Reed Smith Client Alerts

On September 25, Governor Brown signed into law Senate Bill No. 813, which updated the California Voluntary Disclosure Program (VDP) to include out-of-state trusts with California beneficiaries and non-resident partners of out-of-state partnerships, and to allow the Franchise Tax Board (FTB) to waive the S Corporation or partnership late-filing penalty for specified returns under the VDP. As the authors of this alert have argued for years, the expansion of the VDP to include out-of-state trusts with California beneficiaries was long overdue.

Authors: Mike Shaikh Yoni Fix

Trusts are subject to the California personal income tax and pay tax at the individual personal income tax rates.1 California rules differ from many other states in their determination of a trust’s taxability. California taxes the income of a trust if the trust either

  1. has income from California sources;2 or
  2. has California residency based on the California residence of a fiduciary or non-contingent beneficiary of the trust.3

Because taxing trusts based on the residency of its beneficiaries is uncommon, many administrators have overlooked reporting tax liabilities to the California Franchise Tax Board. In our experience, many trusts with a California beneficiary discover their California filing obligation many years after the obligation first arose. Often the discovery is the result of the trust hiring new administrators to manage the trust.