The following contains corrections/additions to the California Tax Lawyer, Volume 25, Number 3 that were received after the edition had gone to print. We regret the errors.
Order out of Chaos – Making [the Other Half of] California’s Trust Taxation System Work
Addition to Footnote 6:
Although the analysis in the text is somewhat self-evident and simplistic, there may be an opportunity for an individual fiduciary resident in California to avoid being characterized as a resident fiduciary. In the Yolanda King Family Trust case, the individual trustees who were California residents delegated the administration of the trust to an out-of-state trustee. The Franchise Tax Board ruled that the trust was not subject to income tax in California because California residents did not control trust administration even though the delegation could have been revoked at any time. The decision seemed to turn on the place of actual administration, which is similar to the test for a corporate fiduciary. If all of the significant decisions relating to a trust are carried out outside of California by a non-California resident trustee, perhaps the policy of the state to tax trusts with resident trustees is not violated because the administration of the trust is not carried out within the state. Such an interpretation would place individual resident trustees who do not administer the trust within the state of California in the same position as corporate trustees who do not administer a major portion of the trust in the state. Adding some weight to this argument is Chief Counsel Ruling AR-97-0251 (December 31, 1999). In that Advice, a trust was not subject to California income tax because although there was a California trustee, the trustees could administer the trust without the involvement of that trustee because the trust decisions could be made by the non-California corporate trustee and a non-California resident advisor. If a trustee has delegated the authority for the administration of the trust in an appropriate manner, then the person or entity to whom those powers are delegated will be able to administer the trust without the involvement of a California trustee until the delegation is revoked.