the decedent’s will, and the siblings filed a cross-petition to partition the property by sale. The decedent’s siblings alleged the 2020 deed was valid and that as a result, the decedent’s interest in the property would eventually pass to them as the intestate heirs. While the competing probate petitions were still pending, the trial court entered an interlocutory judgment for partition by sale, ordering that the proceeds of the sale, after expenses, would be distributed equally to the estate and the co-owner. The co-owner appealed.

The Court of Appeal reversed and directed the trial court to dismiss the partition action. Until the probate dispute is resolved, the siblings lack standing to bring a partition action relating to the real property. Although there is a possibility that at the conclusion of the probate proceedings the siblings will collectively own part of the property, they have not yet shown they have a concrete and actual interest in the real property subject to partition. Code of Civil Procedure section 872.210, subdivision (a)(2), provides that a partition action may be commenced by an owner of an estate of inheritance. Here, however, the siblings’ interest was not yet certain—if the probate court were to rule in favor of the co-owner, she would acquire title to the half of the property the decedent left behind. Parties seeking a partition must have clear title, and because it was uncertain who would succeed to the decedent’s interest pending the outcome of the probate proceedings, the siblings were precluded from establishing the ownership interest necessary to bring a partition action.

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Notes:

^*. Withers Bergman LLP, Los Angeles, California

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MCLE SELF-STUDY ARTICLE CONFUSION IN THE WORDING AND APPLICATION OF THE LAWS GOVERNING THE ENTITIES AND INDIVIDUALS CONDUCTING THE BUSINESS OF ACTING AS A FIDUCIARY SUGGESTS A NEED FOR IMPROVEMENT

Written by Ralph E. Hughes, Esq.^*

I. SYNOPSIS

California law long had a relatively simple approach to identifying the entities and the individuals that could be permitted to conduct the business of acting as trustees, executors, administrators, guardians, and conservators of estates. The rule for entities was that the only entities that could serve in those positions were corporations and the only corporations that could do so were banks and trust companies.⁰¹ There was an absence of rules for individuals. Any individual could conduct the business of acting as trustee of trusts, or as executor, administrator, guardian, or conservator of any number of estates.

The historic approach reflected the state’s interest in protecting wards and beneficiaries. A bank or a trust company—a limited liability entity with an unlimited lifespan—was empowered to exercise extensive fiduciary powers over estates in probate court and trusts only if it was subject to statutes and regulations that protected beneficiaries.⁰² At the same time, individuals—often but not always attorneys or Certified Public Accountants (“CPAs”)—were permitted to act as trustees, executors, administrators, guardians, and conservators of estates in any number of cases without being subject to any specific statute or regulation directed at their general ability to act as a fiduciary or their financial ability to make wronged beneficiaries whole. However, their lifespans were limited and their individual liability to beneficiaries was unlimited.

The historic approach changed with respect to individuals in 2006 when the legislature adopted the Professional Fiduciaries Act,⁰³ which defined a “professional fiduciary” as a person who acts as trustee or agent “for more than three individuals, at the same time,”⁰⁴ or acts as executor, administrator, conservator of an estate, or guardian of an estate for more than two or three non-family members (depending on the situation) at the same time.⁰⁵ The Act also required most professional fiduciaries (but not attorneys, CPAs, or enrolled agents acting within the scope of their licenses) to have specific qualifications and to be licensed, regulated, and subject to continuing educational obligations.⁰⁶ Once the Act came into effect, the only individuals who could conduct the business of acting as a

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trustee or as an appointed fiduciary in the Probate Court for more than a few people were licensed individual professional fiduciaries, attorneys, and, with some limitations, CPAs and enrolled agents.⁰⁷

The historic approach changed with respect to entities in 2011, when the Legislature adopted Financial Code section 1553, subdivision (b), authorizing law and accountancy corporations to act as trustees of trusts “established by them for their respective clients” if no “member” of the corporation engages in “advertising for trust business in this state.”⁰⁸ With the enactment of this provision, California law for the first time authorized an entity with an unlimited lifespan to act as a trustee without also being subject to regulation directed specifically to the entity’s qualifications to act as a trustee or to make wronged beneficiaries whole, such as the regulations that govern banks and trust companies.⁰⁹

This article examines the laws governing which individuals or entities are authorized to conduct the business of acting as trustees or as executors, administrators, guardians, or conservators of estates.¹⁰ It discusses how the laws have developed over time, sometimes without reference to—and in conflict with—existing laws and how conflicting laws appear to lead to confusion in their application. It illustrates how the web of laws can generate confusion. For example, individuals and entities seeking to act as fiduciaries of trusts and estates might find themselves subject to rules found in the Financial Code,¹¹ the Probate Code,¹² the Business and Professions Code,¹³ and the California Code of Regulations.¹⁴

Without seeking to resolve the several areas of conflict and confusion, the article examines risks that the conflict and confusion generate, ranging from a fiduciary’s loss of fees or liability exposure to attorney malpractice to the expense of litigation required to determine how inconsistent laws will be applied. The risks are not hypothetical and can be seen in cases drawn from the records of the superior court which show that fiduciaries, lawyers, and judges appear to be applying existing laws incorrectly.

The article does not advocate regulation of individuals and entities that act as fiduciaries of estates. It argues, rather, that—since the California Legislature has determined to regulate these entities and individuals—its statutes should be drafted carefully to minimize exceptions and ambiguities and should be even-handed. Statutes that have been adopted separately in various codes over time should be reviewed together with the goal that both the citizens of California and the individuals and entities that wish to act as professional fiduciaries for those citizens are protected by a clear set of laws.

This discussion grows out of a seminar presented to the Professional Fiduciary Association of California (“PFAC”) in 2021. During the seminar, the presenters did their best to explain to the assembled professional fiduciaries their unified opinion, that while professional fiduciaries have legitimate reasons to conduct their fiduciary businesses through limited liability entities with unlimited lifespans, the law simply does not permit them to do so.

When the presentation concluded, more than one member of the audience informed the presenters that they were wrong, that professional fiduciaries could legally conduct their fiduciary businesses through entities, that they (the professional fiduciaries) were already functioning as fiduciaries through entities, and that their own attorneys had informed them this practice was proper. The author has since been made aware of several cases in which courts appear to have made rulings contrary to law by appointing or recognizing a limited liability entity formed by a professional fiduciary as an administrator or a trustee. These cases are discussed in Section V, below.

The California Professional Fiduciaries Bureau, which licenses and regulates professional fiduciaries,¹⁵ agrees with the seminar presenters that business entities cannot function as professional fiduciaries—”The Bureau requires the licensure of individuals providing fiduciary services but does not allow for the licensure of business entities.”¹⁶ The Bureau is, though, aware that individually licensed professional fiduciaries “desire to provide their clients with cost-effective succession planning of the named licensed professional fiduciary,” and are pressing for the ability to practice through a business entity.¹⁷

In the 2023-2024 legislative session, PFAC-supported Assembly Bill No. 2148 (“AB 2148”), which would have authorized the formation of a professional “fiduciary corporation” was approved by several legislative committees even though it did not address the historic rule limiting corporate fiduciary activity to banks and trust companies.¹⁸ In spite of this omission, AB 2148 appeared to be on the way to enactment before being sidetracked due to budgetary concerns.¹⁹ Given that licensed professional fiduciaries desire the ability to practice through a business entity, it is likely that PFAC will seek legislation authorizing the creation of a professional fiduciary corporation sometime in the future, including through the PFAC-supported Assembly Bill No. 586 in the 2025-2026 legislative session.²⁰

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Given the foregoing developments, exploration of the situation is warranted.

II. THE HISTORIC RULE LIMITING THE CONDUCT OF “TRUST BUSINESS” BY CORPORATIONS TO BANKS AND TRUST COMPANIES

A. Historically, the Only Corporations That Could Conduct “Trust Business” Were Banks and Trust Companies

Since at least 1951, Financial Code section 115²¹ has defined “trust business,” as follows:
“Trust business” means the business of acting as executor, administrator, guardian or conservator of estates, assignee, receiver, depositary or trustee under the appointment of any court, or by authority of any law of this or any other state of the United States, or as trustee for any purpose permitted by law.

Throughout most of the same period, Financial Code sections 115, 1550, and 1100 together provided that the only corporations that could conduct “trust business” were banks and trust companies.²²

The historic rule reflects a key difference between banks and trust companies and general business corporations. Both sorts of corporations provide limited liability to their shareholders, but banks and trust companies are subject to an array of laws and regulations designed to safeguard trust and estate beneficiaries that do not apply to general business corporations. For example, in order to provide a fund to protect their beneficiaries,²³ banks and trust companies must deposit funds or securities with the State Treasurer in amounts depending on the size of the city in which they operate and the amount of property they hold in trust.²⁴ When banks and trust companies receive new trust assets, they must deposit additional security with the State Treasurer.²⁵ In addition, the Commissioner of Financial Protection and Innovation²⁶ is required to examine the “court trust business” of every trust company “at least once every 24 months” and the “private trust business” of every bank or trust company when deemed “necessary or advisable.”²⁷ None of these requirements apply to general business corporations. Joe’s Used Cars, Inc. cannot do business as a trustee.

B. Professional Corporations Could Not Conduct “Trust Business”

California law began permitting the formation of professional corporations in 1968.²⁸ Pursuant to Corporations Code section 13401, subdivisions (a) and (b), a professional corporation can be formed to engage in rendering “professional services [lawfully rendered only pursuant to a license. . . authorized by the Business and Professions Code] in a single profession.”

When professional corporations were authorized in 1968, they could not conduct “trust business” because Financial Code sections 115, 1550, and 1100 together provided that the only corporations that could conduct “trust business” were banks and trust companies.

C. New Limited Liability Entities Could Not Conduct “Trust Business”

In the 1980s and 1990s, the legislature authorized the creation of new limited liability entities. Consistent with the public policy of providing protection to the beneficiaries of trusts and estates, the statutes creating new limited liability entities provided expressly that they could not act as banks or trust companies.

1. California Limited Partnerships Cannot Conduct “Trust Business”

The California Revised Limited Partnership Act was adopted in 1984.²⁹ From the beginning, the act specified that a California Limited Partnership could not engage in the banking business or in the trust company business.³⁰ This rule is continued under current law.³¹

2. California Limited Liability Companies Cannot Conduct “Trust Business”

The Beverly-Killea Limited Liability Company Act, adopted in 1994,³² authorized the creation of limited liability companies in California. From the beginning, the Act specified that a California Limited Liability Company could not engage in the banking business or in the trust company business.³³ This rule is continued under current law.³⁴

3. California Limited Liability Partnerships Cannot Conduct “Trust Business”

California recognized the Limited Liability Partnership (“LLP”) in 1995, when the governor signed urgency legislation “permitting the registration of domestic and foreign LLPs in California.”³⁵ A limited liability partnership may not engage in the banking business or the trust company business.³⁶

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III. THE DEVELOPMENT OF RULES TO GOVERN THE CONDUCT OF “TRUST BUSINESS” BY INDIVIDUALS

A. The Number of Individuals Conducting “Trust Business” Grows

In the latter half of the 20th century, the number of individuals marketing themselves to the public as providers of “trust business” expanded beyond the attorneys and accountants who had traditionally acted as executors, administrators, and trustees and, perhaps less often, as guardians or conservators of estates.

There were several reasons for this expansion. First, during the 1970s, the use of the revocable trust to avoid probate exploded.³⁷ Second, in the latter half of the 1900s, banks and trust companies began a process of consolidation resulting in fewer banks and trust companies.³⁸ The resulting larger entities tended to impose significant minimum requirements for new clients, creating opportunities for individuals willing to handle smaller cases. Third, a smaller number of banks and trust companies employed fewer trust officers, thrusting knowledgeable individuals into the job market. Finally, the last decades of the 20th century were a time when marital dissolutions grew in number, causing an increase in the number of mixed families who perceived that they would need a neutral fiduciary to oversee anticipated family disputes.³⁹

B. The Perceived Need for Regulation of Individuals Conducting “Trust Business”

In 2005, the Los Angeles Times reported on the growing number of individuals conducting “trust business” in a four-part front-page series entitled “Guardians for Profit.”⁴⁰ The authors of the series called for regulation of the growing private fiduciary business which, they charged, was harming seniors. Taking aim at this “new breed of entrepreneur,”⁴¹ they noted:

Conservatorships began as a way to help families protect enfeebled relatives from predators and self-neglect…. But lawmakers and judges did not foresee that professionals would turn what had been a family matter into a business. In the hands of this new breed of entrepreneur, a system meant to safeguard the elderly and infirm often fails them.⁴²

Then, calling for regulation, the paper noted:

There are about 500 professional conservators in California, overseeing $1.5 billion in assets. They hold legal authority over at least 4,000 of California’s most vulnerable adults. Yet they are subject to less state regulation than hairdressers or guide-dog trainers. No agency licenses conservators or investigates complaints against them. Probate courts are supposed to supervise their work. Yet oversight is erratic and superficial. Even when questionable conduct is brought to their attention, judges rarely take action against conservators. Three of the past four governors have vetoed legislation that would have provided tougher oversight. This deeply flawed system is about to be hit by a demographic wave. By 2030, the number of Americans older than 65 is expected to double. Experts predict that as many of 10% of them will suffer from Alzheimer’s disease.⁴³

C. The Professional Fiduciaries Act Focuses on Individuals Acting as Professional Fiduciaries

Not surprisingly, in 2006, the year after the Los Angeles Times series, the Legislature passed the Professional Fiduciaries Act (“Act”),⁴⁴ taking aim at this “new breed of entrepreneur.”⁴⁵ It defined the “professional fiduciary”⁴⁶ and created a Professional Fiduciaries Bureau (“Bureau”) to begin regulating professional fiduciaries.⁴⁷ The Bureau was designed “to establish licensing standards and regulations for individuals acting as conservators, guardians, trustees, personal representatives, and others, as specified.”⁴⁸ It has since published regulations ranging from “Licensing” and “Continuing Education” to a “Code of Ethics” with provisions for enforcement.⁴⁹

When it deals with court-appointed fiduciary roles (personal representatives and guardians or conservators of estates), the Act clearly focuses on individuals, not entities.⁵⁰ It defines persons acting in court-appointed fiduciary roles with respect to their human relationships to their wards, heirs, or beneficiaries.⁵¹

The Act’s focus on individuals is less clear when it comes to trustees. It defines a “trustee” as “a person who acts as a trustee . . . for more than three individuals, at the same time,”⁵² without reference to any human relationship between trustee and beneficiary. However, the Bureau’s regulations refine this definition to focus on individual trustees by providing that, “[a] person acting as a trustee under the Act is an individual who meets the requirement of paragraph (1) and (2) [regarding human relationships] ….”⁵³

The Act specifies requirements for licensure that are specific to the business of an individual acting as a fiduciary for another person. For example, licensees must undertake pre-licensing education and continuing education.”⁵⁴ Among other requirements, applicants for professional fiduciary licenses “consent to the Bureau conducting a credit check on the applicant”⁵⁵ and “[a]gree to adhere to the

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Professional Fiduciaries Code of Ethics and to all statutes and regulations.”⁵⁶ Separately, the Bureau maintains records on licensees dealing directly with the fiduciary services that they provide, including and not limited to: the names of the trusts and estates they administer, the names of their wards, “the aggregate dollar value of all assets currently under the licensee’s supervision as a professional fiduciary,” records of court discipline or removal of the fiduciary, and records of bankruptcies of the fiduciary, some of which records may be made public.⁵⁷

IV. THE RULES GOVERNING THE CONDUCT OF “TRUST BUSINESS” BY CORPORATIONS CHANGE

A. The Adoption of Financial Code Section 1553 – a Radical Departure from the Historic Rule Limiting Corporate Trust Business to Banks and Trust Companies

1. The Background of Senate Bill 664 (2011)

Before it was signed in 2006, Senate Bill No. 1550, the Professional Fiduciaries Act, was heard several times, amended seven times, subject to debate, and never passed unanimously before it was signed.⁵⁸ Throughout this process, there is no record that the legislators who defined “professional fiduciary”⁵⁹ and required the licensing of individual professional fiduciaries excepting attorneys, CPAs, and enrolled agents⁶⁰ even began to consider whether law or accountancy corporations should be permitted to act as fiduciaries or to conduct “trust business.”⁶¹

Just two years later, in 2008, the California Department of Financial Institutions (“DFI”) “commenced a multi-year effort to update and reorganize the laws over which it has jurisdiction.”⁶² Also in 2008, the United States experienced a severe banking crisis⁶³ and, in 2010, as a result of the banking crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, affecting banking operations in the states (“Dodd-Frank”).⁶⁴ Between 2008 and 2010, DFI sponsored three different bills designed to update and reorganize the banking laws generally and to respond to Dodd-Frank.⁶⁵

One of these bills, Senate Bill No. 664 (“SB 664”)—the Financial Institutions Law⁶⁶—passed by the Legislature in 2011, finalized “the reorganization process, by renumbering code sections amended by earlier bills.”⁶⁷ SB 664 also updated the Financial Code to conform to Dodd-Frank, allowing “state and federal banks to branch into any state, as if the state or national bank is organized under the laws of the state into which it branches.”⁶⁸

When SB 664 was introduced, nothing in it concerned Financial Code Division 1.1 Chapter 16 (Financial Code sections 1550-1557) governing corporate conduct of “trust business” in California.⁶⁹ The Legislative Counsel’s Digest describing the bill as introduced stated, “This bill would amend and renumber various provisions of the Financial Code applicable to financial institutions and financial services regulated by [DFI] and would make other conforming changes.”⁷⁰

2. Financial Code Section 1553 Was Inserted into SB 664 and Passed into Law without Debate

SB 664 was amended twice.⁷¹ The Legislative Counsel’s Digest describing the amended bill stated that it would “revise and recast various provisions of the Financial Code applicable to financial institutions and financial services regulated by [DFI] and make other conforming changes.”⁷² In spite of this limited description, SB 664 as amended proposed a new Financial Code section 1553, subdivision (b), which would—for the first time—authorize law and accounting professional corporations to act as trustees and to conduct “trust business,” as follows:

The following persons are exempt from section 1550 [the Financial Code section restricting corporate conduct of “trust business” to banks and trust companies]:

(b) Any member of the State Bar, as specified in Section 6002 of the Business and Professions Code, any certified public accountant, as defined in Section 5033 of the Business and Professions Code, and any professional corporation of one or more members of the State Bar or certified public accountants, where these professionals are acting as trustee of a trust established by them for their respective clients, provided that the member of the State Bar, certified public accountant, or professional corporation engages in no advertising for trust business in this state. (Emphasis added.)⁷³

Proposed Financial Code section 1553, subdivision (b), radically changed the corporate conduct of “trust business” by permitting private law and accountancy corporations to conduct “trust business” as long as they limited their activity to acting as trustee for their “respective clients” using documents that they “established.”

Financial Code section 1553 passed unanimously, and it appears that it was never considered or debated in any legislative proceeding.⁷⁴ The Senate Banking Committee held a hearing regarding SB 664 on April 27, 2011. The record of the hearing includes no reference to “trust business” or the conduct of “trust business” by a law corporation or an accountancy corporation.⁷⁵ The record states, “[t]he contents of the Financial Code sections would remain unchanged, only

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the code numbers would be revised, and the code sections reorganized.“⁷⁶ (Emphasis added.) The Assembly Committee on Banking and Finance considered SB 664 on June 27, 2011.⁷⁷ The record of the hearing states, “[t]his bill finalizes the reorganization process, by renumbering code sections amended by the earlier bills. This reorganization makes no substantive changes. . . .”⁷⁸ (Emphasis added.) The Assembly Committee on Appropriations heard SB 664 on July 13, 2011.⁷⁹ The record of the hearing states, “[t]his bill finalizes the reorganization process, by renumbering code sections amended by the earlier bills. This reorganization makes no substantive changes, it merely orders the code sections more logically, and is intended to be easier for licensees to follow and for DFI to administer.”⁸⁰ (Emphasis added.)

