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Taxing trusts: navigating the waters of California's income taxation of trusts.

Article Excerpt
unlike the law regarding the income taxation of trusts in many other jurisdictions, the grantor residence is inconsequential under California's law. Rather, the income of a trust is taxed by California if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident (Revenue and Taxation Code Sec. 17742).

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A trust's terms determine the extent of a beneficiary's interest in the trust income or corpus, and whether the beneficiary is contingent or noncontingent. For example, when a trust's terms state that distributions to a particular beneficiary are subject to the trustee's discretion, then that beneficiary's interest is contingent because it's subject to the trustee's decision to make a distribution. To the extent the condition is satisfied, however, the beneficiary will be considered to be noncontingent and the applicable tax consequences will follow.

The issue can become more complicated when the trust's terms limit the trustee's discretion or when an otherwise contingent beneficiary is granted powers over trust corpus or income. Additionally, contingencies can lapse over time, as a beneficiary's rights to income or corpus "ripen" if the beneficiary attains a given age, educational status or satisfies other conditions of the trust. Thus, a particular...

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