Discussion:Trust Return ... oh my.....

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Discussion Forum Index --> Tax Questions --> Trust Return ... oh my.....


Taxgirl12 (talk|edits) said:

3 April 2007

I have a ND Trust with California Trustee/beneficiary. In the past a 1041 filed with California 541 with K-1 distributed and ND income picked up on Non-resident personal ND return. The trust has 2 trustees/beneficiary California, 1 trustee North Dakota. Trust income from ND only. ND trusts have new withholding requirements so now a ND trust is a MUST. My question, 1041 filed with 541 CA with nonresident Form38 N.Dakota have to be filed....what happens to California income since 2 Trustee's are California based? and CA form 541 insists on keeping the Share of income for 2 trustee's in California......

Riley2 (talk|edits) said:

4 April 2007
Was all of the trust income distributed to the beneficiaries?

KatieJ (talk|edits) said:

4 April 2007
A trust is subject to California tax on all of its income if either the fiduciary or the beneficiary is a California resident. Calif. Rev. & Tax. Code Sec. 17742. If all of the beneficiaries (I can't tell from your post how many there are, one or two) are California residents, then all of the trust's income is subject to California tax. California will allow credit for any tax paid to North Dakota on the trust's income. CRTC Sec. 18004.

Dennis (talk|edits) said:

4 April 2007
Interestingly, North Dakota defines trust residency in terms of nexus and will also give a credit for other state tax. Could be a fun calculation. ♫

KatieJ (talk|edits) said:

4 April 2007
This often gets to be fun for trusts, because a trust can be considered a resident taxable on all of its income by several states at the same time.

I think you just have to pick a state to give you the credit. Look for "source" limitations in the state's credit statute. California doesn't apply that limitation to trusts. I don't know about North Dakota.

Taxgirl12 (talk|edits) said:

4 April 2007
Thank you for your imput. There are 2 CA and 1 ND beneficiaries and all income is distributed equally to the 3. I am questioning the ALL income to 541 CA because my thought is that the ND portion (because 1 is ND resident) goes away on CA 541 and picked up again on form 38.

KatieJ (talk|edits) said:

5 April 2007
Well, there are special rules when there are multiple fiduciaries and multiple beneficiaries. If either ALL of the fiduciaries or ALL of the beneficiaries are California residents, then ALL of the trust's income is subject to California tax. If the taxation of the trust's income depends on the residence of the fiduciary, and there are multiple fiduciaries some of whom are residents and others not, the income is prorated (e.g.: 3 fiduciaries, 2 resident, 1 nonresident: 2/3 of the income is subject to California tax). The same thing happens if the taxation of the trust depends on the residence of the beneficiaries, only in that case you prorate in accordance with the beneficiaries' interests in the trust. If there are both multiple fiduciaries and multiple beneficiaries, you do the proration twice -- once on the whole amount of income, and again on the difference between the total income and the amount allocated to California in the first calculation. It doesn't matter whether you start with the fiduciaries or the beneficiaries, the result will be the same.

I'm still not sure what your facts are, but I get the impression that all of the beneficiaries are also fiduciaries -- is that right? I'll also assume that the beneficiaries' interests in the trust are equal -- each gets 1/3. In that case, this would be your calculation:

Total income of the trust (intangible income, not CA source): $100,000

Fiduciaries 2/3 x 100,000 = 66,667 Beneficiaries 2/3 x (66,667/3) = 22,222

Total California taxable income 88,889

CRTC Secs. 17741 and 17742, FTB Legal Ruling 238 and Legal Memo 406

Bengoshi (talk|edits) said:

5 April 2007
I still don't understand the logic in taxing trust income based on the residence of the fidiciary when the grantor was a non-resident of the fiduciary's state (other than the fiduciary receiving state law protection)... taxing income based on the residence of the beneficiary or grantor I can understand.

On a side note, if estates are taxed differently than trusts, can a IRC 645 election apply to eliminate a filing requirement in states like Cali (assuming an estate is a resident estate where decedent was domiciled at death, and decedent was domiciled outside of Cali)?

Riley2 (talk|edits) said:

5 April 2007
KatieJ, I believe that Taxgirl said that all of the income was distributed to the beneficiaries, making none of the trust income taxable under 17742 or 17743.

KatieJ (talk|edits) said:

5 April 2007
Riley, you asked if all of the income had been distributed, but I didn't see an answer to that question. Of course there would be no tax at the trust level if there was no income. However, even a simple trust can have taxable income, e.g. capital gains that go to corpus.

KatieJ (talk|edits) said:

6 April 2007
Bengoshi -- As for taxing trust income based on the fiduciary's residence, it isn't logic, it's tax law <G>. In fact, for California purposes the residence of the grantor is irrelevant. But states are all over the map on this. A trust may be taxable on all income based on the residence of the fiduciary, the beneficiay, or the grantor, or because the trust is organized under that state's laws.

As for the 654(a) election -- in California, an estate is taxable on all of its income if the decedent was a resident at the date of death (CRTC Sec. 17742). The residence of the fiduciary is not relevant to the residence of the estate. So I think you can eliminate a filing requirement for a revocable trust by making the election under IRC Sec. 654(a). Note that CRTC Sec. 17751 precludes an inconsistent election. If you make the federal election, it is binding for state, and if you don't make it for federal, you can't make it for state.

Bengoshi (talk|edits) said:

6 April 2007
Thanks Katie. I must say it's quite a headache dealing with California tax law (as a non-California newbie professional). Fortunately I haven't had to deal w/ too many multistate returns, but California seems to have the greatest ties to Hawaii in terms of people moving back and forth, etc.


Chase (talk|edits) said:

1 April 2010
I have a decedent's estate (CA) with a nonresident bene and a CA beneficiary. None of the income is CA sourced. For the CA resident, does it make sense that her K-1 income is showing up in column "e" as if sourced in CA? Not sure why this is happening. For the nonresident the column "e" is appropriately blank. Thanks.

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