As of January 1, 2012, when Financial Code section 1553 went into effect⁸¹—apparently without legislative consideration—law and accountancy corporations appear to have the power to join banks and trust companies to act as corporate trustees, at least in certain situations. However, unlike banks and trust companies, law and accountancy corporations that act as trustees are not required to deposit security with the State Treasurer based on the amounts they hold in trust, and their finances are not subject to routine scrutiny by any governmental examiner. In addition, since the Professional Fiduciaries Act has been interpreted to apply only to individuals, these corporations—unlike individual professional fiduciaries—may not be required to be licensed as professional fiduciaries, are not subject to credit checks, do not report their fiduciary activities to any agency, and their discipline records regarding their fiduciary activities are not maintained or made public.⁸²

V. SUPERIOR COURT CASES REVEAL THAT THE STATUTES GOVERNING THE APPOINTMENT OF ENTITIES TO PROBATE FIDUCIARY POSITIONS ARE PROBABLY BEING VIOLATED

A. Professional Fiduciaries Appear to be Conducting Trust Business through Entities in a Manner That May Violate the Law

A check of the internet under “fiduciary services San Diego,” “fiduciary services Los Angeles,” or “fiduciary services San Francisco” reveals that many professional fiduciaries are already operating with fictitious business names.

A random comparison of the names of fiduciary entities with the rosters of corporations and limited liability companies doing business in California reveals that a significant number of professional fiduciaries are conducting some or all of their business activities through entities such as corporations or limited liability companies.⁸³

If fiduciaries operating business entities can maintain clear lines between the fiduciary’s trust business and the fiduciary’s non-trust business, it appears that no law prevents a fiduciary from conducting non-fiduciary business through an entity. For example, a fiduciary’s entity could own computers or lease real property. However, since it is not always easy to keep the lines clear, and since clients, courts, and others can easily begin to identify a professional fiduciary with the fiduciary’s business name, it can be difficult for a professional fiduciary to ensure that “trust business” is always conducted individually. If or to the extent fiduciaries operating entities find themselves using their entities to conduct “trust business” they may find themselves and their entities in violation of the law.

B. Fiduciary Entities and the Courts

What follows is an analysis of actual cases illustrating the difficulties that fiduciaries, attorneys, and courts have when applying the laws governing the appointment of fiduciaries and entities in probate cases. The cases illustrate how a professional fiduciary might conduct “trust business” through an entity and how members of the public, attorneys, and courts who are accustomed to dealing with professional entities in non-fiduciary contexts might assume that a professional fiduciary’s entity is entitled to conduct “trust business” in a probate court proceeding. There is every reason to believe that the few cases discussed here are the tip of the iceberg and that similar cases can be found throughout the courts of California. There is also every reason to believe that—if a professional fiduciary’s entity can be named to conduct “trust business” improperly in probate court proceedings—professional fiduciary entities are also improperly conducting “trust business” outside the courts.

The cases discussed below were overseen by many different judges and involved numerous attorneys. The names in the cases have been changed and the case numbers have been omitted because the author wishes to report and analyze the substance of what can be seen in the court records. The hope is to encourage discussion and resolution of an apparent problem. The author has no interest in disrupting any case or in embarrassing or inconveniencing any person. If or to the extent that the author is wrong, the wish is to ensure that waters have not been troubled. The author has made relevant documents available to the editors of the Quarterly, and the existence of the facts discussed below has been verified independently.

In each case, the entity is “Fiduciaries R Us,” owned and operated by the fictitious Joshua Deets, a licensed professional fiduciary.

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1. Estate of Augustus McRae (2021)

The probate court appointed Fiduciaries R Us, LLC as Administrator of the Estate by an Order dated March 23, 2021. Letters were issued to Fiduciaries R Us, LLC on March 25, 2021. Attorney Clara Simon represented Fiduciaries R Us, LLC. Bond was set at $1,500,000.00.

The Affirmation portion of the Letters identified Fiduciaries R Us, LLC as an Institutional Fiduciary. The Letters were signed by Fiduciaries R Us, LLC by Joshua Deets.

Comment: The Order and the Letters appear to have violated Corporations Code section 17701.04 providing that a limited liability company cannot engage in either the banking business or the trust company business.
The professional fiduciary, Joshua Deets, appears to be operating his LLC in violation of Corporations Code section 17701.04 providing that a limited liability company cannot engage in either the banking business or the trust company business.
By signing the Affirmation, Mr. Deets appears to have violated both Corporations Code section 17701.04 providing that a limited liability company cannot engage in either the banking business or the trust company business and Probate Code section 60.1, subdivision (b), providing that only a licensed fiduciary can “act or hold himself or herself out to the public as a professional fiduciary.”

2. Estate of July Johnson (2020)

The Order appointed “Joshua Deets, Fiduciaries R Us, LLC” as Administrator of the Estate with full authority. The bond was set at $400,000. The Letters, which were apparently prepared by attorney A. Oakley, acting as attorney for a family member, identified the Administrator as “Fiduciaries R Us, LLC.” The Affirmation was executed by “Fiduciaries R Us, LLC” as an “Institutional Fiduciary” by “Joshua Deets, Managing Member.”

Comment: The Order is ambiguous. Who was appointed, Deets or Fiduciaries R Us, LLC?
Probable violation of Probate Code section 60.1, subdivision (b), and section 2340.
Probable violation of Corporations Code section 17701.04.

3. Estate of Maggie (2021)

Attorney Susan Onoda representing “Fiduciaries R Us, LLC” filed a petition for administration of the intestate estate of Maggie. The petition asked that Joshua Deets, individually, be appointed as administrator. Joshua Deets verified the petition individually, adding “CLPF Managing Principal of Fiduciaries R Us, LLC, Probate Administrator.” (“CLPF” apparently stood for California Licensed Professional Fiduciary)

It appears that no person was available to nominate an administrator. Therefore, Attachment 3g(2)(a) to the Petition recited, in part, “Fiduciaries R Us, LLC, through its California licensed professional fiduciary managing principals, and their licensed successor and assignees, is entitled to appointment as a personal representative even without nomination, pursuant to Probate Code Sections 56 and 8461, as this entity qualifies as ‘any other person.’” Attachment 3g(2) (a) also recited that another attorney was aware of “the potential nomination of Fiduciaries R Us as personal representative for Decedent’s estate.”

The Order for Probate, prepared by attorney George Smith, representing Fiduciaries R Us, LLC, appointed “Fiduciaries R Us, LLC” as administrator. The Letters of Administration, also prepared by Smith, granted authority to “Fiduciaries R Us, LLC.” The Affirmation was signed on behalf of an “Institutional Fiduciary” by “Fiduciaries R Us, LLC by Joshua Deets.”

Comment: Although the Petition properly asked that Joshua Deets be appointed administrator, as an individual, Attachment 3(g)(2) improperly asserted that it would be appropriate for the court to appoint Fiduciaries R Us, LLC, as administrator. The wording of Attachment 3(g)(2) suggests that the attorney who worked on the Petition was aware of one issue—that there was no nomination—but was not aware that the court could not appoint this LLC as administrator. However, the fact that Attachment 3(g)(2) refers to “Fiduciaries R Us, LLC, through its California licensed professional fiduciary managing principals, and their licensed successor and assignees” as being “entitled to appointment” reveals that someone was concerned about the issue of perpetual existence.
By (i) verifying the petition as “CLPF Managing Principal of Fiduciaries R Us, LLC, Probate Administrator,” (ii) signing the Affirmation as an “institutional fiduciary,” and cooperating in the process, Mr. Deets appears to have violated both Corporations Code section 17701.04 providing that a limited liability company cannot engage in either the banking business or the trust company business and Probate Code section 60.1, subdivision (b), providing that only a licensed fiduciary can “hold himself or herself out to the public as a professional fiduciary.” Mr. Deets also may have purposely misled the court.

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4. Estate of Jake Spoon (2019)

The parties to a settlement stipulated that “Joshua Deets” would be appointed as personal representative of the estate.

Later, Joshua Deets, in pro per, petitioned for the appointment of “Fiduciaries R Us, LLC and its successors and assigns,” as administrator. The petition was verified by “Fiduciaries R Us, LLC by Joshua Deets, Co-Managing Principal.” Next to the signature, the Petition identified the Petitioner as “Fiduciaries R Us, LLC and its successors and assigns.”

The Order for Probate, prepared by Angela Crooks, as attorney for “Fiduciaries R Us, LLC, through its licensed principal, Joshua Deets,” named “Fiduciaries R Us, LLC, through its licensed principal, Joshua Deets,” as administrator. Letters were issued with the same wording. This time, the Affirmation was made on behalf of an “Individual” and was signed “Joshua Deets, Fiduciaries R Us, LLC.”

Comment: The documents show significant confusion between Mr. Deets and his entity. The parties to the settlement properly stipulated that Mr. Deets, as an individual, should be appointed. However, when Mr. Deets filed documents to implement the settlement, the petition requested appointment of his entity, and his entity “and its successors and assigns.” The court appointed the entity as administrator, adding “through its licensed principal Joshua Deets.”
While the parties to the settlement properly designated an individual to act as administrator, they appear not to have realized that Mr. Deets then acted to change the administrator’s identity to his entity. The Order and the Letters appear to have violated Probate Code section 2340, providing that when the Probate Court appoints a professional fiduciary, it can only appoint an individual fiduciary, and Corporations Code section 17701.04, providing that a limited liability company cannot engage in either the banking business or the trust company business.
The use of “Fiduciaries R Us, LLC and its successors and assigns” reveals Mr. Deets’s concern with continuity. “Successors and assigns” appears in several of the cases.

5. Dish Goggett Irrevocable Trust (2017)

An “Order After Hearing” filed by Maureen Cheeney as attorney for Fiduciaries R Us, LLC regarding a settlement recited the participation of two other attorneys, then stated:

…

2) Joshua Deets and Roscoe Brown of Fiduciaries R Us, LLC (“FRU”) shall serve as Successor Trustee. FRU shall post bond in the amount of $700,000.
3) FRU may set its “Petition to Modify Trust” for hearing and said Petition must be filed by September 8, 2017.
Comment: The Order is ambiguous. While it was appropriate for the court to appoint the individual professional fiduciaries as successor trustee, it was not necessary for the court to identify their entity. Identification of the entity did not add anything, and it certainly could have led to confusion regarding the role, if any, to be played by FRU.
The confusion and inconsistency were exacerbated by the fact that the order apparently appointed the individuals but required that the bond be posted by the entity and provided that a further petition was to be filed by FRU.
The court’s designation of FRU as the party to file the next petition emphasized that the court saw FRU as the trustee.

6. Lonesome Dove Trusts (2019)

An “Order After Hearing” filed by James Shelgren as attorney for Large National Bank, Trustee of the Lonesome Dove Trusts, recited a Settlement Agreement negotiated with the participation of three attorneys. The Settlement Agreement provided that almost $700,000 was to be distributed to “Fiduciaries R Us, LLC, Trustee of The Blue Duck Lifetime Benefit Trust, for administration and distribution thereunder per Restated Trust.” It also recited that almost $1,000,000 was to be distributed to “Fiduciaries R Us, LLC, Trustee of The Blue Duck Lifetime Benefit Trust, for administration and distribution thereunder per Insurance Trust.”

Comment: This was a complicated case involving several attorneys and large amounts of money. Nevertheless, the parties agreed to the appointment of an entity as trustee that, under Corporations Code section 17701.04 was specifically prohibited from engaging “in either the banking business or the trust company business.” The court compounded the mistake by approving this designation.

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Armed with the order, Fiduciaries R Us, LLC could easily open bank and other accounts and manage the trusts in its name as an LLC. However, when it did so, it would be violating both Corporations Code section 17701.4, mentioned above, and Probate Code section 60.1, subdivision (b), providing that only a licensed fiduciary can “act or hold himself or herself out to the public as a professional fiduciary.”

7. Subtrust A, Woodrow Call Trust (2021)

An “Order Granting Ex Parte Petition for Modification of Trust and Appointment of Successor Trustee” filed by attorney Don Rogers, as attorney for an individual, recited a Settlement Agreement that had been reached with the participation of three attorneys. The Settlement Agreement provided “Fiduciaries R Us, LLC is appointed Successor Trustee of Sub Trust A to serve without bond.”

Comment: Once again, a court appointed an LLC as a trustee in violation of Corporations Code section 17701.04 providing that a limited liability company cannot engage in either the banking business or the trust company business.
Once again, Fiduciaries R Us, LLC was armed with an order permitting it to conduct trust business in California in violation of both Corporations Code section 17701.4, mentioned above, and Probate Code section 60.1, subdivision (b), providing that only a licensed fiduciary can “hold himself or herself out to the public as a professional fiduciary.”
Once again, a judge and several attorneys seem to have been unaware that a limited liability company cannot engage in the trust business.

C. Is the Confusion Revealed in These Cases Inevitable?

The developments seen in the above cases seem inevitable. Attorneys can appear in court through a professional corporation.⁸⁴ Certified public accountants can practice accounting through a professional corporation.⁸⁵ Professional fiduciaries cannot conduct their fiduciary practices through an entity, but they can conduct their non-fiduciary activities through an entity. A rule requiring professional fiduciaries to conduct their core “trust business” only as individuals is confusing. A client who finds Fiduciaries R Us, LLC through a computer search, calls Fiduciaries R Us, LLC on the phone and enters a door labeled Fiduciaries R Us, LLC when seeing Joshua Deets logically thinks that Fiduciaries R Us, LLC is an entity that can conduct “trust business” and can be named as a fiduciary in an estate planning document. Judges and attorneys who identify Joshua Deets with Fiduciaries R Us, LLC naturally assume that they can name Fiduciaries R Us, LLC as a fiduciary.

D. Risks Inherent in the Foregoing Cases

Will the actions of Fiduciaries R Us, LLC as a personal representative or as a trustee be given effect? Can they be set aside?

Can the LLC business form provide Deets with any protection from personal liability under these circumstances?

If there is liability to the heirs or beneficiaries, what liability does Deets have? What liability does Fiduciaries R Us, LLC have?

If a bond was issued to Fiduciaries R Us, LLC, but Deets was the actor, can the bond be enforced? If the bond was issued to Deets, but Fiduciaries R Us, LLC was the actor, can the bond be enforced?

Will Deets or Fiduciaries R Us, LLC be able to retain fees if fees are contested?

Will any attorney who represented Fiduciaries R Us, LLC as a personal representative or as a trustee be able to retain fees if fees are contested?

Will Deets or his attorneys be sanctioned for misrepresentations to the court?

Are Deets and Fiduciaries R Us, LLC subject to removal?

What discipline might the Bureau impose on Deets? Can it impose penalties of any kind on Fiduciaries R Us, LLC?

If there is liability to the heirs or beneficiaries, do attorneys who participated in the negotiation of settlement agreements naming Fiduciaries R Us, LLC as a personal representative or as a trustee face malpractice exposure?

Any attorney who advised Deets that he could use Fiduciaries R Us, LLC to provide fiduciary services could be liable for malpractice.

In the Lonesome Dove Trusts case, Large National Bank as trustee distributed to Fiduciaries R Us, LLC as trustee. If there is liability to the beneficiaries what liability does Large National Bank face? If Large National Bank faces liability, what liability does its attorney face?

VI. PROFESSIONAL FIDUCIARIES HAVE A REASONABLE DESIRE TO PRACTICE THROUGH AN ENTITY WITH AN UNLIMITED LIFESPAN

Professional fiduciaries typically begin their practices as sole proprietorships and act as individuals when they assume an

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executorship or a trusteeship. As their practices develop, many realize that they have the same interests in creating a business entity that other professionals have. These include:

1. Protecting their personal assets from business liabilities;
2. Creating entities that can employ staff and provide staff with benefits available to business entities;
3. Operating with a business name that is recognizable and memorable; and
4. Protecting the value of years of work by permitting them to have entities that can be bought and sold, or that can be left to qualified family members.

Professional fiduciaries have another important reason to conduct their business through an entity with an unlimited lifespan—the need to provide continuity for their clients. A well-run fiduciary business entity can create efficiencies for clients and their descendants who learn to trust the entity and the individuals in its employ and who can rely on the entity and its institutional knowledge for consistent administration of family matters over time. If a client must name an individual professional fiduciary as trustee, there is a potential for delay and confusion when that individual dies, becomes disabled or retires. In an easy case, the names on deeds, bank accounts, financial accounts, and similar items must be changed to identify the successor nominated in the relevant document. In a hard case, the replacement of one individual with another is a time for inefficiency, dispute and, potentially, court involvement.

The requirement that they must conduct their trust business as individuals is a competitive disadvantage for professional fiduciaries, especially now that law and accountancy corporations can act as trustees. When a client tells an attorney that the client is considering nominating a professional fiduciary, an attorney advising the client may have a duty to point out that the individual professional fiduciary does not have the perpetual existence possessed by a corporation, such that the professional fiduciary’s services cannot be as long-lasting or as continuous as the services provided by those entities.

Although it is not a matter directly related to the priorities of a professional fiduciary, the requirement that professional fiduciaries act as individuals can be a burden on the courts. When an individual who has been appointed as a fiduciary to administer one case dies or becomes incapacitated, it is one thing. When an accomplished individual fiduciary who is administering one hundred cases must be replaced, it is quite another. Since it is highly unlikely that all documents administered by the professional fiduciary will name an available alternate appointee, a multitude of court cases would be required to identify and appoint new individuals to replace the former fiduciary. The delay and expense inherent in this process burden not only the courts, but also the beneficiaries who rely on action from their fiduciaries.

VII. CONFUSION, AMBIGUITIES, AND POLICY QUESTIONS RAISED BY THE STATUTES

A. Potential Problems in Interpreting and Enforcing Financial Code Section 1553

1. Financial Code Section 1553, Subdivision (b), Appears to Conflict With Business and Professions Code Section 13401

Corporations Code section 13401, subdivision (b), provides that a professional corporation is a corporation “that is engaged in rendering professional services in a single profession, except as otherwise authorized in Section 13401.5 . . . .”⁸⁶ No provision in section 13401.5 authorizes a law corporation or an accountancy corporation to engage in business as a professional fiduciary. And, while a professional corporation can conduct business activities unrelated to the profession which it is authorized to practice, a professional corporation cannot engage in another activity “which would require another Business and Professions Code authorization covering a different professional service.”⁸⁷ Since a professional fiduciary must be licensed under Business and Professions Code section 6530, and since at this time there is no authority for the creation of a California professional fiduciary corporation, the Corporations Code authorizes a law corporation to practice law and an accountancy corporation to practice accounting, but neither is authorized, in addition, to conduct the business of a professional fiduciary.

However, Financial Code section 1553, subdivision (b), discussed above, now appears to authorize law and accountancy corporations to act as trustees in violation of Corporations Code section 13401.5 by exempting them from the statutory prohibition on conducting “trust business”: “any professional corporation of one or more members of the State Bar or certified public accountants, where these professionals are acting as trustee of a trust established by them for their respective clients, provided that the member of the State Bar, certified public accountant, or professional corporation engages in no advertising for trust business in this state.”

2. The Terms of Financial Code Section 1553, Subdivision (b), Are Ambiguous

a. Issues Affecting Accountancy Corporations

Financial Code Section 1553, subdivision (b), apparently exempts a professional corporation of “one or more . . . certified public accountants” from the historic prohibition

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on conducting “trust business” when “these professionals are acting as trustee of a trust established by them for their respective clients, provided that the member of the . . . professional corporation engages in no advertising for trust business in this state.”

The extent of the accountancy corporation’s authority under this statute is unclear. First, although the language of section 1553, subdivision (b), certainly appears to authorize an accountancy corporation to act as a trustee, the language of the statute also emphasizes the actions of the “member of the professional corporation,” suggesting that it may be the member who is in fact the trustee.

Second, if accountancy corporations are authorized to act as trustees, they can only act as trustees of a trust “established by them for their respective clients.” What does it mean to “establish” a trust? Must the accountancy corporation draft the trust? If so, is it practicing law without a license? Can an accountancy corporation administer a trust drafted by a lawyer or by an individual? Can an accountancy corporation administer a trust drafted by a CPA in a different accounting firm?

b. Issues Affecting Attorneys

Just as with accountants, it is not clear that a trust drafted by an attorney is “established” by the attorney. In addition, could a law corporation act as trustee of a trust drafted by an attorney who was unaffiliated with the law corporation? If an attorney in a law corporation amended a trust drafted by an attorney unaffiliated with the law corporation, did the law corporation “establish” the trust? If an attorney drafts a trust naming the attorney’s firm as trustee but then moves to another firm, what happens to the trusteeship?

