Tax Law FAQ

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When is a trust subject to taxation in California?

Generally, a trust is subject to tax in California “if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident, regardless of the residence of the settlor.”  See Cal. Rev. & Tax 1774(a).  This means that a trust has a California income tax return filing obligation if the trustee or any beneficiary, whose interest is non-contingent, is a California resident.

A trust can be subject to substantial penalties for failing to comply with its California tax obligations including failure to file and failure to pay penalties.  The Franchise Tax Board also imposes interest running from the due date for the tax return.

Generally, the California statute of limitations is four years from the due date of the return or from the date filed, whichever is later.  See Revenue and Taxation Code section 19066.   However, there is no time limit for the FTB to assess tax if the trust did not file a tax return.  See Revenue and Taxation Code section 19087.  There are risks for not complying. Trust, with delinquent California tax returns potentially owe substantial tax, interest, and penalties to the FTB.

There is a solution for trusts that are not compliant with their California tax obligations.  The California Franchise Tax Board has a Voluntary Disclosure Program, which allows qualified entities, such as trusts, that may have incurred an unpaid California tax liability or an unfulfilled filing requirement to disclose their liability voluntarily.  The Franchise Tax Board (FTB) will waive penalties associated with the return filings, and has a six-year lookback period.  The Voluntary Disclosure Program allows trusts to become tax compliant.

Fiduciaries or beneficiaries of trusts, who may be concerned about a California tax compliance issue, should contact competent tax counsel, who evaluate whether a voluntary disclosure makes sense.

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