Order Out of Chaos – Making [the Other Half of] California’s Trust Taxation System Work

By Paul N. Frimmer¹

The author’s first article on the subject of California’s income taxation of trusts was limited to a discussion of taxation based upon the California residence of the trust beneficiaries.² This article will explore the second nexus for taxation of trusts in California – the residence of the fiduciary.³ As with the first article, the purpose of this article is to outline workable rules for applying the statutes and to suggest changes or interpretations if the statutes are difficult or impractical to apply.

I. IMPOSITION OF TAX BASED ON RESIDENCY OF FIDUCIARY

In general, California imposes income tax on the accumulated income of a trust if the fiduciary is a resident of California, or in the case of a corporate fiduciary, if California is the place where the corporation transacts the major portion of its administration of the trust.⁴ If there is more than one fiduciary, the tax is imposed on a proportionate amount of the trust’s accumulated income based on the ratio of fiduciaries resident in California to the total number of fiduciaries.⁵ For example, assume that a trust has no California source income and all of its beneficiaries are non-California residents or all beneficiaries’ interests are contingent. If the trust has two individual trustees, one of whom is a California resident and one of whom is not, 50 percent of the trust’s accumulated income will be subject to income tax in California.