3. If a Professional Corporation Acts as a Trustee, Must it Be Licensed as a Professional Fiduciary?

Under Business and Professions Code section 6501, subdivisions (f)(4)(A) and (f)(4)(B), the Professional Fiduciaries Act excludes banks and trust companies from the definition of “professional fiduciary.” Because they are not professional fiduciaries, banks and trust companies are not required to be licensed by the Bureau.⁸⁸

However, no portion of the Professional Fiduciaries Act excludes law or accountancy corporations from the definition of “professional fiduciary” or otherwise deals with professional corporations. This is not surprising because the Professional Fiduciaries Act was passed in 2006. At the time, no law suggested that a law corporation or an accountancy corporation could act as trustee—Financial Code section 1553, subdivision (b), went into effect on January 1, 2012.⁸⁹

If law and accountancy corporations begin acting as trustees, it appears that they may well be required to be licensed as professional fiduciaries. Business and Professions Code section 6501, subdivision (f)(2), provides that “‘[p]rofessional fiduciary’ also means a person who acts as a trustee….” Since “person” can include a corporation, the Professional Fiduciary Act on its face may require a law corporation or an accountancy corporation acting as a trustee to be licensed.⁹⁰

4. Financial Code Section 1553 Unnecessarily Exempts Individuals from the Coverage of Financial Code Section 1550

In addition to having been adopted in an unusual fashion, Financial Code section 1553, as brought to us by SB 664, contains provisions that are surplus at best, and confusing at worst.

Financial Code section 1550 is limited to corporations and provides that the only corporations that can engage in a “trust business” in California are banks and trust companies. Since Financial Code section 1550 applies only to corporations there is no need to exempt from its coverage any person or entity that is not a corporation. Nevertheless, Financial Code section 1553 unnecessarily exempts from the operation of section 1550 the following individuals: (i) “natural persons” serving as trustees of certain trusts,⁹¹ (ii) “any member of the State Bar,”⁹² (iii) “any certified public accountant,”⁹³ and (iv) “any person licensed as a professional fiduciary….”⁹⁴

There is no need for these exceptions and the lack of debate over SB 664 renders it impossible to understand why these exceptions were included in what became Financial Code section 1553. They make a confusing situation more confusing.

5. A Potentially Misleading Exemption for Individual Certified Public Accountants in Financial Code Section 1553

Besides unnecessarily exempting individuals from a statute that regulates corporations, Financial Code section 1553, subdivision (b), confuses the ability of an individual CPA to conduct “trust business” without being licensed.

Before section 1553, subdivision (b), was enacted, an individual CPA was exempt from being licensed only if the CPA was “acting within the scope of practice of, a certified public accountant.”⁹⁵ However, since section 1553, subdivision (b), applies to “any [individual] certified public accountant” it suggests that an individual CPA can conduct “trust business” only if the CPA “[is] acting as trustee of a trust established by them for their respective clients, provided that the . . . certified public accountant . . . engages in no advertising for trust business in this state.” And if an individual CPA is limited to acting as a trustee only “of

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a trust established by them for their respective clients,” can an individual CPA act as trustee of a trust drafted by an attorney? Further, if an individual CPA can only act as trustee of a trust “established by them” does the new statute conflict with—and perhaps limit—the rule in the Business and Professions Code that a CPA is exempt from being licensed as a professional fiduciary when “acting within the scope of practice, of a certified public accountant?”

6. Policy Issues Raised by Permitting Law and Accountancy Corporations to Act as Trustees

a. Beneficiary Protection

As discussed above, California’s historic approach to identifying individuals and entities that could conduct “trust business” protected beneficiaries by providing them a pocket from which to seek relief when they were damaged by a trustee’s actions. In the case of corporate trustees, banks and trust companies were heavily regulated and subject to inspection.⁹⁶ In the case of individual trustees, beneficiaries could seek relief from an individual who had no liability protection.

To the extent that Business and Professions Code section 1553, subdivision (b), authorizes law and accountancy corporations to act as trustees, the law appears to have changed to reduce relief available to beneficiaries. Law and accountancy corporations have liability protection for the clients of their law and accounting practices.⁹⁷ It is not clear that this protection would extend to beneficiaries of trusts administered by those corporations.

b. Consistency and Even-Handedness

Under current law, professional fiduciaries cannot form professional corporations even though they, as individuals, are subject to laws directly related to their ability to act as professional fiduciaries. If law and accountancy corporations are to be permitted to act as trustees, consistency would seem to require a law permitting professional fiduciaries to incorporate.

B. Although Defined as “Professional Fiduciaries,” Individual Attorneys, CPAs, and Enrolled Agents Can Conduct “Trust Business” Without Being Licensed

1. A Blanket Exclusion from Licensing for Attorneys

PFAC sponsored Senate Bill No. 1550 (“SB 1550”), which became the Professional Fiduciaries Act.⁹⁸ PFAC’s position was that every individual engaged in “trust business” should be included within the definition of “professional fiduciary.” A letter that PFAC wrote to Senator Figueroa, the legislative sponsor of the bill, stated:

Our position is that ALL individuals who are currently practicing as a “professional” Conservator, Guardian and Trustee should be included and required to be licensed and regulated to practice within this field…. We see this bill as … an opportunity to encompass ALL those individuals … this business is quite unique and just because one is a CPA, Attorney, Banker or with Public Guardian’s office does not mean they are qualified to practice within this field or should be allowed to practice in this field without the proper training and licensure….⁹⁹

In spite of PFAC’s position, SB 1550 as introduced provided that “an individual attorney could hold themself out to the public as a professional fiduciary” without being licensed as a professional fiduciary.¹⁰⁰ This meant that individual attorneys could continue to conduct “trust business” free from the new regulatory environment. Unlike the newly-created “professional fiduciary” the attorney fiduciary had no duty to submit to a credit check or disclose the amounts under fiduciary management. No government bureau tracked the attorney fiduciary’s cases or discipline imposed on the attorney fiduciary by the courts.

The legislative history does not explain why attorneys were given a blanket exclusion from licensing when SB 1550 was first introduced, and the exclusion does not appear to have been debated. The blanket exclusion remained in all amendments to SB 1550 and can be found in Business and Professions Code section 6530, subdivision (c).

2. A Limited Exclusion from Licensing for CPAs and Enrolled Agents

SB 1550 containing the licensing exclusion for attorneys was introduced on February 23, 2006.¹⁰¹ It was not long until CPAs determined that they, too, should be permitted to conduct “trust business” without being required to be licensed as professional fiduciaries. During the spring and summer of 2006, “more than 100” CPAs objected to being required to be licensed. Their letters included statements ranging from “we are already regulated by the California Board of Accountancy,” to “we are not the problem,” to “why aren’t we treated like lawyers?”¹⁰²

The California Society of Certified Public Accountants (“CSCPA”) wrote to oppose SB 1550 unless amended. Its letter dated May 30, 2006, stated:

[W]e are concerned that this bill creates a burdensome regulatory scheme that unnecessarily impacts CPAs. CPAs are often asked by long-term clients to act as trustees. CPAs are already licensed by the California Board of Accountancy and those requirements meet or exceed the minimal standard

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of competence envisioned by the bill. CPAs must abide by state law, a Code of Ethics and extensive national professional standards governing their actions in client matters….¹⁰³

For a time, the Senate refused to amend SB 1550 as requested by the CPAs.¹⁰⁴ Ultimately, however, the parties agreed on a compromise that CPAs could be excluded from the definition of “professional fiduciary” as long as they were “acting within the scope of practice of, a certified public accountant pursuant to Chapter 1….” This provision can be found in Business and Professions Code section 6530, subdivision (c).

Finally, when SB 1550 was last amended, the legislature also excluded enrolled agents from the licensing requirement “only when acting within the scope of practice pursuant to Part 10 of Title 31 of the Code of Federal Regulations,” although the legislative history contains no evidence explaining this exclusion.¹⁰⁵

3. Policy Issues Raised by the Exclusion of Attorneys, CPAs, and Enrolled Agents from Licensing as Professional Fiduciaries

The legislature’s exclusion of attorneys, CPAs, and enrolled agents who act as fiduciaries of estates from the need to be licensed as a “professional fiduciary” raises at least the following questions:

What is it about the licensing and regulation of attorneys, CPAs, or enrolled agents that qualifies them to act as trustees, executors, guardians, or conservators of estates and therefore to a blanket (for attorneys) or limited (for CPAs and enrolled agents) exclusion from the duty to be licensed as a professional fiduciary?

What regulations applicable to attorneys, CPAs, or enrolled agents require them to disclose their activities as trustees and personal representatives to state regulators?

How do the exclusions for attorneys, CPAs, and enrolled agents benefit the public?

Is the argument made by the CSCPA that “CPAs are already licensed by the California Board of Accountancy and those requirements meet or exceed the minimal standard of competence envisioned by the bill” accurate? Do CPAs receive training directly related to the functions of acting as a fiduciary?

What does it mean for a CPA to be acting as a fiduciary “within the scope of practice of, a certified public accountant pursuant to Chapter 1…”? The Consumer Assistance Booklet published by the California Board of Accountancy lists the tasks performed by CPAs with no mention of trusteeship or fiduciary services.¹⁰⁶ Does a CPA’s “scope of practice” include acting as a fiduciary?

Do the boards that regulate attorneys, CPAs, and enrolled agents maintain fiduciary-specific records on their licensees similar to those records maintained by the Bureau?

VIII. ISSUES TO CONSIDER IF THE LEGISLATURE IS TO CREATE AN ENTITY THROUGH WHICH PROFESSIONALS CAN CONDUCT TRUST BUSINESS

Given the foregoing realities and the confusion and ambiguities in the applicable statutes addressed above, it appears that it may be time for the California legislature to review the laws governing the powers of individuals and corporations to conduct “trust business” as a whole. This section discusses some of the matters that the creators of any such legislation might consider.

A. Professional Corporations Should Have Clear Liability to Their Beneficiaries

Financial Code section 1553, subdivision (b), authorizes law and accountancy corporations to act as trustees for their clients provided that they “established” the trusts and do not advertise. However, these entities are not subject to any regulation specifically addressed to their activities as fiduciaries. Public policy suggests that entities that are granted the authority to act as fiduciaries for individuals should have some degree of financial responsibility for their actions. That degree of financial responsibility does not appear to exist under the current law.

Any law generally permitting certain professional corporations to act as fiduciaries should clearly set forth the manner in which beneficiaries are to be protected.

B. If Professional Corporations Are Authorized to Act as Fiduciaries, the Playing Field Should Be Level

If law and accountancy corporations are permitted to act as trustees, it is difficult to see a reason why professional fiduciaries should not be permitted to incorporate.

C. Exemptions from Licensing as Professional Fiduciaries Might be Reconsidered

Attorneys have a blanket exemption from any requirement to be licensed as a professional fiduciary no matter how many trusts or estates they might administer. CPAs and Enrolled Agents have limited exemption from any requirement to be licensed as a professional fiduciary no matter how many trusts or estates they might administer.

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The foregoing professionals argue that their training and licensing is sufficient to cover their activities as fiduciaries. It is not clear that this argument is persuasive. Does a tax accountant or a personal injury attorney truly have the training and continuing education to function effectively as a fiduciary? Will the argument that attorneys have all at least taken a course in trusts and estates be strong? Will the argument hold up when the Multistate Bar Exam no longer tests trusts and estates beginning July 2026?¹⁰⁷

IX. CONCLUSION

The laws governing which individuals or entities are authorized to conduct the business of acting as trustees or as executors, administrators, guardians, or conservators of estates have developed in a confusing manner. It seems likely that attorneys and legislators dealing with professional corporations have ignored the Financial Code and the Probate Code, while attorneys, legislators, executors, and conservators have ignored the Financial Code and the Business and Professions Code.

If professional fiduciaries again seek legislation authorizing the formation of a professional fiduciary corporation, it will be a good time to review and reconcile the various codes.

——–

Notes:

^*. Hughes & Pizzuto, APC, San Diego, California

Thanks to Kent C. Thompson and Mary Cronkleton for assistance with this article.

The Professional Fiduciaries Association of California provided funding for the purchase of the legislative histories of SB 664 and SB 1550 from Legislative Intent Service, Inc. (www.legintent.com). This material provided valuable insight into the development of the statutes discussed in the article. No person affiliated with the Professional Fiduciaries Association of California saw this article or any draft of this article before it was submitted to the California Trusts and Estates Quarterly.

^01. Fin. Code, sections 115, 1100, 1550.

^02. See discussion at Section 11 (A) post and accompanying endnotes 10-16.

^03. Bus. & Prof. Code, sections 6500-6592.

^04. Bus. & Prof. Code, section 6501, subd. (f)(2).

^05. Bus. & Prof. Code, section 6501, subds. (f)(1)(A)-(f)(1)(B).

^06. Bus. & Prof. Code, sections 6530-6534.

^07. Bus. & Prof. Code, section 6530.

^08. Fin. Code, section 1553, subd. (b).

^09. See ibid. The extent to which a professional law or accountancy corporation may not provide beneficiaries with recourse to the corporation’s shareholders is discussed in Section VII. A. 6., post. The corporation’s unlimited lifespan, which is important in the fiduciary context is discussed in Section VI., post.

^10. Questions regarding guardians or conservators of the person are beyond the scope of this article.

^11. Fin. Code, sections 1550-1613.

^12. See, e.g., Prob. Code, sections 60.1, 83, 300, 2340.

^13. Bus. & Prof. Code, sections 6500-6592.

^14. Cal. Code Regs., Tit. 16, sections 4400 et seq.

^15. Bus. & Prof. Code, section 6510.

^16. Cal. Dep’t of Consumer Affairs, Prof. Fiduciaries Bureau, Sunset Review Report 2023, p. 39. < https://www.fiduciary.ca.gov/forms_pubs/2023_sunset_review.pdf > [as of April 30, 2025].

^17. Ibid.

^18. Assem. Bill No. 2148 (2023-2024 Reg. Sess.) (“AB 2148”) as Amended in the Senate June 25, 2024. No portion of AB 2148 as amended referred to the Financial Code or, specifically, to Financial Code section 1550.

^19. Undated letter from the California Department of Finance to Honorable Evan Low stating an “Oppose” position to AB 2148 as amended June 25, 2024. “The Department of Finance notes the Professional Fiduciary Fund has a structural deficit and additional costs will exacerbate the low fund balance, which will result in fund insolvency.”

^20. At the time that this article had completed its editorial round, AB 586 was working its way through the legislature but had not yet been harmonized between the Assembly and Senate.

^21. Fin. Code, section 115 is derived from former Bank Code, section 115 and former Fin. Code, section 115, enacted in Stats. 1951 (1951-1952 Reg. Sess.) ch. 364 and repealed Stats. 2011 (2011-2012 Reg. Sess.) ch. 243, section 1.

^22. Fin. Code, sections 115, 1550, 1100. The rule limiting corporate conduct of “trust business” to banks and trust companies was changed in 2011 with the adoption of Financial Code section 1553, subdivision (b), permitting legal and accountancy professional corporations to act as trustees in certain circumstances. This change is discussed more fully post.

^23. Fin. Code, section 1573.

^24. Fin. Code, sections 1570-1571.

^25. Ibid.

^26. Fin. Code, section 125. See also Fin. Code, sections 500, subds. (a)(6), (a)(4), 1603.

^27. Fin. Code, sections 500, subd. (a)(6), 500, subd. (a)(4), 1603.

^28. Stats 1968 (1967-1968 Reg. Sess), ch 1375, section 9.

^29. 4 Ballentine & Sterling Cal. Corp. Law, section 723.

^30. 4 Ballentine & Sterling Cal. Corp. Law, section 727. See former Corp. Code, section 15616.

^31. Corp. Code, section 15901.04.

^32. Stats 1994 (1993-1994 Reg. Sess.) ch. 1200 (Sen. Bill No. 469) effective Sept. 20, 1994.

^33. Former Corp. Code, section 17200, subd. (a).

^34. Corp. Code, section 17701.04.

^35. 4 Ballentine & Sterline Cal. Corp. Law, section 641.

^36. Corp. Code, section 15901.04, subd. (b).

^37. See Rudolph & Hughes, A Lawyer is a Lawyer is a Lawyer, (2019) volume 25, No. 1, Cal. Trusts and Estates Q.

^38. In 1986, Wells Fargo Corp. acquired Crocker National Bank. In 1988, Wells Fargo Corp. acquired Barclays Bank of California. In 1988, Security Pacific Corp. acquired The Hibernia Bank. In 1992, BankAmerica Corp acquired Security Pacific Corp. In 1994, First Interstate Bank acquired San Diego Trust and Savings Bank. In 1996, Wells Fargo Corp. acquired First Interstate Bancorp. In 1996, Union Bank acquired Bank of California. Wikipedia, List of Bank Mergers in the United States, < https://en.wikipedia.org/wiki/List_of_bank_mergers_in_the_United_States > [as of December 13, 2024].

^39. The divorce rate for women in the United States was 9.2 percent in 1960 and rose to 22.6 percent in 1980. It had fallen to 15.7 percent by 2018. Bowling Green State University National Center for Family & Marriage Research (NCFMR), < https://www.bgsu.edu/ncfmr/resources/data/family-profiles/schweizer-divorce-century-change-1900-2018-fp-20-22.html > [as of December 13, 2024].

^40. Guardians for Profit, L.A. Times (Nov. 13, 2005) p. A1; (Nov. 14, 2005) p. A1; (Nov. 15, 2005) p. A1; (Nov. 16, 2005) p. A1.

^41. Guardians for Profit, L.A. Times (Nov. 13, 2005) p. A1.

^42. Ibid.

^43. Ibid.

^44. Bus. & Prof. Code, sections 6500-6592, Prob. Code, sections 60.1, 2340 (Added by Stats. 2006 (2005-2006 Reg. Sess.) ch. 491, section 3).

^45. Guardians for Profit, L.A. Times (Nov. 13, 2005) p. A1.

^46. Bus. & Prof. Code, section 6501, subd. (f)(1).

^47. Bus. & Prof. Code, section 6501, subd. (b).

^48. 2006 Legislative Highlights, Senate Office of Research, p. 12.

^49. Cal. Code Regs., Div. 41, art. 1-11.

^50. Bus. & Prof. Code, section 8501, subds. (f)(1)(A), (f)(1)(B), and (f)(2). See also Cal. Code of Regs, section 4406, subd. (e) “A person acting as a trustee under the Act is an individual who meets the requirement of paragraph (1) and (2) [regarding human relationships] and shall be licensed as a professional fiduciary unless exempt under the Act.” Banks and trust companies are statutorily excluded from the definition of “professional fiduciary.” (Bus. & Prof. Code, section 6501, subd. (f)(4)(A)-(B) [Emphasis added].

^51. Bus. & Prof. Code, section 6501, subd. (f).

^52. Bus. & Prof. Code, section 6501, subd. (f)(2).

^53. Cal. Code Regs., section 4406, subd. (e) [Emphasis added].

^54. Bus. & Prof. Code, section 6538.

^55. Bus. & Prof. Code, section 6533 subd. (h).

^56. Bus. & Prof. Code, section 6533 subd. (g).

^57. Bus. & Prof. Code, section 6534.

^58. California Legislature, Senate Final History, (vol. 1) p. 1013.

^59. Bus. & Prof. Code, section 6501, subds. (f)(1)-(f)(2).

^60. Bus. & Prof. Code, sections 6530-6543.

^61. The author was unable to find any mention of professional corporations or the licensing of professional corporations in his review of the history of SB 1550.

^62. Legis. Analyst, analysis of Sen. Bill No. 664 (2011-2012 Reg. Sess.) by the Assembly Committee on Banking and Commerce(Hearing Date June 27, 2011) pp. 1-2.

^63. Smith, How The Dodd-Frank Act Protects Your Money, Mar. 10, 2023, Forbes, < https://www.forbes.com/advisor/investing/dodd-frank-act/ > (as of Dec. 13, 2024).

^64. Ibid.

