Taxation

Ca. Tax Lawyer Fall 2014, Volume 23, Number 3

When Should a Trust Be Subject to State Income Tax in California?1

By Justin T. Miller and Richard S. Kinyon2

I. INTRODUCTION

California’s rules on the income taxation of trusts and beneficiaries are unique. Even if a trust holds no California situs property, no beneficiaries reside in the state, and the settlor3 of the trust has never resided in California, that trust would still be subject to taxation by California if a trustee resides in California.4 In fact, California law goes one large step further. If a trust has any "fiduciary" in California, then it will be subject to state income taxation.5 The definition of fiduciary for California tax purposes is both broad and unclear, and includes any person acting in any fiduciary capacity with respect to the trust.6

Sound tax policy dictates that California should tax the fees received by a trust fiduciary that resides or performs services within California. If a fiduciary is residing in California and performing services in California, then such fiduciary is justifiably subject to California income tax. The question is whether California also should tax the trust’s entire net income solely based on the residence of the fiduciary, regardless of whether the settlor of the trust was a California resident, there are any trust assets located in California, or there are any beneficiaries residing in California.

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