Time Sensitive Opportunity for California Taxpayers with Trusts

September 18, 2018

If your California trust paid taxes in prior years and you have at least one non-California fiduciary (even if the trust had California sourced income), then under Paula Trust vs California Franchise Tax Board, Case No. CGC-16-556126 you should file a protective refund claim before the statute of limitations runs out. This case ruled that all trust income, even California source income, can be subject to apportionment based on out of state fiduciaries and out of state beneficiaries.

The State of California is appealing this case, but a protective refund claim would allow the trust to receive a refund if the case is upheld.

California S-Corporation and LLC business owners now have two major reasons to look at transferring some of the business interest they own to a newly formed incomplete and/or complete non-grantor trust:

  1. The new Code Section 199A 20% deduction applies to trusts possibly saving up to $11,655 of federal tax per year, and
  2. Opportunity to obtain a deferral of California taxes, or some portion thereof, in the flow through income that passes through to the trust.

This planning could save thousands of dollars and, depending on the case, defer, or even eliminate, California taxes altogether.

We hope you find this information valuable. Please call or contact us to see if this planning is appropriate for you.

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