^65. “DFI sponsored three pieces of chaptered legislation to accomplish this update, including: AB 1301(Gaines), Chapter 125, Statutes of 2008, AB 2749 (Gaines), Chapter 501, Statutes of 2008, and AB 1268 (Gaines), Chapter 532, Statutes of 2010. ” Analysis of Sen. Bill No. 664 (2011-2012 Reg. Sess.) by the Assembly Committee on Banking and Commerce (Hearing Date June 27, 2011) pp. 1-2.

^66. Fin. Code, section 99.

^67. Analysis of SB 664, supra, atpp. 1.

^68. Analysis of SB 664, supra, at p. 2.

^69. See List of amended and renumbered sections. Sen. Bill No. 664 (2011-2012 Reg. Sess.) pp. 99-100 as proposed February 18, 2011.

^70. Sen. Bill No. 664, supra,at p. 99.

^71. California Legislature at Sacramento, Senate Final History (2011-2012 Reg. Sess.) p. 477.

^72. Sen. Bill No. 664, supra, as amended in the Senate April 25, 2011, p. 66.

^73. Id. at p. 178.

^74. California Legislature at Sacramento, Senate Final History (2011-2012 Reg. Sess.) p. 477.

^75. Senate Banking & Financial Institutions Committee, Hearing Date Apr. 27, 2011, pp. 1-3.

^76. Senate Banking & Financial Institutions Committee, Hearing Date Apr. 27, 2011, p. 1.

^77. Assembly Committee on Banking and Finance, Date of Hearing, June 27, 2011, p. 1.

^78. Assembly Committee on Banking and Finance, Date of Hearing, June 27, 2011, p. 2.

^79. Assembly Committee on Appropriations, July 13, 2011, p. 1.

^80. Assembly Committee on Appropriations, July 13, 2011, p. 1.

^81. See Fin. Code, section 1553 (History, Deering’s Cal. Codes Ann. (2025)).

^82. But see discussion at Section VII. A. 3., post, re possible licensing of professional corporations that act as trustees.

^83. This article does not name any such entities, because this article is written as an examination of the law generally, with the knowledge that the author could be wrong. There is, therefore, no mention of any fiduciary individually or by entity name.

^84. Corp. Code, sections 13401, 13404; Bus. & Prof. Code, section 6160 et seq.; see Rules Prof. Conduct, rule 3.150 et seq.

^85. Corp. Code, sections 13401, 13404.

^86. Corp. Code, section 13401, subd. (b).

^87. 54 Ops.Cal.Atty.Gen. 272, 274 (1971).

^88. Bus. & Prof. Code, sections 6530-6532.

^89. See Fin. Code, section 1553 (History, Deering’s Cal. Codes Ann. (2025)).

^90. “Person” does not appear to be defined specifically in the Business and Professions Code. See Bus. & Prof. Code, sections 1-40 (“General Provisions”). Regarding “person” as including a “corporation” generally, see Code Civ. Proc., section 680.280; Code Civ. Proc., section 17, subd. (b)(6); Merco Constr. Engineers, Inc. v. Municipal Court (1978) 21 Cal.3rd 724, 729;Prob. Code, section 56.

^91. Fin. Code, section 1553, subd. (a).

^92. Fin. Code, section 1553, subd. (b).

^93. Ibid.

^94. Fin. Code, section 1553, subd. (e).

^95. Bus. & Prof. Code, section 6530, subd. (c).

^96. See Section II. A. ante, regarding rules governing banks and trust companies and providing protections for beneficiaries.

^97. See 16 Cal. Code Regs., section 75.8 (Accountancy Corporations) and Rules Prof. Conduct, rule 3.158 (Law Corporations).

^98. Bus. & Prof. Code, section 6534, subd. (a)(2).

^99. Letter dated May 10, 2006, from Professional Fiduciary Association of California to Senator Figueroa and G.V. Ayers Re: SB 1550—PFAC Legislative Committee Comments.

^100. Sen. Bill No. 1550 (2005-2006 Reg. Sess.) (“SB 1550”) Chaptered as Ch. 491, p 7.

^101. SB 1550, supra, Chaptered as Chapter 491.

^102. Correspondence included in the legislative bill files relating to SB 1550.

^103. Letter dated May 30, 2006, from California Society Certified Public Accountants to Senate Floor RE: SB 1550 (Figueroa) Senate Floor.

^104. See, e.g., Assembly Judiciary Committee Mandatory Information Worksheet with stamped date Jun 8, 2008, Item 11.

^105. SB 1550, supra, as Amended in the Senate August 24, 2006, p. 11.

^106. California Board of Accountancy, Consumer Assistance Booklet, pp. 4-6.

^107. See National Conference of Bar Examiners, Press Release (July 17, 2023). “Some Subjects to be Removed from the MEE in 2026”.

“Effective with the July 2026 bar exam, the following subjects will no longer be tested on the Multistate Essay Exam (MEE): Conflict of Laws, Family Law, Trusts and Estates, and Secured Transactions. This change will align MEE subjects with the subject matter for the NextGen bar exam, which will be administered by some jurisdictions beginning in July 2026. The alignment of subject matter will enable students to make informed course selections even before they know whether they will be taking the current or the NextGen bar exam.” “California does not administer the MEE.

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MCLE SELF-STUDY ARTICLE SOME ADDITIONAL ISSUES [AND SOLUTIONS?] RELATING TO THE CALIFORNIA INCOME TAXATION OF ESTATES AND TRUSTS

Written by Paul N. Frimmer, Esq.^*

I. INTRODUCTION

The author’s prior articles on the subject of California income taxation of estates and trusts tried to make sense of California’s antiquated trust taxation rules in the context of current estate planning techniques.⁰¹ Since the publication of those prior articles, there has been one judicial development and one legislative development;⁰² additionally, the author has become aware of several other issues that should be explored. As in the past, the answers to these issues usually are not found in existing authority, so the author’s purposes in this article are to highlight these issues and to apply reasoning and common sense in an attempt to resolve some of them with what little authority exists. As with the author’s past articles, endnotes will be kept to a minimum based on the assumption that the reader is already familiar with the basics of federal and California income taxation of trusts and estates.

II. PAULA TRUST-JUDICIAL SANITY PREVAILS

The first development is the case of Paula Trust v. Franchise Tax Board (“Paula Trust”).⁰³ The ultimate result in the case seemed self-evident to most practitioners in this area, but it took an appellate court to confirm that result.

The trust in Paula Trust had no California non-contingent beneficiaries and two trustees, one of whom was a California resident and the other of whom was not. If the trust only had non-California source income, the rule about taxing accumulated income is clear. The trustees’ residence would control, and under the current guidance of the Franchise Tax Board (“FTB”), one-half of the accumulated income would be subject to California income tax and one-half would not be subject to California income tax.⁰⁴

The wrinkle in the case was that the trustee stipulated that the trust had California source income, and the issue was whether all of the California source income was subject to income tax or whether one-half of the income was subject to California income tax. The lower court held that only one-half of the California source income was subject to income tax based upon the residence of the trustees.⁰⁵

There are three separate bases for the taxation of accumulated income of a non-grantor trust in California:

1. California source income.⁰⁶
2. The trustee is resident in California, and in the case of a corporate trustee, a major portion of the trustee’s activities are conducted in California.⁰⁷
3. The trust has non-contingent beneficiaries who reside in California.⁰⁸

Each basis for taxation is separate and distinct. While it is true that with respect to items B and C above, the FTB applies them sequentially (meaning that the accumulated income first is taxed based on the residence of the non-contingent beneficiaries, and the remaining accumulated income is taxed on the basis of the residence of the trustees),⁰⁹ there is nothing in the statutes nor in the Regulations addressing whether item A is to be read in

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conjunction with item B or item C. The appellate court held that California source income is a separate and distinct basis for taxing income, and if there is California source income, all of the California source income is taxable, irrespective of the residence of the beneficiaries and the trustees.¹⁰

III. WHO IS A NON-CONTINGENT BENEFICIARY?

California taxes the accumulated income of a trust if a non-contingent beneficiary resides in California.¹¹ The term “non-contingent beneficiary” is a beneficiary “whose interest is not subject to a condition precedent.”¹² Neither the statute nor the Regulations define “condition precedent.” However, in Technical Advice Memorandum 2006-0002 (“2006 TAM”), the FTB provided the following definition:

[a]n act or event, other than a lapse of time, that must exist or occur before a duty to perform something promised arises. If the condition does not occur and is not excused, the promised performance need not be rendered. The most common condition contemplated by this phrase is the immediate or unconditional duty to performance by the promisor.¹³

The 2006 TAM consistently uses the word “non-contingent” in conjunction with the term “vested,” suggesting that the terms are synonymous.¹⁴ In addition to providing a definition of the term “condition precedent,” the 2006 TAM sets forth an extensive list of definitions of the word “vested,” including, for example, the following: “vested, adj. [h]aving become a completed, consummated right for present or future enjoyment; not contingent; unconditional; absolute . [Cases: Estates in Property, 1 C.J.S. Estates sections 2-5, 8, 15-21, 116-128, 137, 243.].”15

Despite the FTB’s interpretation, the legislative history suggests that a non-contingent beneficiary is a beneficiary who receives a distribution or who currently is entitled to a distribution.¹⁶ For example, a California resident who is the beneficiary of a simple trust paying all income to the beneficiary is “entitled” to the income. Under subchapter J of the Internal Revenue Code, which is applicable in California, the beneficiary, and not the trust, will be taxed on the income whether or not the income is distributed.¹⁷Another example is a non-grantor trust with a beneficiary who has reached the age at which the trust is required to be distributed to the beneficiary, but the beneficiary decides to leave the assets in the trust under the trustee’s management. The trust becomes a grantor trust as to the beneficiary once the beneficiary attains the stated age.¹⁸ Even if the beneficiary leaves future income in the trust, California will tax the accumulated income under the normal grantor trust rules. These examples demonstrate that it often is not necessary to characterize the beneficiary’s interest as contingent or non-contingent, because the beneficiary will be taxed on the income under the normal rules of subchapter J of the Internal Revenue Code.

With respect to accumulated non-California taxed income prior to the age of distribution, the throwback rules may require the payment of California income tax on the accumulated untaxed income when it is distributed. These rules have been discussed more fully in the author’s previous article and in other articles.¹⁹

A. Contingent and Non-Contingent Interests in the Same Trust/Distributions as Non-Contingent

The application of the “non-contingent beneficiary” concept is less established in other contexts. For example, assume that a beneficiary is entitled to all trust income and distributions of principal in the trustee’s discretion. Although the California income tax consequences of these two distribution standards are somewhat clear when considered separately (the income interest is non-contingent and the discretionary interest in principal is contingent), it is unclear whether the trust is subject to California income tax on accumulated capital gains (which are allocated to principal under California’s Uniform Principal and Income Act)²⁰ when the distribution provisions are combined in one trust, and no distributions of principal are made. The statute explicitly provides that the “tax applies…to the entire taxable income of a trust, if the… beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident.”²¹ In this example, a portion of the beneficiary’s interest in the trust (the income interest) is non-contingent, but a portion (the principal interest) is contingent.

For federal transfer tax purposes, an income interest and a principal interest are considered separate interests.²²Logic dictates that if a beneficiary has separate interests in a trust, one or more of which are contingent and one or more of which are non-contingent, California should tax the interests that are non-contingent but should not tax the interests that are contingent. This conclusion seems consistent with the reasoning behind the 2006 TAM when distributions of principal are subject to the trustee’s exercise of discretion. To treat the beneficiary’s entire interest in the trust as non-contingent just because the income interest is non-contingent would undermine the reasoning behind the FTB’s ruling in the 2006 TAM. The beneficiary’s mandatory income interest should not taint the beneficiary’s discretionary principal interest and cause the trust to pay income tax on accumulated income (in

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most cases, only capital gain), just because the beneficiary’s interest in income is non-contingent (again, assuming no distributions of principal are made).

If distributions in excess of DNI are made, the 2006 TAM would have the trust pay income tax on the excess distribution because the beneficiary’s interest in the distribution is non-contingent, and the beneficiary does not pay tax on the excess under the normal DNI rules. Assume, for example, that a totally discretionary trust that distributes all income to its sole beneficiary distributes $100 more than the trust’s DNI in the year in which the trust has $100 of capital gain. The author believes that the trust should pay income tax on $100 of capital gain because the beneficiary’s interest in the excess distribution is non-contingent, and the capital gain does not enter DNI. However, Kinyon and Wolff, are of the view that the 2006 TAM is wrong because the statute requires that the “interest” in the trust be contingent, and in the case of a distribution in excess of DNI, only the distribution is non-contingent and not the interest in the trust. This position seems to be a reasonable interpretation of the statute, although contrary to the FTB’s position.

Another approach is to apply California’s throwback rules to the excess distribution. Under Revenue & Tax Code section 17745, subdivision (b), if current or accumulated income that has not been taxed is distributed to a beneficiary, the beneficiary is liable for California income tax on that distribution. In the above example, the capital gain is not taxed based on the residence of the beneficiary because the beneficiary’s interest in the trust is contingent (the Kinyon and Wolff theory). The capital gain represents current income that is not taxed, and it is distributed to the beneficiary. Accordingly, when that current income is distributed to the beneficiary, the beneficiary should pay tax under the throwback rules. This approach seems consistent with the legislative history that distributions should be taxed.

B. Standards for Distribution

If the standard for distributions of principal is “health, support, maintenance, and education” or similar provisions (the “HEMS standard”), is the beneficiary’s interest contingent or non-contingent? Assuming no distributions of principal are made under the HEMS standard, does it matter if the Trustee is required to distribute principal for HEMS (“shall distribute”) or is permitted to distribute principal for HEMS (“may distribute”)?

The argument for taxation is that, at least under the “shall distribute” HEMS standard, the beneficiary is “entitled” to receive a distribution for the enumerated purposes. However, the beneficiary’s right is not absolute and is subject to a condition precedent. The beneficiary needs to demonstrate that he or she needs a distribution, and if the trustee disagrees, a court ultimately decides whether the beneficiary should receive a distribution, and in what amount.

Until the trustee or a court determines that a distribution is appropriate, and a distribution is made, the beneficiary’s interest is contingent because it is dependent on being able to prove the need, the amount of the need, and then possibly having that need validated by the trustee or by a court. Even if the concept of “entitled to receive” is equated with “vesting,” as the FTB has indicated in the 2006 TAM, because an act “must exist or occur before a duty to perform something promised arises,” is required (the beneficiary demonstrating the need, the trustee agreeing or disagreeing, and a court ultimately making the decision), it cannot fairly be said that the beneficiary’s interest in principal is non-contingent even under the “shall distribute” HEMS standard.

C. General Powers of Appointment and Vested Interests

Suppose the beneficiary has a testamentary general power of appointment, or that the beneficiary’s interest in the trust is payable to the beneficiary’s estate upon the beneficiary’s death. Many trusts give the beneficiary a testamentary general power of appointment, or the trust is payable to the beneficiary’s estate if the beneficiary dies prior to distribution to the beneficiary. Practitioners use this approach to avoid the generation-skipping transfer tax because each such interest causes the assets of the trust to be subject to an estate tax rather than a generation-skipping transfer tax when the beneficiary dies. Having the assets subject to an estate tax allows the deceased beneficiary’s estate to avail itself of the beneficiary’s estate tax exemption, IRC section 6166 and the previously taxed property credit, none of which are available if the trust is subject to the generation-skipping transfer tax.

Does a beneficiary’s general power of appointment or a “true” vested remainder (trust payable to the beneficiary’s estate) make the beneficiary’s interest non-contingent during the beneficiary’s lifetime? If the interest is non-contingent, then the accumulated income, including capital gain, will be taxed to the trust currently during the beneficiary’s lifetime, even if no distributions are made to the beneficiary.

Although Revenue and Taxation Regulation section 17744 (the “Regulation”)” does not address the issue specifically, it may provide some support for the argument that a testamentary general power of appointment creates a present non-contingent beneficial interest in the holder of the power. The Regulation discusses the apportionment of

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California income taxes when the taxability of the income depends on the residence of the beneficiary and there are multiple non-contingent beneficiaries, some of whom are California residents and some of whom are not. Example 2 under the Regulation provides as follows:

A transferred stocks and bonds and real and personal property located outside this State in trust to [trustee] B, a nonresident of this State. Under the terms of the trust, the income from the intangible personal property is to be accumulated for a number of years and then distributed to C, a resident of this State with a non-contingent interest. The balance of the income is to be distributed to certain named beneficiaries who are nonresidents of this State. The trust is taxable upon all the income from the intangible personal property, i.e., the stocks and bonds, but is not taxable upon any of the income from the remainder of the trust property.²³

The example provides no explanation as to why C’s interest in the trust is non-contingent, nor does it specify at what moment in time C’s interest is treated as non-contingent. One possible reading of this example is that C is a non-contingent beneficiary of the trust during the entire period in which all trust income is being accumulated for future distribution to C, even though C is not currently entitled to any distributions of income during that period. If C dies before the end of the period, C will never be entitled to a distribution, although C’s estate might be entitled to the distribution; the example is not clear. By analogy, if C instead had only a testamentary general power of appointment over the trust, all trust income would be accumulated for future distribution at C’s death to any one or more persons selected by C. Consequently, under this interpretation of the law, C should be treated as a non-contingent beneficiary of the trust during C’s lifetime as to all accumulated income even though C never is entitled to a distribution of such accumulated income during C’s lifetime, and the persons to whom the income will be distributed are not known until C’s death.

The author believes that this interpretation reads too much meaning into what was intended to be a simple example of a completely unrelated issue. The author believes that a better interpretation is that C becomes a non-contingent beneficiary of the trust upon the expiration of the term of years, at which time the income accumulated for C’s benefit is distributed to C. This result would be uncontroversial, and would be consistent with the legislative history that seems to require a distribution (or the right to a distribution) before income is taxed currently. Nonetheless, because of the ambiguous wording of the Regulation, Example 2 could provide support for the argument that the possession of a testamentary general power of appointment causes the holder of the power to be treated as a non-contingent beneficiary during the powerholder’s lifetime.

In its Notice 98-12,²⁴ the FTB has acknowledged the difficulty in determining whether a beneficiary’s interest is contingent or non-contingent. In addition, some commentators have speculated that a beneficiary’s testamentary general power of appointment may be a non-contingent interest based on the meaning of the word “vested:”

The relevant statutes and cases do not specifically describe the conditions or circumstances required for a beneficiary’s interest to be vested. However, a logical analysis of the established principles of vesting indicates that a beneficiary is only vested if he or she has an absolute right to receive the accumulated income in the future. In addition, the FTB may assert that a beneficiary has a vested interest where accumulated income will be distributed to the beneficiary’s estate or the beneficiary has a general power of appointment over the accumulated income at his or her death.²⁵

The 2006 TAM provides the definition of “vested:” “[h]aving become a completed, consummated right for present or future enjoyment; not contingent; unconditional; absolute .” A testamentary general power of appointment vests in the holder of the power immediately upon the creation of a trust. During the powerholder’s lifetime, the powerholder has an absolute right to determine who will receive the accumulated income at the powerholder’s death. In this sense, the testamentary general power of appointment is vested in the powerholder during lifetime, even if the exercise will not take effect until death.

However, the author believes that the right to determine who will receive accumulated income should be distinguished from the right to receive the income. The latter right only becomes effective (“vested”) at the powerholder’s death. Until such time, the exercise of the testamentary general power of appointment is revocable, and the ultimate beneficiaries of the appointed property are not fixed. This interpretation is consistent with common law principles that a general testamentary power is not property.26Further, under federal tax law, the moment of death is the critical moment at which a testamentary general power of appointment is treated as vesting in the powerholder an ownership right over such assets.²⁷ Similarly, under California property law, property subject to a general testamentary power of appointment is subject to creditor’s claims only at the death of the powerholder, at which time “the appointive property has come under the power of

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disposition of the debtor-donee and hence is treated the same as other property of the decedent.”²⁸ Thus, there is a strong argument that the holder of a testamentary general power of appointment is a contingent beneficiary until the moment of death, at which time the disposition of the assets will be clear.

The legislative intent behind the 1963 amendment to sections 17742 and 17745 of the California Revenue and Taxation Code lends further support to the argument that a testamentary general power of appointment does not cause the powerholder to be treated as a non-contingent beneficiary during the beneficiary’s lifetime. Assembly Bill 386, which was ultimately approved by the Legislature, proposed adding the distinction between “contingent” and “non-contingent” beneficiaries for purposes of applying the California income tax to fiduciaries. Documents submitted to the executive branch in support of the bill are particularly illustrative of the intent behind the amendment. In a letter from a law firm to the Governor of California, the author stated as follows:

The bill corrects a technical problem which exists under the present California Personal Income Tax Law. Section 17742 of the Revenue and Taxation Code presently purports to subject the accumulated income of a trust to California income tax even though the trustee and the trust property are located outside of California and the only connection which the trust has with California is the residence here of a beneficiary who may or may not ever receive distribution of the accumulated trust income.²⁹

The distinction between contingent and non-contingent beneficiaries was intended to prevent the taxation of a beneficiary who might never receive a distribution of accumulated income. The holder of a testamentary general power of appointment never will receive a distribution of accumulated income, but at the moment of death, the exercise of the general power of appointment is irrevocable and the identities of the appointees of the property who will receive the accumulated income are determined. Until that moment in time, the powerholder (or the powerholder’s estate, if the power is exercised in favor of the estate) will never receive a distribution of accumulated trust income. Therefore, it seems contrary to the intent of Assembly Bill 386 to treat the holder of a testamentary general power of appointment as a non-contingent beneficiary during the powerholder’s lifetime when such individual will never receive a distribution of the income being taxed. In fact, it appears that Assembly Bill 386 was enacted to prevent this result.

Although the courts have not addressed the California tax treatment of testamentary general powers of appointment, in a pre-1963 unpublished case, a California court addressed the impact of a beneficiary’s testamentary limited power of appointment on the taxation of a trust’s accumulated capital gains. In J.F. Goux v. Franchise Tax Board, a taxpayer created a trust for the benefit of the taxpayer’s wife’s (“W“), which provided that W was entitled to all income of the trust, W was not entitled to distributions of principal, and W held a limited power of appointment exercisable at death in favor of the taxpayer, W‘s descendants, and charities. In default of the exercise of the power of appointment, one-third of trust was to pass back to the taxpayer. W never exercised her limited power of appointment. The trustees of the trust were not California residents, and the taxpayer and W were California residents. No other beneficiaries were California residents. W filed income tax returns reporting all ordinary income distributed to W, but the trust did not file returns reporting accumulated capital gains. The FTB argued that the trust should have been filing returns to report the capital gains being accumulated for future distributions to the taxpayer, a remainder beneficiary of the trust, and that the failure to do so resulted in transferee liability to the taxpayer upon the death of W and the distribution of one-third of the trust to the taxpayer. The court rejected the FTB’s argument, and instead held that the trustees were not required to pay taxes on the accumulated income because the trustees of the trust had no way to determine what portion of the trust would be payable to a California resident until W‘s death, as a result of W‘s ability to exercise her testamentary limited power of appointment.

While the case was decided before the distinction between a “contingent” and “non-contingent” beneficiary was added to the law, the court’s reasoning relating to the testamentary limited power of appointment is informative. The court reasoned that California cannot impose a current tax on accumulated income when it is impossible to determine definitively whether a California resident beneficiary will receive a distribution of the accumulated income until a future date. This reasoning should apply to any testamentary power of appointment, regardless of whether it is limited or general.

If the beneficiary’s interest in the trust actually is vested (payable to the beneficiary’s estate at death), and if no distributions are made to the beneficiary prior to the beneficiary’s death, the same analysis should apply. If the ultimate beneficiary upon the beneficiary’s death is a California resident, upon the distribution to the beneficiary’s estate or revocable trust, the throwback rules will result in the payment of California income tax on the income that was untaxed during the beneficiary’s lifetime.³⁰ But suppose the beneficiary moves out of California prior to death, and the distributions are made to a non-California

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resident’s estate? The throwback tax should not apply because the distribution is being made to a nonresident of California.³¹

Another approach to the “vested” issue is to treat the accumulated income as being taxable to the person holding the vested interest at the time the vested interest becomes “possessory” or “effective,” usually at the time of the powerholder’s death. At that time, all of the “negative” tax and non-tax events occur: estate tax is imposed and the property becomes subject to the powerholder’s creditors. While the interest over which the general power of appointment applies has been “vested” during the beneficiary’s lifetime under the typical definition of “vested,” the beneficiary is not treated as owning the assets subject to the power during the beneficiary’s lifetime for tax or property purposes. It is only when the beneficiary dies that the beneficiary is treated as the owner. Imposing California tax on the undistributed income at that time seems consistent with the general rule that the attributes of ownership are attributed to the beneficiary when the power becomes effective, which is typically upon the beneficiary’s death.

Until there is further guidance, the author believes that California does not have the power to tax accumulated income if the only nexus for taxing that income is the California beneficiary’s testamentary general power of appointment or vested remainder. This conclusion is based on the reasoning of the J.F. Goux case and the legislative history that equates “non- contingent” with a distribution (or entitlement to a distribution) rather than the concept of “vested” or its equivalent. As with many questions relating to California income taxation of estates and trusts, the answer must await judicial authority, or at least well-reasoned guidance from the FTB.

IV. IS THE POST-DEATH ADMINISTRATION OF A REVOCABLE TRUST AN “ESTATE” FOR PURPOSES OF REVENUE AND TAXATION CODE SECTION 17742?

Revenue and Taxation Code section 17742 provides that the accumulated income of an estate is taxable in California if the decedent was a California resident, regardless of the residence of the beneficiary or fiduciary. The accumulated income of a trust is taxable based on the residence of the fiduciary and the beneficiaries, regardless of the residence of the grantor of the trust.

Most California estate plans today are implemented through a funded revocable trust, and, if handled properly, there is no probate “estate.” So the question arises as to whether the post-death revocable trust, which is commonly known as an administrative trust, should be treated like an estate or like a trust for California income tax purposes. When the statute was enacted, revocable trusts were not in use to the degree that they are in use today, and in fact, until the book “How to Avoid Probate”³² was written in 1979, the use of revocable trusts probably was rare. If the statute was written today, the administrative trust probably would be treated as an estate for California income tax purposes, but as the statute currently is written, the author believes that the administrative trust is not an estate based on the plain language of the statute even though the administrative trust takes the place of an estate in most California estate plans.

Consider the following fact patterns:

A. Assume a California resident’s revocable trust is distributable outright to the grantor’s child who is a California resident, but the trustee is not a California resident. During some reasonable period of administration, even though the child’s interest is vested, the child is not “entitled” to distributions from the trust because creditors must be ascertained and paid, taxes must be paid, etc. For federal tax purposes, the administrative trust is treated as a separate taxpayer and not as a grantor trust as to the beneficiary, at least for that reasonable period.

Is the accumulated income of the administrative trust taxable in California? Because the trustee is not a California resident, taxation will depend on whether the beneficiary’s interest is contingent. If there is a survivorship period, then the beneficiary’s interest seems to be contingent during the survivorship period because the beneficiary could die prior to the end of the survivorship period, in which case the beneficiary will not receive the accumulated income. If there is no survivorship period, then the beneficiary’s interest becomes “vested” on the grantor’s death, and the beneficiary or the beneficiary’s estate will receive the accumulated income. However, during a reasonable period of administration, the beneficiary still is not entitled to distributions.
Under these facts, it probably does not matter whether the trust is subject to California income tax during a reasonable period of administration, because California’s throwback rule will tax the income to the beneficiary when it is distributed if the beneficiary is a California resident. Because the period of administration usually is not very long, the result of treating the trust as a trust with a contingent beneficiary results in a timing difference in the payment of tax, at least in

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larger estates in which there is no significant rate difference between the trust and the beneficiary. However, if the beneficiary moves out of California before distribution, then the status of the interest as contingent or non-contingent becomes more important. If the beneficiary moves during the survivorship period when the beneficiary’s interest clearly is contingent, unless section 17745, subdivision (e), applies, the beneficiary should avoid the throwback tax. But if there is no survivorship period, then the beneficiary’s interest becomes “vested” on the death of the preceding interest, and moving should not allow the beneficiary to avoid the tax.

B. Suppose the “beneficiary” of the revocable trust is a subtrust for the benefit of a child rather than the child. Normally, a distribution to a trust would not be subject to a survivorship period. The distribution usually is made to the subtrust in any event, and the terms of the subtrust dictate who receives distributions based on who is alive and who is deceased from time to time. Is the subtrust treated as a contingent or non-contingent beneficiary? For purposes of the analysis, again assume that the post-death revocable trust has no California source income and the trustee is a non-California resident. Therefore, the taxation of accumulated income in the administrative trust during administration depends on whether the subtrust itself is characterized as a beneficiary.

If the trustee of the subtrust is not a California resident, does it matter whether the beneficiaries of the subtrust are California residents or whether their interests are contingent or non-contingent within the subtrust? The author believes that if the trustee of the subtrust is a nonresident of California, the residence of the beneficiaries of the subtrust is not relevant for determining whether the administrative trust’s income is taxable during the period of administration because the “beneficiary” (the subtrust) is not a California resident. The throwback rules should not result in the accumulated income being subject to tax upon funding because the subtrust is a nonresident.³³ Once the subtrust is funded, the status of the beneficiaries as residents or nonresidents will be relevant on a going forward basis for the subtrust itself. But if the California beneficiaries of the non-California subtrust receive distributions from the subtrust in excess of DNI, do the throwback rules apply, or was the accumulated income of the administrative trust “cleansed” upon distribution because during administration, that income was not subject to California tax and distribution was made to a non-California beneficiary? The answer is not clear, but because the subtrust is a separate taxable entity, like an individual, distribution to a non-resident trustee of the subtrust should “cleanse” the income from the throwback tax as it would if the distribution was made to a nonresident individual. The author believes that the result may be different for an irrevocable decanted trust during the grantor’s lifetime.³⁴

C. Now assume another fact pattern in which the decedent was a California resident at the time of his death, but he moved to California shortly prior to his death. His estate plan was implemented through a funded revocable trust that was created in a state other than California and is governed by the law of that state. The trustee of the trust following the decedent’s death is not a California resident, and none of the outright beneficiaries of the trust are California residents. The author believes that the administrative trust is not subject to California income tax on its accumulated income during administration because neither the trust nor the beneficiaries are California residents. If the decedent’s estate requires a probate administration in California, where the decedent resided at the time of death, the accumulated income of the estate is subject to California income tax.

Another multi-state example illustrates some added complexity. Assume a nonresident of California dies leaving real property in his name in California and most of his assets in a revocable trust that is governed by the law of his home state. The executor of the estate and the trustee of the trust are California residents. The trust makes an IRC section 645 election to be treated as part of the estate for income tax purposes. The California property is a vacation residence that does not generate any income, but the trust assets consist of marketable securities that generate dividend income. The executor probates the will in California so that title to the vacation residence can be transferred to the trust pursuant to the decedent’s pour over will. How is the dividend income taxed during the period of administration?
The answer depends on the consequences of the IRC section 645 election. If the IRC section 645 election is made, the trust now is treated as part of the estate for income tax purposes, and the income tax return that is filed is an estate income tax return that includes the income of the probate estate (none in this example) and the income of the

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revocable trust (dividend income in this example) during the administration period. Does making the IRC section 645 election somehow convert the trust to an estate for income tax purposes, and therefore, allow the avoidance of California income tax on the accumulated dividend income because estates are not subject to income tax based on the residence of the trustee? The IRC section 645 election creates a tax fiction that two entities are one for reporting purposes, but the income still is the income from two separate taxable and state law entities.
Because IRC section 645 is an income tax section, and because California has the equivalent of the IRC section 645 election by reason of Revenue and Taxation Code section 17731, a reasonable conclusion is that the income of the trust is not taxable in California because it is the income of an estate and not a trust. However, that conclusion is not supported by any authority other than the author’s opinion.³⁵ Likewise, if the decedent was a California resident and the revocable trust was not, making the IRC section 645 election will subject the trust income to tax when it otherwise would not be subject to tax.
Many of these issues can be sidestepped easily by having the trust or the estate make a preliminary distribution during administration. If the distribution carries out DNI, the trust or estate will obtain a deduction under the normal rules of subchapter J, and the income tax will be paid by the beneficiaries in their home states, all of which will have less state income tax than California.

V. THE IMPACT OF DECANTING

Under modern trust administration, the concept of decanting has become very popular, and California now has enacted its own decanting statute.³⁶ Decanting often is used to change the terms of a trust, or in some instances, to change the jurisdiction of the trust from California to another state with more favorable tax and trust laws. When a “California” trust is decanted to another state, such as Delaware, how does the decanting impact the California income taxation of the trust?

As an example, assume that a trust governed by California law has a non-California resident trustee and two beneficiaries, one of whom resides in California and one of whom does not. The trustee may make distributions to either beneficiary as the trustee determines in the trustee’s sole discretion. The trust is decanted to Delaware, and there is a Delaware corporate trustee. Delaware corporate trustees (and other state’s corporate trustees) often prefer to have themselves “directed” by an individual advisor to minimize the trustee’s liability for investments and distributions. Delaware has a “directed trust statute,” which provides in general that if the trust is a directed trust, the trustee is not responsible for any actions that it implements at the direction of the advisor. The former non-California trustee is now the advisor. The advisor generally is a fiduciary under Delaware law.

Assume the trust in question had $100,000 of untaxed accumulated income when it “moves” to Delaware because the trust never had California source income, and no distributions had been made to the beneficiaries. What happens to that untaxed income when the trust is moved to Delaware, and distributions are made?

When the trust is moved from California to Delaware, it is common for the trust to obtain a new federal identification number so the trust is treated as a “new” trust. It is unclear what the Internal Revenue Service’s position is with respect to the decanted trust.³⁷ The Internal Revenue Service has promised guidance in this area, but none has been forthcoming as of the date of this article. However, private letter rulings and comments from the Internal Revenue Service indicate that the Internal Revenue Service will treat the new trust as a continuation of the old trust for most, if not all, purposes. For example, unless the modification takes the trust out of the grandfathered GST provisions,³⁸ the trust will remain grandfathered if it was GST grandfathered while it was in California. If there are Crummey withdrawal provisions in the trust, those provisions should carry over to the new trust, and the tax consequences of the powers and the lapse of the powers should continue in the new trust. The grantor of the old trust will continue to be the grantor of the new trust even if the new trust is “created” by a trust protector or trustee who has the power to decant under the terms of the original trust instrument.

Because it is likely that the new trust will be treated as a continuation of the old trust for most federal tax purposes, it seems logical that the new trust will be treated as a continuation of the old trust for California tax purposes. However, it is unclear what this means. Normally, if this trust made a distribution to a non-California resident while it was a California trust, the throwback rules would not be applicable, and the beneficiary who receives the distribution would not have to pay California income tax on the untaxed accumulated income. Is the new trust a “beneficiary” of the old trust, in which case the distribution is to a nonresident of California, and the accumulated untaxed income is “cleansed” upon distribution?³⁹ Or will California take the position that the untaxed accumulated income continues in the new trust, and will be subject to California income tax if it is distributed to a California individual beneficiary after

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decanting even though the initial distribution (decanting) is made to a nonresident trust?

From a policy perspective, the untaxed accumulated income should remain in the trust and be treated as it would have been treated if the trust had remained a California trust. To cleanse the trust of its untaxed accumulated income would allow for gamesmanship; all that a California trust with substantial accumulated income would have to do is be decanted to another state, and then have the trust distribute the income to a California beneficiary after the accumulated income had been cleansed. There is a distinction between a distribution to a nonresident individual, who presumably will retain the income, and a distribution to a decanted California trust, which may or will distribute it to a California resident. However, because of the lack of clarity as to how decanted trusts are treated, the “cleansing” approach may be a reasonable position to take.

VI. MIXED INCOME: CALIFORNIA SOURCE AND NON-CALIFORNIA SOURCE

Another issue arises if a trust has both California source income and non-California source income. Assume a trust with a non-California trustee and a single discretionary California beneficiary has California source income and non-California source income in a given year. For example, the trust has $250 of rental income from California real property, and $100 of dividend income from publicly traded securities. Also assume that the trust has $500 of untaxed accumulated non-California source income from prior years, consisting of $500 of capital gain from the sale of publicly traded securities. The trustee makes a distribution of $400 to the California beneficiary in 2023. What are the California tax consequences of this distribution?

1. The DNI of the trust is $350, so clearly the $350 will be deductible by the trust and includable in the income of the California beneficiary. The $50 distribution in excess of DNI makes the beneficiary’s interest in that distribution non-contingent, but the beneficiary’s interest in the trust still is contingent.⁴⁰ For federal tax purposes, the beneficiary is not taxed on the extra $50 because that income previously was taxed to the trust, and there is no throwback for domestic trusts in the federal system. That distribution of the $50 does not enter DNI for California income tax purposes because California follows the federal rule with respect to what is and what is not DNI. However, the beneficiary should pay tax on the $50 distribution under the throwback rules.
2. As another example, assume a trust has no untaxed accumulated income, but in 2023, the trust receives $250 of rental income from California real property and $250 of dividends from publicly traded securities. The beneficiary receives a distribution of $400. What are the California tax consequences of that distribution? The DNI of the trust is $500, and accordingly, when the beneficiary receives $400, the beneficiary will pay income tax on the $400. But does the trust pay income tax on $50, which is the excess of the California rental income over the proportionate part of the rental portion of the distribution, or is the entire $250 California source income “subsumed” within the $400 distribution so there is no further California income tax?

Under the general federal rule, distributions from a trust carry out the character of the income proportionately. For federal income tax purposes, the $400 distribution would consist of $200 of rental income and $200 of dividend income. Because California follows the same rules, the beneficiary is deemed to have received $200 of California rental income and $200 of dividend income. The trust should pay tax on $50 of rental income so that the entire California source income is subject to California income tax.

VII. ANTI-ING LEGISLATION

On July 10, 2023, Senate Bill No. 131 was enacted, adding section 17082 to the California Revenue & Taxation Code. This section provides that a California resident who is the grantor of a non-grantor trust that is an incomplete gift is required to include the trust’s income in the grantor’s income each year.⁴¹ The statute is very similar to the statute enacted in New York several years ago, and its purpose is to eliminate the benefits of incomplete gift non-grantor trusts (“INGs”) in California.

A complete discussion of INGs is beyond the scope of this article, but in general, the purpose of an ING is to avoid or postpone state income tax. Because the ING is not a completed gift for gift tax purposes, there is no transfer tax (gift, estate, or generation skipping) benefit to creating an ING. Under the new law, with some exceptions, the income of an ING will be includable in a California grantor’s income, so the benefit of avoiding or postponing the imposition of California income tax on the trust’s income is no longer available.

A. Exceptions

There is one statutory exception in section 17082, and one exception that has been created by the FTB in its first guidance on the new law:

1. The statutory exception is section 17082, subdivision (c), which provides that the statute

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does not apply if (a) the fiduciary of the trust files a California fiduciary income tax return and makes an irrevocable election on that return to be taxed as a resident non-grantor trust; (b) the ING is a non-grantor trust, as defined in the Revenue and Taxation Code; and (c) 90 percent or more of the distributable net income of the trust is distributed or treated as being distributed to a charitable organization described in IRC section 501(c)(3).

Obviously, the last criterion of the exception will limit the exception to very few trusts. At first look, it appears that the exception will apply to a charitable lead trust that is a non-grantor trust. However, well drafted, charitable lead trusts are not incomplete gift trusts because the purpose of a charitable lead trust is to transfer the remainder interest at little or no transfer tax cost. If the grantor retains a power that would make the gift to the charitable lead trust incomplete, such as a power to change the charitable recipients of the annuity or the unitrust amount, the trust will be subject to estate tax in the grantor’s estate.

2. The second exception is set forth in the initial guidance from the FTB, which provides that charitable remainder trusts are not subject to section 17082.⁴² The charitable remainder trust is a non-grantor trust, and if the grantor retains the power to change the charitable remainderman, the transfer to the trust is an incomplete gift for gift tax purposes. Therefore, charitable remainder trusts fit squarely within the definition of an ING, assuming the grantor is the beneficiary of the life interest. During the legislative process, this fact was pointed out to the tax-writing committees, but they specifically chose not to exempt charitable remainder trusts from the statute. However, in the initial guidance from the FTB, citing the legislative history, charitable remainder trusts are excluded from the statute even though based on the criteria in the statute, charitable remainder trusts should be subject to the statute. The FTB’s exclusion makes perfect sense based on the purpose of the statute, but why a specific exception was not included in the statute itself is a mystery and an example of poor statutory drafting. Notably, on February 26, 2025, a California Senate Bill was introduced (Sen. Bill No. 376) and later chaptered on October 6, 2025, which now amends the definition of an ING in section 17082 to specifically exclude a CRT.⁴³

B. Administration

The statute does not make an ING a grantor trust with respect to the grantor. There is no change in the federal tax treatment of INGs. The ING remains a non-grantor trust for federal purposes and presumably for California purposes. Mechanically, the trust files a California fiduciary income tax return and treats all of the income, including capital gain and presumably all deductions, as being the grantor’s income and deductions. The trust itself does not pay California income tax.

Because the income of a trust is includable in the grantor’s income, presumably the deductions of the trust are available to the grantor, assuming the deductions otherwise would be deductible by the grantor as if the deductions actually were the grantor’s deductions. How the income and deductions will be reported is not clear, but if the trust was a grantor trust, each item of deduction would be reportable on the grantor’s return, to be deducted, or not, depending on the nature of the deduction and the grantor’s other income and deductions.

Based on the somewhat poor wording of the statute and the legislative history, it is also not clear how transactions between the grantor and the trust will be treated. Revenue and Taxation Code, section 17082, subdivision (a), provides that the income of an ING is included in its grantor’s “gross income to the extent the income of the trust would be taken into account in computing the [grantor’s] taxable income if the trust in its entirety were treated as a grantor trust” under the Revenue and Taxation Code (emphasis added).⁴⁴The statutory language does not appear to make an ING trust an actual grantor trust. The legislative history, SB-131, 06/26/23 – Assembly Floor Analysis, provides as follows: “[T]he income from an incomplete gift non grantor trust would be included in the income of the grantor, as if the trust was a grantor trust…” (emphasis added).⁴⁵

If the ING was a true grantor trust, transfers between the grantor and the trust would be ignored pursuant to Revenue Ruling 85-13. Because the statute and legislative history provide that the grantor includes in the grantor’s income such income that would be included “as if” the trust was a grantor trust or “would be included in the income of the grantor if the trust in its entirety were treated as a grantor trust,” perhaps there is no gain to report for California purposes because there would be none if the trust actually was a grantor trust. Likewise, if the trust pays interest to the grantor on a note from the sale of an asset by the grantor to the trust, there would be no tax on that interest if the trust was a grantor trust.

On the face of the statute, the statute applies to INGs created by residents of any state or other jurisdiction; it

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is not limited to INGs created by California residents. The initial guidance provided by the FTB sets forth its view of how an ING’s California source income will be treated even if the grantor is not a California resident when the ING was created or when the California source income is realized.⁴⁶

The initial guidance from the FTB provides that an ING created by a nonresident of California that has California source income must file a California trust income tax return, and the grantor of the trust must report the income on a personal, nonresident California income tax return. The constitutionality of this approach is questionable. Clearly California has the right to tax the California source income. But for both federal and California purposes, the trust is a separate taxable entity. Accordingly, California can require the trust to file a California income tax return and report the California source income. However, the author does not believe that California can constitutionally require the grantor of the trust to file a California income tax return and report income on his or her personal return. California will receive the tax on the California source income realized by the non-grantor trust. The purpose of the legislation is satisfied, and to make the “leap” from a non-grantor trust created by a non-California resident to require that resident to report the income seems inappropriate.

One unanswered question is what happens when a grantor who created an ING in a state other than California moves to California. The statute does not distinguish between INGs created by a California resident and INGs created by a non-California resident. Read literally, and consistent with the FTB guidance relating to California source income, if the grantor of an ING lives in California, the anti-ING statute is applicable, and the income of the ING is taxable to the grantor. The author believes that there is a constitutional question about whether California can implement the anti-ING rules under these circumstances.

There is an element of double taxation if California’s position is that the statute applies to the grantor. The trust will pay income tax in the jurisdiction governing the trust, and in the author’s opinion, it is not relevant that the jurisdiction governing the trust does not impose an income tax; it is able to impose an income tax. The grantor also will be taxed on the income under the California statute. Accordingly, income tax will be paid twice on the same income. While it is constitutionally possible for two states to subject the same income to income tax, the unfairness of this result has been recognized by having one state give credit to the taxpayer in the other state, thus avoiding double taxation. Usually, the imposition of tax by two states involves the same income and the same taxpayer. In this example, the tax is imposed on the same income, but there are two separate and distinct taxpayers. While the author is far from a constitutional scholar, could California’s imposition of income tax violate the U.S. Constitution?

The Supreme Court case in Kaestner⁴⁷ may be helpful on the constitutional issue. The trust in Kaestner was created outside of the State of North Carolina, and at the time the trust was created and for some time thereafter, none of the beneficiaries lived in North Carolina. One of the beneficiaries moved to North Carolina but did not receive a distribution from the trust. The North Carolina statute imposed an income tax on the trust based upon the beneficiary’s residence, and the Supreme Court held that the imposition of that tax was unconstitutional.

While the grantor of an ING is the person on which California seeks to impose an income tax, there is some doubt in the author’s opinion as to whether California can impose an income tax based merely on the residence of the grantor in California. While the grantor is taking advantage of California’s laws by living in California, the taxpayer is the trust and not the grantor. The taxpayer is not taking advantage of California law because it is located outside the State of California, and has nothing to do with the State of California other than the fact that the grantor lives in California.

The difference between this example and Kaestner is that in Kaestner, the beneficiary did not create the trust, while the grantor did create the ING. However, in both cases, the income tax is being imposed based solely on the residence of someone (the grantor or the beneficiary), and in the author’s opinion, the principles of Kaestner should apply to deny the ability of California to impose an income tax on the grantor who moves to California but does not receive a distribution from an ING created by the grantor in another jurisdiction.

While this discussion may be interesting, the typical ING will result in California taxation of the trust based on the residence of the grantor or a fiduciary in California. Under the terms of the typical ING, the grantor is a beneficiary, but the grantor also has certain powers which may be characterized as fiduciary powers:

1. Grantor has a “sole power” to approve certain distributions.
2. Grantor is a member of the distribution committee, with the right to approve certain distributions.

Accordingly, under the normal income tax rules of California taxation of trusts, the grantor is a fiduciary, and the status as fiduciary is a reason for the accumulated income of the trust to be subject to taxation in California. However, that rule allows California to tax the income of the trust, but not to tax the grantor on the trust’s income.

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Accordingly, there seem to be competing rules for the taxation of an ING in the typical case in which the grantor is a fiduciary under the terms of the ING. Clearly, the grantor’s interest as a beneficiary is contingent, but the grantor is also a fiduciary. The author believes that California should not be able to apply the ING rules to the grantor if the trust is otherwise subject to California income tax. This conclusion is supported by the statutory exception in Section 17082, which provides that the ING statute does not apply if the fiduciary files a California fiduciary income tax and an irrevocable election to be taxed as a resident non-grantor trust. In the case of taxation based on the residence of the fiduciary, it should not be necessary to make an election because the normal California rules will apply to tax the income of the trust as long as the grantor/fiduciary is a California resident. If the trust is taxed in California and the trust is taxed in the jurisdiction state, the credit system most likely will eliminate the double taxation.

Another income tax issue is the treatment of loss carryforwards. If an ING has pre-2023 loss carryforwards and current capital gain in 2023 and thereafter, and if the trust distributes the current year’s income, including capital gain, is the current capital gain offset against the pre-2023 loss carryforwards so only the net 2023 capital gain is subject to inclusion on the grantor’s return? The answer to this question should be yes.

And if the trust has current and pre-2023 accumulated untaxed capital gain, do the pre-2023 loss carryforwards offset current capital gain before they offset accumulated untaxed capital gain (assuming they can be used to offset accumulated untaxed capital gain)? The answer to this question is not clear. The trust is a non-grantor trust in all respects, even for California purposes. Accordingly, the correct answer seems to be that for 2023 and beyond, any loss carryover from before 2023 tax years should be able to be used at the trust level to offset post-2023 capital gain. Only the net capital gain should be reportable by the grantor under the statute. Any other result would result in the loss carryforwards being trapped within the trust, which seems contrary to the overall concept that the trust remains a non-grantor trust. Remember that the statute requires the income from an ING to be reportable by the grantor, but the income does not flow through to the grantor as it does with a true grantor trust.

C. Planning

There are a few planning techniques that are available to deal with pre-existing INGs that now are subject to section 17082, but none of them are entirely satisfactory:

1. The grantor could request that the distribution committee exercise its powers to terminate the trust and distribute the assets back to the grantor. The termination of the trust should have no transfer tax consequences because transfers to the trust were incomplete gifts, so transfers back to the grantor are not gifts. For federal income tax purposes, transfers back to the grantor should have no unexpected income tax consequences; current year’s DNI and realized capital gain will be taxable to the grantor. But for California income tax purposes, a big negative consequence is that all of the untaxed California accumulated income will be taxed to the grantor under the throwback rules. For trusts that were established shortly before the new legislation took effect, and which do not have significant amounts of accumulated, non-California taxed income, this solution may be the easiest.
2. The grantor could complete the gift by giving up those powers that cause the transfers to the trust to be incomplete gifts. The problem with this solution for most INGs is that in the author’s experience, most INGs consist of substantial assets, and completing the gift will cause the grantor to use any remaining gift and estate tax exemption and most likely incur a substantial gift tax. However, for relatively small INGs, this approach may have some merit, although if the grantor retains an interest, it is not clear whether this will subject the trust to estate tax upon the grantor’s death under section 2036 of the Internal Revenue Code even after the gift is completed. But because INGs were established in “asset protection states,” the laws of which do not treat a grantor’s interest as being subject to the grantor’s creditors, completing the gift should result in accumulated non-California taxed income being trapped inside the trust as long as no distributions of accumulated income are made to California beneficiaries. On a going forward basis, no California income tax should be paid on non-California source income because the trust will no longer be an “ING” subject to the provisions of the new legislation.
3. Probably the easiest approach for the future is for the distribution committee to distribute current income, including current capital gain, to the grantor each year. As long as distributions to the grantor do not exceed the current year’s income, including capital gain, the untaxed California accumulated income within the trust should not be subject to the throwback tax until it is distributed to a California resident in the future. Upon the grantor’s death, the assets will be includable in the grantor’s gross estate, which was always the

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result with an ING, and whether the non-California tax accumulated income will be subject to the throwback tax will depend upon the ultimate distributees of the trust.

——–

Notes:

^*. Loeb & Loeb, LLP, Los Angeles, California

^01. See Frimmer, Order Out of Chaos – Making [Half of] California’s Trust Taxation System Work (2016)_25 Cal. Tax Law. 1; Frimmer, Order Out of Chaos – Making [the Other Half of] California’s Trust Taxation System Work (2016) 25 Cal. Tax Law. 3; Frimmer, Does Kaestner Have Any Relevance for the Taxation of Trusts in California (2019) 25 Cal. Tax Law. 4. There are many other excellent articles relating to California’s system of taxation of estates and trusts, many of which express the same frustration at the lack of clarity on the subject. See Kinyon, Marais & Johnson, California Income Taxation of Trusts and Estates (2015); See Kinyon, Marias & Johnson, California Income Taxation of Trusts and Estates (2015) 21 Cal. Tr. & Est. Q3; Kinyon & Wolff, The California Throwback Tax Applicable to Distribution of Previously Untaxed Accumulated Trust Income to California Resident Beneficiaries (2020) 26 Cal. Tr. & Est. Q4; Kinyon & Wolff, A Proposal Regarding the California Taxation of Non-California Resident Trusts and Their Beneficiaries (2021) 30 Cal. Tax Law. No. 2; Brown, Keligian & Lambourne, California Income Tax Issues for Non-California Trusts Part 2 (2014) 20 Cal. Tr. & Est. Q2; Brown, Keligian & Lambourne, California Income Tax Issues for Non-California Trusts, Part 1 (2014) 19 Cal. Tr. & Est. Q4; Brown, Keligian & Lambourne, California Income Tax Issues for Non-California Trusts – Part 2 (2014) 20 Cal. Tr. & Est. Q2; Miller & Kinyon, When Should a Trust Be Subject to State Income Tax in California (2014) 23 Cal. Tax Law. 3.

^02. The passage of Sen. Bill No. 131, enacting Rev. & Tax. Code, section 17082.

^03. Paula Trust v. Franchise Tax Bd. (2018, No. CGC-16-556126).

^04. Rev. & Tax. Code, section 17743. See also Cal. Franchise Tax Bd., Legal Ruling No. 238 (Oct. 27, 1959).

^05. Paula Trust, supra.

^06. Rev. & Tax. Code, section 17951.

^07. Rev. & Tax. Code, section 17742.

^08. Ibid.

^09. Cal. Franchise Tax Bd., Legal Ruling No. 238 (Oct. 27, 1959). See also Instructions to Form 541, Schedule G.

^10. Paula Trust, supra.

^11. Rev. & Tax. Code, section 17742, subd. (a).

^12. TAM 2006-0002 (Feb. 17, 2006).

^13. Id.

^14. TAM 2006-0002, supra.

^15. Id.

^16. Hale Champion, Director of Finance. Report on Assembly Bill No. 386, dated May 4, 1963, Office of Legislative Council, Memorandum, dated May 6, 1963, to Edmund G. Brown, Governor, from the Department of Financing relating to Assem. Bill No. 386.

^17. IRC, section 652, applicable in California pursuant to Rev. & Tax. Code, section 17731.

^18. IRC, section 678.

^19. See n. 1, supra.

^20. Prob. Code, sections 16320 et seq. See Appeal of C. Pardee Erdman (Feb. 18, 1970 Cal. St. Bd. Eq.) 1970 WL 2442 at p.1, in which the board ruled in a pre-1963 tax return case that the capital gain that was accumulated during the income beneficiary’s lifetime was taxable to the remainderman when it was distributed to the remainderman following the income beneficiary’s death. Although not completely clear from the case, it appears that the income beneficiary was entitled to receive the income, which she reported each year. The remainderman argued that his interest was contingent during the income beneficiary’s lifetime, and accordingly, the accumulated capital gain was not taxable during the income beneficiary’s lifetime. His position was that because the capital gain was not taxable during the income beneficiary’s lifetime, it was not taxable when it was distributed to him after the income beneficiary’s death. The board concluded that the statute in effect at the time authorized the state to tax the entire taxable income of the trust, which included the capital gain realized during the income beneficiary’s lifetime even though the income beneficiary was not entitled to receive the capital gain and never received any distributions beyond the income that she reported each year. What is unclear about the decision in the context of the current statute is whether any non-contingent interest in the trust makes the entire income of the trust taxable. The remainder beneficiary was taxed on the income upon distribution under the throwback rules because the income was not taxed during the income beneficiary’s lifetime. The implication of the case is that the capital gain should have been taxed during the income beneficiary’s lifetime even though the income beneficiary did not receive any distributions of principal and the remainderman’s interest in the trust was contingent. Under the pre-1963 statute, the concept of contingent/non-contingent was not relevant. Although the 1963 amendment added the non-contingent element to the statute, it did not modify the basic provision which taxes the “income” of the trust if the resident beneficiary’s interest is non-contingent. How the term “beneficiary” is construed in the context of the amended statute is not clear. If the trust has two “interests,” one of which is non-contingent and one of which is contingent, then capital gain should not be taxed during the income beneficiary’s lifetime, assuming no distributions of principal are made. However, if any non-contingent interest taints the entire trust, then capital gain is subject to income tax during the income beneficiary’s lifetime.

^21. Rev. & Tax. Code, section 17742, subd. (a) (emphasis added).

^22. See Treas. Reg. section 25.2518-3.

^23. Cal. Code Regs., tit. 18, section 17744.

^24. Draft Legislation Symposium—Taxation of Trusts Resulting from the Trend Toward Nationwide Trust Administration.

^25. Kinyon, Marois & Johnson, California Income of Trusts and Estates, supra,. In a subsequent article by two of the authors, the authors proposed that trusts with “vested” remainder interests, such as IRC section 2642, subd. (c)(2), trusts and general power of appointment marital trusts be treated as if the vested beneficiaries’ interests were non-contingent, the implication being that current law was either unclear or did not treat such interests as being contingent. Kinyon and Wolff, A Proposal Regarding the California Taxation of Non-California Resident Trusts and Their Beneficiaries, supra, note 1. Under this theory, any trust in which the beneficiary has a testamentary general power, or is payable to the beneficiary’s estate, should be similarly treated.

^26. Rest.2d Property, section 13.6, com. (b).

^27. IRC, section 2041.

^28. Prob. Code, section 682, subd. (b).

^29. Claude H. Hogan of Pillsbury, Madison & Sutro (May 6, 1963) Letter to Honorable Edmund G. Brown, Governor of the State of California.

^30. Rev. & Tax. Code, section 17745.

^31. Rev. & Tax. Code, section 17745, subd. (e), contains a paragraph that states that if a person was a California resident when the accumulation occurs, leaves the state within 12 months of the accumulation distribution, and returns to the state within 12 months after the distribution, the person was a resident throughout the period, and therefore, is subject to the throwback tax. However, if the person actually leaves the state permanently, or the timing is outside of the rules, there should be no throwback tax.

^32. Dacey, How To Avoid Probate (1979).

^33. See Rev. & Tax. Code, section 17779, which provides that the federal throwback rules do not apply to California’s throwback tax. But the instructions to California Form 541 refer to the federal rules for the treatment of trust-to-trust distributions. Former Internal Revenue Code sections 665-668 would treat the distributions as an accumulation distribution, but they are not clear about whether the distributions would be deemed to cleanse the income of the California taint. See also Kenyon & Wolff, supra, note 1, at pp. 15-16.

^34. See discussion in section V, supra.

^35. Kinyon, Marais, & Johnson, California Income Taxation of Trusts and Estates, supra, note 1, concur.

^36. Prob. Code, section 19501, et seq.

^37. IRS Notice 2011-101; Rev. Proc. 2019-3, 2019-1 IRB 130.

^38. See Treas. Reg. section 26.2601-1(b); PLR 9440015; PLR 200530012.

^39. The IRS will not rule on whether the distribution from the old trust to the new trust allows the old trust an IRC section 661 deduction and inclusion in the new trust as provided in IRC section 662. Rev. Proc. 2019-3, section 5.01(7).

^40. See TAM 2006-0002, and the discussion covered in section III.A of this article.

^41. Rev. and Tax. Code, section 17082.

^42. FTB, Incomplete Gift Non-Grantor (ING) Trusts (Oct. 2023), < https://www.ftb.ca.gov/file/personal/filing-situations/estates-and-trusts/incomplete-nongrantor-trusts.html > (as of May 9, 2025).

^43. Sen. Bill No. 376 (2025-2026).

^44. Rev. & Tax. Code, section 17082, subd. (a).

^45. Sen. Bill No. 131 (2023-2024), Assembly Floor Analysis.

^46. See note 40.

^47. North Carolina Dept. of Revenue v. The Kimberly Rice Kaestner Trust, 588 U.S. 262 (2019). See Frimmer, Kaestner, n. 1.

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MCLE SELF-STUDY ARTICLE WHEN, WHY AND HOW TO LEAVE RETIREMENT ACCOUNTS TO CHARITY

Written by Bryan Kirk, Esq.^*

I. SYNOPSIS

Other than real estate, the largest component of wealth for most U.S. households is retirement benefits.⁰¹ In the third quarter of 2024, for household in the 50-90 percent wealth percentile (roughly $200,000 to $1,600,000), retirement benefits comprised about 16 percent of their assets.⁰² For households in the 90-99 percent wealth percentile (roughly $1,600,000 to $13,000,000), retirement benefits represented about 13 percent of their assets.⁰³

Imagine you have a client whose assets consist of a house worth $1 million and retirement benefits worth $1 million. The client has come to you to do their estate plan. They want your advice on who should receive the house and who should receive their retirement benefits. They want to maximize the benefits to all their beneficiaries. In your head, you run through the options:

• They could leave the property to their spouse
• They could leave it to their children
• They could leave it to charity
• They also could leave it to friends or others in their life
• They could combine the options through some type of trust, including split-interest trusts that give an annuity interest to individuals for their lifetime or a period of years and the remainder to charity, or vice versa

You also ask yourself what type of retirement benefits the client has. Retirement benefits take a variety of forms (pension, 401(k), 403(b), SEP IRA, Simple IRA, etc.). For the sake of example, let’s assume the client has a traditional individual retirement account (IRA), which is the more common form of retirement benefit held by high-net-worth individuals at the time of their death. The client might alternatively have a Roth IRA. That would require a different approach, which we will discuss later.⁰⁴

You ask the client who they would like to receive their assets. They say they want to leave half of their estate to charity and half to their one child. For now, let’s assume the client is not married. The client’s response triggers an early lesson you learned as an estate planner: charitable bequests should always first be made from a client’s traditional retirement accounts.

You are tempted to blurt out your advice. But there have been a lot of changes in the world of retirement benefits. You know the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed the rules around inherited retirement accounts in 2019. You also know the law was updated with the SECURE 2.0 Act in 2022. You vaguely remember what the new laws provide but you are not totally confident. So you tell the client you need to research the law and get back to them.

This article is intended to help you handle this situation and others like it. First, the author goes through the math behind the early lesson of leaving traditional retirement accounts to charity to describe why the lesson is still valid and why it can be even more important post-SECURE Act. Second, this article reviews challenges the estate planner may encounter when applying the initial lesson and how you can solve them. Third, this article works through how the analysis changes if the client has a spouse or Roth IRA. Last, the article briefly explains when leaving a retirement account to a charitable remainder trust may make sense-including for readers of this article!

Leaving all or a portion of a traditional retirement account to charity can be one of the easiest ways for clients to save tax, benefit their communities and benefit their families.

[Page 9]

The goal of this article is to help you help your clients do it right, know when not to do it and avoid clients doing it wrong (or not all when there’s easy savings to be had).

II. THE BASIC MATH

Returning to our example: the client owns a house worth $1 million and a traditional IRA worth $1 million. The client wants to leave their estate half to charity and half to their one child. There are a few ways they might try to accomplish their goal.

A. A Not-Great Option: IRA to Child

The client could leave the house to charity and their IRA to their child. This may be the intuitive option for the client. Their child may not want the house. Meanwhile, their child could use the financial assets in the IRA. The charity, they assume, would be happy with either.

The problem with this approach is taxes. The traditional IRA carries a tax burden for the child. The house does not. The house receives a step-up in income tax basis at the client’s death.⁰⁵ As a result, the child can sell the house without any capital gain taxes except for the post-death appreciation.

In contrast, if the child receives the IRA, any distributions the child receives will be subject to tax at the rates applying to ordinary income.⁰⁶ Let’s say the child is a single person otherwise earning $97,000 a year.⁰⁷ In 2025 the distributions would be taxable income subject to a 22 percent federal income tax rate and a 9.3 percent California income tax rate.⁰⁸ The combined income tax at 31.3 percent would consume nearly a third of each distribution.

The total net to the child may be less than $700,000, even after factoring in post-death appreciation.⁰⁹ In comparison, the charity would likely net well over $900,000 from the sale of the house after deducting broker commissions and other sale expenses. If the client’s intention is to split their assets equally between the child and charity, they would not have accomplished their goal.

B. A Not-As-Bad-But-Still-Not-Great Option: 50/50 Split

Based on the numbers above, the client may reason they can fix the problem by leaving each asset 50-50 to their child and charity. This improves the numbers somewhat, but the problem persists.

If the child receives half of the IRA and a 50 percent undivided interest in the house, the distributions from the IRA remain subject to tax. Those taxes only impact half of what the child receives. But that’s still a third of each distribution in the tax scenario described above.

The net to child from the IRA may be $350,000 or less. Add in a minimum of $450,000 from the sale of the house—and ignore the hassle of co-owning the house through the sale process.—the child receives $800,000.

Meanwhile, the charity as a tax-exempt organization receives distributions from the IRA tax-free. Its $500,000 from the IRA remains $500,000. Add in $450,000 from the sale of the house. The total to charity is $950,000.

If the client’s goal is to benefit their child and charity equally, they continue to miss the mark.

C. Sidebar #1: SECURE Act Inherited IRA Distribution Reinforces the Basic Lesson

Before 2020, a legitimate response to the numbers above was to point to the child’s ability to stretch out distributions from the IRA over their lifetime. This diffused the tax impact. The amount to be withdrawn each year was relatively small. Income was deferred into lower earning years. Tax-free growth was more of a factor.

But the SECURE Act in 2019 got rid of the “stretch IRA.”¹⁰ Under current rules, an adult child inheriting an IRA will generally be required to take minimum distributions based on their life expectancy for 10 years following the IRA participant’s death and the entire IRA is required to be distributed by the end of the 10th year.¹¹ This assumes the participant dies after the date they were required to begin to take minimum distributions (or RMDs) from the IRA. Currently, under SECURE 2.0, that date is April 1 of the year after attaining age 73 (and will increase to age 75 in 2033). If the participant died before that date, the requirement to take distributions during the 10-year period goes away but the 10th year end-date for withdrawing all the IRA remains.¹²

In short, in a post-SECURE Act world, you need to look the tax burden in the face. As described below, there is a way to replicate some of the benefits of a “stretch IRA” using a charitable remainder trust. But that goes beyond our basic math example.

Under the current tax rules for inherited IRAs, the initial lesson has even more relevance: Traditional

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retirement accounts should be the first place to fulfill any charitable bequest.

D. Sidebar #2: Estate Taxes Add to the Rationale

Let’s pump up our example and say the client’s house is worth $20 million and the IRA is also worth $20 million.¹³ In 2025, the client’s estate would be subject to about $2.4 million in federal estate taxes.¹⁴ This assumes a $20 million charitable deduction and a $13.99 million federal estate tax exemption.

Absent special drafting, the estate tax of $2.4 million would all be paid from the child’s share.¹⁵ The child would receive an income tax deduction for the estate tax paid.¹⁶ But that deduction would offset only a portion of the income that otherwise is subject to tax.

Following the first option above, the child would likely net less than $10 million from the bequest of the $20 million traditional IRA.¹⁷ Following the second option above, the child would still likely net less than $15 million from the $20 million bequest.¹⁸

In other words, if an estate will be subject to estate taxes, the rationale to follow the basic lesson of leaving traditional retirement accounts to charity becomes even stronger.

E. The Better Option: IRA to Charity

We have now said it several times. But let’s do the math. In our example, the better option for the client is to leave the IRA to charity and the house to the child.

After selling costs, the child should net $900,000 or more. Meanwhile, the charity would likely be able to liquidate the IRA for the full $1 million.

That is still a five-to-six percent difference in the net amounts. But that is much better than the twenty-to-thirty-plus percent difference under the other options. It also mean a lot less going out to pay taxes.

While not a perfect split, the client is likely as close as they can get to their goal without involving more complicated drafting.

F. Final (and Important!) Sidebar: The Better Option Also Applies for Smaller Bequests

“But wait a minute,” you may be thinking. “My clients don’t typically leave half their assets to charity.”

The basic lesson still applies. The math holds true for a $10,000 bequest to charity as much as a $10 million bequest. If a client leaves $10,000 to charity under their will, that’s $10,000 not going to their child or other noncharitable beneficiaries. Phrased another way, the cost of the charitable bequest under the will to the noncharitable beneficiaries is $10,000.

If instead the client leaves $10,000 to charity out of their traditional IRA, that’s not a full $10,000 not going to the child. We know that because the traditional IRA carries a tax burden to the child or other noncharitable beneficiaries. Phrased another way, the cost to the noncharitable beneficiaries of leaving the IRA to charity is much less.

Depending on the noncharitable beneficiaries’ income tax rates, the cost of the charitable bequest from the IRA may be only $7,000 or $8,000, or less.¹⁹ That’s a pretty good deal.

III. CHALLENGES AND HOW TO SOLVE THEM

Now let’s assume you know the basic lesson. If a client wants to leave money to charity, you always look first to their traditional retirement accounts.

Sometimes, though, it may not be quite that simple. Below are six common issues you may encounter when trying to fulfill a client’s charitable goals through their traditional IRAs and suggestions on how to solve them:

A. Not Having Enough Left

Traditional retirement accounts are designed to be depleted. If a client lives out their life expectancy, the rate of their required minimum distributions (RMDs) from their retirement accounts will increase each year.²⁰

For clients with significant charitable bequests, they may wonder if there will be sufficient funds left in their account to fulfill those bequests when they die. This can apply with large or small accounts as the RMD rate increases at the same pace for each. It also takes on special concern as clients may not have capacity to change their estate plans in their final years as accounts deplete.

Luckily, this issue has an easy answer. If the alternative to providing for the bequest in the retirement account’s beneficiary designation was a provision in the client’s will or revocable trust, hold onto that provision but use it as a backstop with a clause to abate the gift if it is fulfilled through the client’s retirement accounts.

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That was a long sentence. The drafting, though, should be straightforward. Name the charity in the IRA beneficiary designation. Then, the will or provision can read along the lines of the following:

Distribute $10,000 to Charity, if Charity is still in existence at the time of my death; provided, however, such amount shall be decreased by any amount designated to be distributed to Charity from my retirement accounts at the time of my death.

B. Leaving Too Much

Clients may also worry about leaving too much to charity. This may arise if a client is contemplating leaving all or a set percentage of a retirement account to charity.

If this is your client’s concern, there are a couple of easy answers. One is to switch the beneficiary designation to a specific dollar amount. The other is to leave a smaller percentage of the IRA to charity. Either of these can be coupled with a will or trust provision like the one above to avoid overcompensating and leaving less to charity than desired.

C. Dealing with Beneficiary Designations

Unlike most assets, retirement accounts generally are not controlled by the client’s will or revocable trust. Instead, they are controlled by the beneficiary designation on file with the account administrator.

Today, the beneficiary designation for most retirement accounts is effectuated either online or via an app on the client’s phone. Paper forms are generally still available. But they are often not the default for either the account administrator or a client.

This has a few consequences. First, clients and/or their attorneys may overlook designations entirely. Alternatively, clients and/or their attorneys may not properly engage with designations as part of the estate planning process. Designations may be viewed as either something the client simply handles on their own, or as a hassle not worth the effort of doing anything outside clicking on the defaults.

These responses are mistakes—both specifically and generally. Digital beneficiary designations should be viewed as a convenience. If a client wants to designate a charity as the beneficiary of their IRA, they might complete that change while sitting in your office or on a call. The client could send you a screenshot of their designation confirmation to add to your file. You may provide the client with valuable tax savings in a matter of minutes.²¹

If the client’s charitable goals are more involved, the client may need to request a form to complete them. For specific dollar amount bequests, they likely will need to include an attachment. This may involve some leg work for the client. But making these requests now is how an account administrator eventually will incorporate the necessary options in their digital tools.

D. Too Many Charitable Beneficiaries

Clients often want to leave bequests to several charities. These may involve specific dollar amounts to some and percentages of the residue to others. There also may be alternative provisions that cascade amounts from one charity to another based on certain conditions.

Providing for distributions of various dollar amounts to five or six charities on an attachment to a beneficiary designation form typically is not an issue. But more complicated provisions may vex attorney, account administrator, client and charity alike.

The answer to this issue may be to leave the retirement account (or desired amounts) to a donor-advised fund (DAF). If the client has one, they might use their private foundation. The complex becomes simple with either option.

If the client’s charitable goals exceed the value of their traditional retirement accounts, the easy approach is to leave the entirety of those accounts to the client’s DAF or private foundation. The DAF or foundation can then distribute the desired amounts to the charities.

One potential downside to this approach is that it relies on the discretion of the DAF advisors or foundation managers to implement the distributions. But it is possible to designate how a DAF is to be distributed after your death and to remove the discretion of the advisors. This may be preferable to having the retirement account administrator distribute amounts to charity as presumably the DAF administrators are more familiar with charitable gifts.

Advisor or manager discretion may, however, be an advantage. As circumstances change, a client may take comfort in knowing their designated advisors or foundation managers will have flexibility in fulfilling the client’s charitable goals.

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E. Not Fulfilling the Specific Purpose

Clients leaving significant amounts to charity often have specific purposes for their bequests. In some cases, the terms of those purposes may run to several pages. Depending on the circumstances, it may not be feasible or appropriate to include those terms in a beneficiary designation.

One answer to this issue is the one laid out above: leave the charitable gift to the client’s DAF or private foundation. That would allow the DAF or foundation to make the gift subject to the specific terms. It also could allow a more fruitful discussion with the charity on the viability of the specific purposes.

The other answer to this issue is to have a separate writing delivered to the charity laying out the specific purposes. Under the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”), the gift instrument governing the terms of a charitable gift is broadly defined.²² A gift instrument includes any record or records, including a solicitation from the charity, under which property is granted to, transferred to, or held by a charity for its charitable purposes.²³ A record is defined as “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.”²⁴

Under UPMIFA, charities are bound to use charitable funds in the manner you designate them to the extent those purposes have been expressed in any tangible or retrievable form. This creates an easy best practice when leaving retirement accounts to charity. Simply leave all or a portion of the account to the charity via the beneficiary designation and use a separate letter to the charity to designate the specific purposes.

This approach avoids reliance on an account administrator to maintain and communicate the specific purposes of a bequest. It also facilitates updating the purposes of a gift without the need to update the client’s beneficiary designations or estate plan. The client can send a new letter to the charity without touching their beneficiary designation or incurring the cost and delay to revise their will or trust.

F. Undue Influence

How can estate planning attorneys protect a client’s charitable intentions, when dealing with retirement accounts whose beneficiary designations likely represent the portion of an estate plan most easy to change and vulnerable to challenge? This is a difficult question.

Clients leaving a significant portion of the estate to charity often are those who do not have children.²⁵ Sadly, these clients can also be among those most susceptible to undue influence and elder abuse as they grow older and become dependent on others (who are not their natural heirs) for care.

One response is to use the strategies described above. A beneficiary designation done online without any incorporation in an overall estate plan is a fragile designation. A beneficiary designation done online, yet confirmed with notes in the attorney’s file, with a back-stop provision in the client’s will or revocable trust as described above, and a designation letter on file with the charity, is a much more secure designation. The designation may still be susceptible to change and undue influence, but it creates more hurdles for someone seeking to impose their will on the client.

A second response is to facilitate a support system for the client to resist potential abuse. Charities may be cautious to keep close connections with donors toward the end of their lives, or during periods of illnesses, given the charity’s concern of themselves being perceived as exerting undue influence. However, that concern may diminish if there is a team approach to ensuring the client’s plan is up to date and properly reflects the client’s intent. A client with multiple professionals (including the charity) working together is always in a better position to prevent abuse. In the best case, this begins at the time of the client’s initial planning. But it can begin at any time.

IV. WHAT ABOUT JUST LEAVING IT TO THE SURVIVING SPOUSE?

At this point, you may ask yourself, “Isn’t this just for folks who aren’t married? Shouldn’t everyone else simply leave their retirement benefits to their spouse?”

In general, yes. Other than charities, surviving spouses generally have the most options and, due to the marital deduction and ability to stretch out distributions over their lifetime, favorable tax treatment when receiving traditional retirement accounts. But there is at least one scenario where a married client might consider leaving their traditional retirement accounts to charity rather than their surviving spouse.

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Some wealthy clients do not rely on their retirement accounts. During their lifetime, they may primarily look to their retirement accounts to make qualified charitable distributions (QCDs).²⁶ With a QCD, the distribution is made directly from the retirement account to charity, which fulfills all or part of their RMDs while avoiding recognizing income for those amounts. QCDs, however, are limited ($108,000 in 2025) and thus QCDs may only satisfy a fraction of a wealthy client’s RMDs. But the client may make the QCD each year because otherwise they are forced to recognize income they do not need.

In this context, leaving their traditional retirement accounts to charity, rather than their surviving spouse, could be thought of as a single-chance, only-at-death option for an unlimited QCD. Leave the account to charity and never need to worry about RM Ds again.

Alternatively, the client could leave the retirement account to their surviving spouse. Their spouse could continue to make the limited QCDs each year. The spouse would also be forced to recognize income each year on any RMDs over the QCD limit. All the while, the spouse may wish, “If only I could simply leave that IRA to charity now and be done with it.” But they cannot. The one-time shot was when their spouse died. Even if the surviving spouse ultimately leaves the account to charity themselves when they die, they will likely have incurred years of tax on the account while they were alive that might have been avoided if the account was left to charity on the death of the first spouse to die.

Leaving the retirement account to charity may be particularly attractive to clients with substantial outstanding charitable pledges in their later years. The retirement account can fulfill those pledges and avoid the less optimal tax result of the spouse receiving the account and incurring the attendant tax, with non-retirement account assets being used to fulfill the pledges.

V. ROTH ACCOUNTS FLIP THE LESSON

“But what about Roth accounts,” you may also have on the tip of your tongue. In our initial example, we assumed the client had a traditional retirement account. That’s because the lesson flips when dealing with Roths.

If a client’s retirement account is a Roth, there is no income tax on distributions from the inherited account.²⁷ Estate tax may still apply. But the smart tax move is to leave the Roth account to the child. This is because the child can continue to benefit from tax-free growth within the Roth account before it is required to be withdrawn.

If we switch our initial scenario to a Roth, the child who receives a $1 million Roth IRA does not have a tax burden to go along with the account. Instead, they receive a tax benefit. Assuming they fall under the 10-year distribution rule, they can have 10 years of tax-free growth. With a Roth IRA, annual distributions during the 10-year period are not required.

The charity, on the other hand, does not receive any additional benefit from tax-free growth since the entity itself is tax exempt. If the charity receives the house and the child receives the IRA, both get (roughly) $1 million. And the child gets a tax benefit to boot.

This can be one of the multiple factors to consider for clients considering whether to convert their traditional IRAs to Roth during their lifetimes, an analysis beyond the scope of this article.

VI. CHARITABLE REMAINDER TRUSTS AND RETIREMENT ACCOUNTS

Last, we need to discuss the option mentioned earlier: leaving a retirement account to a charitable remainder trust (CRT). Admittedly, this may be an option more written about than implemented. But that may be an interrelated flaw on both ends.

A CRT qualifies as a trust under IRC section 664 if it has the following two components:

• A present annuity or unitrust interest of at least 5 percent to a noncharitable beneficiary for lifetime or a period of years not to exceed 20 years.
• A remainder interest of at least 10 percent of the initial value of the trust going to charity at the end of the trust term.

CRTs are not subject to income tax, but the distributions to the noncharitable beneficiaries are subject to income tax under ordering rules that generally provide for the beneficiary to recognize the highest-tax income of the trust first. Income realized by the trust in one year is accumulated until it is distributed and recognized by the beneficiary.

Much has and can be written about CRTs. But the question for this article is when leaving a traditional IRA to a CRT for a child or other beneficiary is likely to make sense. Here’s my answer:

To decide if the strategy makes sense, you need to know the benefit and the cost. The tax benefit of leaving a traditional retirement account to a CRT is the deferral of

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the income tax liability on withdrawing the assets over the duration of the trust, which can stretch over the lifetime of the beneficiary.

The cost largely involves two things:

• A minimum 10 percent remainder interest to charity.
• Giving up the beneficiary’s ability (and requirement over 10 years) to withdraw the assets from the account as they like.

There is also the cost to set-up and administer the trust, but many charities will facilitate this process. Charities often have forms available to prepare the trusts. Some will also serve as trustee, potentially for a nominal or no fee.

This strategy does not make sense if the client does not have charitable intent.²⁸ The strategy also does not make sense if it’s likely the beneficiary may need assets from the retirement account exceeding the CRT’s set annuity or unitrust payments. For example, if the beneficiary has debt to pay down or large purchases to make like a home, the CRT is likely not a good solution.

Considering the above factors, the generic situation where the strategy makes sense is a family with charitable intent and children who, while desiring the funds, are likely to have other funds available to meet any large expenses or capital needs. This situation may coincide with a child with spendthrift tendencies the parent would like to guard against.

A more specific situation where the strategy may make sense is a client who would like to leave assets to a grandchild with a degree of spendthrift protection. A bequest to a grandchild requires consideration of generation-skipping transfer (GST) tax consequences, which is outside the scope of this article. But assuming GST exemption can be applied (without meaningful sacrifice) or perhaps the grandchild’s parent is deceased, leaving the retirement account to a CRT for the grandchild may make sense because:

• The grandchild presumably has a longer life expectancy to make use of the deferred tax and tax-free growth.
• The trust provides a form of spendthrift control.

Another specific group of people for whom the strategy may make sense is the parents of readers of this article. Huh? Let me make some assumptions (and perhaps exclude some of you for whom the prior sentence would not apply):

• You are successful professionals (or on your way to being one).
• You are likely to hit peak earnings in your fifties and sixties.
• Those peak earnings cover your expenses and are likely to keep going for at least 10 years.
• Sadly, there’s a good chance your parents will pass away while you are enjoying your peak earnings (or at least in a higher income tax bracket than you will be in 10 years later when you’re retired or moving that way).
• If you inherit your parents’ traditional retirement accounts at that point and are required to take distributions over the subsequent 10 years, there exists a good chance that supplemental income will hit you in the years when it’s taxed at the highest rate.
• Wouldn’t you rather be able to defer even some portion of that income until 10 years or more later when you’re cruising toward or fully in retirement and your income is a more modest amount and thus taxed at a lower rate?

If I didn’t lose you at some point in that sequence, it may be time to talk with your parents and update their estate plans.

VII. PUTTING THE LESSON TO USE

Step One: Find out if your clients have charitable intent. (Hint: Most do.)

Step Two: Ask if they’d like to leave any amounts to charity at their death.

Step Three: If the answer is yes or they pause in an uncertain manner, offer that it may make sense to leave any traditional retirement accounts they have to charity.

In many cases, specific client discussions about leaving their retirement accounts to charity may not need to go much further. If the client needs more explanation, walk them through the basic math.

The rest may simply be the estate planning process. Discover the specifics of their intent. Optimize to achieve the client’s goals in the most efficient fashion. Memorialize the plan and do your best to make sure the plan is implemented.

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VIII. CONCLUSION

If a client is leaving assets to charity, start with their traditional retirement accounts. If you hit a stumble along the way, most likely there is a way to step over it and preserve the tax benefits for the client, savings for their beneficiaries, and impact for the community.

IRA		Individual Retirement Account. Retirement savings vehicle often created through roll-overs from an employer plan like a 401(k). Taxpayer may receive deductions on contributions up to a limit. Assets are generally tax-free while in the account. Distributions are subject to income tax, including after death.
Roth IRA	Roth Individual Retirement Account. A special kind of Individual Retirement Account named for Senator William Roth who introduced the relevant legislation. Unlike a traditional IRA, there’s no deduction for contributions to a Roth IRA but distributions are tax-free.
RMD	Required Minimum Distribution. At a certain age, retirement plan participants and IRA owners are required to take minimum distributions each year. Currently, this kicks in at age 73 for IRAs. Special rules apply for inherited IRAs.
QCD	Qualified Charitable Distribution. This is a way to satisfy your RMDs each year by a direct payment to charity. In 2025, up to $108,000 of your RMDs can be satisfied by a direct payment to charity. There’s no charitable deduction, but you also don’t report the income on the IRA distribution.
CRT	Charitable Remainder Trust. A trust that provides for an annuity or unitrust amount to be paid to individuals for their lifetime or a period of no more than 20 years, with the remainder going to charity at the trust’s termination. Can provide for an immediate income tax deduction for the gift of the remainder to charity. Might also be a way to stretch out the benefits of an inherited IRA over the beneficiary’s lifetime.
DAF	Donor Advised Fund. A separate fund created by donor at a sponsoring IRC, section 501(c)(3), organization. While the sponsoring organization retains legal control over the funds, the donor (or their designated representatives) may retain advisory privileges with respect to distributions and investments of the fund.

——–

Notes:

^*. Stanford University’s Office of General Counsel, Palo Alto, California

^01. Federal Reserve Board, Distributional Financial Accounts (June 20, 2025) < https://www.federalreserve.gov/releases/z1/dataviz/dfa/ > (as of Aug. 17, 2025).

^02. Id.

^03. Id.

^04. For a summary of the different types of retirement plans, please see, IRS, Types of Retirement Plans (May 27, 2025) < www. irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans > (as of Aug. 17, 2025).

^05. IRC, section 1014.

^06. IRC, sections 402, 72.

^07. According to United States Census Bureau information, the median household income in California for years 2019-2023 (in 2023 dollars) was $96,334.

^08. For the 2025 federal tax brackets, see Rev. Proc. 2024-40. The California tax rate is based on the 2024 tables. Cal. Franchise Tax Bd., Tax News (Oct. 2024) < https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/october-2024/index.html > (as of May 19, 2025).

^09. It is important to remember that appreciation in an IRA is also subject to tax at the time it is withdrawn. As a result, a six percent return may be more like four percent or less to the client.

^10. Text of the SECURE Act is available here: Setting Every Community Up for Retirement Enhancement Act of 2019, H.R. No. 1994, 116th Cong., 1st Sess. (2019) < https://www.congress.gov/bill/116th-congress/house-bill/1994/text#toc-H084B5EBD76DF47C0B895121999E2270E > (as of May 19, 2025).

^11. IRC, section 401(a)(9)(B), Treas. Reg. section 1.401(a)(9)-5(d).

^12. See Treas. Reg. section 1.401(a)(9)-3.

^13. Thomas A. Barthold, Memorandum re: Revenue Estimate to Kara Getz, Tiffany Smith, and Drew Couch, July 27, 2021, < https://www.finance.senate.gov/imo/media/doc/728.21%20JCT%20Mega%20IRA%20Data1.pdf > (as of May 19, 2025). These are somewhat absurd numbers but the author keeps the scenario simple to make the point. Based on a memorandum from the Joint Committee on Taxation dated July 27, 2021, there were 2,275 taxpayers with IRA balances between $10 and 15 million, 853 taxpayers with balances between $15 and $25 million, and 497 taxpayers with balances of at least $25 million

^14. In 2025, the federal estate tax exemption is $13,990,000. In this scenario, the taxable estate would be about $20,000,000 ($40,000,000 minus a $20,000,000 charitable deduction and likely some other deductions as well). Less the exemption amount, $6,010,000 at the federal estate tax rate of 40 percent would be $2,404,000.

^15. Under apportionment rules, the distribution to the child would be subject to tax while the distribution to charity would be offset by the charitable deduction under IRC, section 2055. Prob. Code, section 20112.

^16. IRC, section 691(c).

^17. Out of the $20 million, there first would be $2.4 million of estate tax to be paid. Then, the distributions from the IRA to pay the estate tax and fulfill the minimum distribution requirements, after the deduction of $2.4 million for the estate tax paid, would be subject to federal and state income taxes. At combined federal and state income tax rates of 45 percent, the tax would be $7.92 million. That would result in a total tax of $10.32 million.

^18. The estate tax in this scenario would remain $2.4 million. This would still result in a deduction for income tax purposes. But the income tax at a combined rate of 45 percent on $7.6 million of taxable income would be $3.42 million.

^19. It may be counter-intuitive to think of the cost of a bequest, but when a client has multiple beneficiaries and assets with different characteristics and tax attributes, it is important to evaluate which assets most efficiently provide the desired benefit to each beneficiary. Thinking in terms of the cost to other beneficiaries of a bequest to one beneficiary is a way to do this.

^20. The IRS provides worksheets to calculate required minimum distributions. IRS, Required minimum distribution worksheets (May 27, 2025) < https://www.irs.gov/retirement-plans/plan-participant-employee/required-minimum-distribution-worksheets > (as of May 19, 2025).

^21. This assumes you follow up with whatever changes are necessary to their other estate planning documents to adjust for the change in beneficiary designation.

^22. Prob. Code, section 18502, subd. (c).

^23. Ibid.

^24. Prob. Code, section 18502, subd. (h).

^25. James, American Charitable Bequest Transfers across The Centuries: Empirical Findings and Implications For Policy And Practice (2020) 12 Estate Planning and Community Prop. L.J., 235, 281 (“Childlessness has been a dominant predictor of charitable bequests across 350 years of American probate data, with childless decedents often representing the majority of all charitable decedents.”).

^26. IRC, section 408(d)(8).

^27. IRC, section 408A(d)(2)(A)(ii).

^28. While it is possible for the net amount to the noncharitable beneficiaries via the CRT to beat the net from leaving the IRA directly to the noncharitable beneficiaries, that result depends on several factors outside a client’s control (namely, the growth of the IRA, the child’s tax brackets, the applicable 7520 rate at the client’s death, and the child’s lifespan). As a result, it is not advisable to recommend the CRT strategy for a client only focused on the financial result to the noncharitable beneficiaries.

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Tax Alert

Written by Jenny Hill Bratt, John Crisp, Darian Hackney, Justin Hepworth, Allison Hirsh, Jacob Kwitek, Mariah Lohse, Austin Prewitt, Corey Steady^*

This article summarizes selected developments in federal and state taxation since the last issue of the Quarterly that may be of interest to trust and estate attorneys. “IRC” refers to the Internal Revenue Code of 1986, as amended. “Treas. Reg.” refers to any treasury regulation. “IRS” refers to the Internal Revenue Service.

I. FEDERAL ADMINISTRATIVE & LEGISLATIVE ACTIVITIES

A. IRS Finalizes Regulations on Opting out of Subchapter K
89 Fed. Reg. 101881 (Dec. 17, 2024)

On November 20, 2024, the IRS issued final regulations amending the existing regulations under IRC section 761 (“761 Regulations”). The previously existing regulations permitted certain organizations to elect out of the partnership tax rules under Subchapter K. Effective January 19, 2025, the 761 Regulations introduce a limited exception, primarily for tax-exempt entities making elective payment elections related to renewable energy tax credits.

The Inflation Reduction Act (Pub.L. No. 117-169) (“IRA”) added IRC section 6417, which allows “applicable entities” to make an elective payment election, effectively treating credits created or expanded under the IRA as refundable tax credits. Generally, an “applicable entity” is an organization exempt from income tax, such as states or political subdivisions thereof, the Tennessee Valley Authority, Indian tribal governments, any Alaskan Native Corporation, or any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas.⁰¹

Final regulations under IRC section 6417⁰² specify that a partnership is not considered an “applicable entity” and is generally ineligible to make an elective payment election.⁰³ However, the 761 Regulations establish a specific exception allowing “applicable unincorporated organizations,” owned in whole or in part by one or more “applicable entities,” to opt out of Subchapter K. This exception allows those organizations to make an elective payment election under IRC section 6417.

II. FEDERAL CASES AND RULINGS: INCOME TAX

A. Fraud Victim Allowed to Rollover IRA Funds
PLR 202441015 (Oct. 11, 2024)

The IRS waived the 60-day rollover requirement for a fraud victim to make rollover contributions to an IRA. Following direction from a scammer, the taxpayer withdrew money from her IRA and thereafter distributed it to the scammer through a variety of methods. Upon realizing it was a scam, the taxpayer was able to recover some of the transferred funds, which she then recontributed into her IRA.

Under IRC section 408(d), any amount paid or distributed out of an IRA shall be included in gross income by the payee or distributee unless the entire amount received is paid into an IRA for the benefit of such individual not later than the 60th day after the day on which the individual receives the payment or distribution. Under IRC section 408(d)(3)(I), the IRS may waive the 60-day requirement where the failure to waive such requirement would be against equity or good conscience. The IRS agreed that the taxpayer’s failure to time rollover IRA funds was due to her being a victim of fraud and waived the 60-day rollover requirement.

B. No Loss Deductions for Currency Options Trades Wright v. Commissioner (2024) TCM
2024-100,3

In Wright v. Commissioner, the tax court held that IRC section 165(c) prevented an individual taxpayer from deducting a capital loss because the offsetting currency option transactions entered into by the taxpayer lacked a profit motive.⁰⁴ In 2002, Cyber Advice, LLC (“Cyber Advice”), a partnership owned by the taxpayer and his wife, realized long-term capital gains. Upon the advice of the taxpayer’s estate planning attorney and accountant, the taxpayer

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attempted to offset those gains by engaging in foreign currency option transactions intended to generate losses.

On December 20, 2002, Cyber Advice purchased both a euro put option and an offsetting euro call option (each with nominal premiums of $36,177,750), as well as a Danish krone put option and an offsetting Danish krone call option (each with nominal premiums of $36,162,000). Several days later, Cyber Advice assigned both put options to a charity and closed out the call options with the counterparty through various other offsetting currency option transactions.

Cyber Advice argued that the assignment of the euro put option resulted in a termination, as defined in IRC section 1256(c), and the taxpayer reported a short-term capital loss related thereto. On October 2, 2009, the IRS issued a Notice of Deficiency for the taxpayer’s 2002 taxable year.

Notably, the tax court emphasized that currency option transactions structured in the same manner as the partnership’s foreign currency option transactions could have a profit motive under different circumstances, and as such, would be entitled to take a deduction under section 165(c).⁰⁵ However, in this case, the record did not support the existence of a profit motive, and as a result, the short-term capital loss was disallowed.

III. FEDERAL CASES AND RULINGS: ESTATE TAX, GIFT TAX & GENERATION-SKIPPING TRANSFER TAX

A. Bad Facts: Underlying Assets Transferred to Family Limited Partnership Included in Gross Estate
Estate of Anne Milner Fields, et al. v. Commissioner (2024) TCM 2024-90

The tax court found that IRC section 2036(a) functioned to include the full value of underlying assets in a decedent’s gross estate, not the discounted value of a limited partnership interest.

Decedent was diagnosed with Alzheimer’s and declared incapacitated. Decedent’s nephew, acting as agent under a durable power of attorney, formed a limited partnership (AM Fields LP; the “LP”) and transferred approximately $17 million of decedent’s assets to the LP in exchange for a 99.9941 percent limited partnership interest. The nephew-agent acted as sole member of an LLC, which in turn acted as general partner of the LP. Critically, the subject planning and transfer occurred in the approximately one-month period preceding decedent’s death.

As executor, the nephew claimed lack-of-marketability and control-related discounts on decedent’s estate tax return, valuing the LP interest at roughly $11 million. The tax court, relying on several prominent retained interest cases, found that the nephew’s dual role as general partner and attorney-in-fact, combined with the decedent’s 99 percent limited partnership interest, triggered IRC section 2036(a), and specifically that the decedent had retained:

1. the right to income under IRC section 2036(a)(1) because the LLC’s interest in income, as general partner, was de minimis;
2. enjoyment of the transferred assets because the assets transferred to the LP constituted the bulk of her wealth, suggesting an implied agreement that the LP would operate to satisfy her obligations; and
3. the right to designate beneficial enjoyment of the property through the power, in coordination with the general partner, to dissolve the LP.

The tax court also swept aside IRC section 2036’s exception for bona fide sales for adequate and full consideration. While decedent’s receipt of a proportional interest in the LP meant there was adequate and full consideration, the tax court concluded the sale was not “bona fide” under Strangi v. Commissioner, Estate of Bongaard v. Commissioner, and related authority. In particular, the tax court was unconvinced there was a significant nontax justification for the transfer of the decedent’s assets to the LP. While the estate offered several potential nontax justifications (e.g., preventing elder abuse, streamlining asset management, and avoiding difficulties with third parties not accepting the nephew’s role as agent under a durable power of attorney), the tax court dismissed these justifications as mere post hoc rationales. The entity-related discounts were denied and the underlying assets transferred to the LP were included in the decedent’s gross estate at fair market value at her date of death.

Notably, the tax court also imposed accuracy-related penalties under IRC subsections 6662(a) and (b)(1), finding the nephew had not acted in good faith because a reasonable person would have viewed the substantial estate tax discounts produced by the last-minute planning to be “too good to be true.”

B. Government’s Claim to Collect Estate Taxes Time-Barred
United States v. Dill (M.D.Fla. 2024) No. 6:22-cv-01487

The U.S. District Court for the Middle District of Florida held that the government’s claim to collect unpaid estate taxes was time-barred by the ten-year statute of limitations set forth under IRC section 6502(a)(1). In 2006, the estate tax return for the estate of Gladys R. Dill (the “Estate”) was filed. The Estate also elected an extension of time to pay

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the associated estate tax liability in installments under IRC section 6166 (“6166 Extension”).

In 2010, the Estate failed to make its installment payment and did not request an extension of time to pay until May 2011. The requested extension was denied and an appeal was filed, which was also denied, resulting in termination of the 6166 Extension in March of 2012. The Estate had 90 days to contest the termination, which it did not do, so the termination became final on June 5, 2012.

On August 20, 2012, the government issued a Notice and Demand for Payment of Entire Tax Liability, which was never paid by the Estate. On August 19, 2022—9 years and 364 days after the Notice and Demand was issued—the government filed suit to collect the tax deficiency.

Under IRC section 6502(a)(1), the collection of estate taxes is subject to a ten-year statute of limitations that begins to run on the date of assessment of the tax. Under IRC section 6503(d), such statute of limitations is suspended for the period of any extension of time for payment granted under the provisions of IRC section 6166. The question before the court was when did the section 6503(d) suspension end and the statute of limitations begin to run.

The court asserted that the language of section 6503(d) is straightforward—if a 6166 Extension is in place, the statute of limitations is suspended; if a 6166 Extension is not in place, the statute of limitations is not suspended. Accordingly, the court agreed with the Estate that the suspension was lifted when the 6166 Extension was terminated—on June 5, 2012, and not later on August 20, 2012, when the Notice and Demand was sent. Accordingly, the government filed suit two months after the statute of limitations expired and was thus time-barred from collecting the associated estate taxes.

C. Extension of Time Granted to Make Election To Opt Out of Automatic Allocation of GST Exemption
PLR 202449004 (Dec. 6, 2024)

The IRS granted an extension to a donor to make a generation-skipping transfer (“GST”) tax election for an irrevocable remainder trust created by donor. Following the termination of a grantor retained annuity trust (“GRAT”) created by donor, the remaining principal in the GRAT transferred to a remainder trust for the benefit of the donor’s relatives and friends. Distributions from the remainder trust could be subject to GST tax. The donor failed to elect out of the automatic allocation of the GST tax exemption to the remainder trust due to the oversight of tax professionals, who did not advise the donor of the automatic allocation rules and the possibility to opt out under IRC section 2632(c)(5). The IRS concluded that the taxpayer reasonably relied on a qualified tax professional and the tax professional failed to make, or to advise the taxpayer to make, the “opt-out” election.

D. Extension of Time Granted to Make Portability Election
PLR 202440006 (Oct. 4, 2024)

The IRS granted a decedent’s estate a 120-day extension to file Form 706 to make a portability election when an estate tax return was not required to be filed under IRC section 6018(a). Treas. Reg. section 301.9100-1(c) specifically provides that the IRS may grant an extension (not to exceed six months unless the taxpayer is living abroad) to make the portability election. To receive an extension, the estate must demonstrate reasonableness, good faith, and that an extension would not prejudice the interests of the government.

IV. FEDERAL CASES AND RULINGS: OTHER

A. Beneficiaries of Trusts Granted Extension for QSST Election
PLR 202444001 (Nov. 1, 2024)

The IRS provided relief for the inadvertent termination of S Corporation status by granting an extension of time for various trusts to make a Qualified Subchapter S Trust (“QSST”) election and maintain S Corporation status. One of the grantors of a revocable trust died, which caused two trusts to become shareholders of an S Corporation. The trusts failed to make a QSST election under IRC section 1361(d)(2), and, as a result, the corporation’s S corporation election terminated.

The IRS ruled that the Corporation will continue to be an S Corporation, provided that the beneficiaries of trusts make a QSST election within 120 days.

——–

Notes:

^*. Sheppard, Mullin, Richter & Hampton LLP, San Diego, California

^01. The term “applicable entity” is defined in IRC section 6417(d)(1) (A) and Treas. Reg. section 1.6417-1(c).

^02. 89 Fed. Reg. 17546 (2024); Treas. Reg. section 1.6417-2(a)(1) (iv).

^03. An exception to this general rule is that partnerships can make elective payment elections with respect to specific renewable energy credits under IRC sections 45Q, 45V, and 45X. Treas. Reg. section 1.6417-4(c).

^04. Wright v. Comm’r (2024) TCM 2024-100, 3.

^05. Wright v. Comm’r, supra, at p. 14.

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