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Estates and trusts filing requirements

Do you have clients who need to file a California Fiduciary Income Tax Return, Form 541? Do you need more information about the filing requirements for estates and trusts? We'll answer these questions, and give you information on taxability of estates and trusts.

Estates and trusts must file California Form 541 to:

  • Report income received and/or earned by an estate or trust.
  • Report income that is accumulated or currently distributed to beneficiaries.
  • Report the current tax liability of the estate or trust.
  • File an amended return for the estate or trust.

Decedents' estates

The fiduciary must file a Form 541 for the estate of a decedent that has:

  • Gross income for the taxable year of more than $10,000, regardless of the amount of net income (California Revenue &Taxation Code (CR&TC) Section 18505(f)).
  • Net income for the taxable year of more than $1,000 (CR&TC Section 18505(d)).
  • An alternative minimum tax liability (CR&TC Section17062 (5)(c)(ii)).

Trusts

The fiduciary must file a Form 541 for a trust that has:

  • Gross income for the taxable year of more than $10,000, regardless of the amount of net income (CR&TC Section 18505(f)).
  • Net income for the taxable year of more than $100 (CR&TC Section 18505(d)).
  • An alternative minimum tax liability (CR&TC Section17062 (5)(c)(ii)).

Taxability of estates and trusts

If the decedent and noncontingent beneficiaries are all nonresidents of California (for an estate), or if the fiduciaries and noncontingent beneficiaries are all nonresidents of this state (for a trust), only the following income is taxable (California Regulation Section 17742):

  • Income from real or personal property located in this state (Cal. Reg. 17951-3).
  • Business carried on within this state (Cal. Reg. 17951-4).
  • Intangible personal property having a business or taxable situs in this state (Cal. Reg.17952).

A noncontingent beneficiary is one whose interest is not subject to a condition precedent (California Regulation 17742(b)).

Taxability of estate and trust based on residency

Income is taxable to the estate or trust; residency of the decedent or the trust fiduciary is the controlling factor:

Under CR&TC Section 17742, the entire income of an estate is taxable if the decedent was a resident, regardless of the fiduciary's or the beneficiary's residence.

Under this same section, the entire income of a trust is taxable if the fiduciary or a noncontingent beneficiary is a resident, regardless of the residence of the settler.

Trust taxability dependent upon the residence of the fiduciary:

Under CR&TC Section 17743, and the Regulation thereof, the trust is taxable when these conditions exist:

  • There are two or more fiduciaries for the trust, and one or more is a California resident, and one or more is a California nonresident.
  • All the beneficiaries are California nonresidents.

If these conditions are met, the trust is taxable on:

  • All net income sourced in California.
  • Net income from sources outside California, which is apportioned by the number of California resident fiduciaries to the total number of fiduciaries.

Trust taxability dependent on the residence of the beneficiary:

Under CR&TC Section 17744, and the Regulation thereof, when one or more of the noncontingent beneficiaries is a California resident, one or more is a California nonresident, and all the fiduciaries are California nonresidents, the trust is taxable upon both of the following:

  • All net income from sources in California.
  • Net income from sources outside California, is apportioned according to the number of California resident noncontingent beneficiaries to the total number of noncontingent beneficiaries.

FTB Legal Ruling 238

Both CR&TC Sections 17743 and 17744 apply when the entire taxable income of a trust is derived from sources outside this state, and at least one of the fiduciaries, and at least one of the noncontingent beneficiaries, are California residents.

Apportionment worksheet

Trusts that have nonresident trustees or beneficiaries report their income and deductions on Side 3 of Form 541 using the Non-California Source Income and Deduction Apportionment Worksheet. The worksheet is designed to assist taxpayers in computing California taxable income of the trust as required by CR&TC 17743, 17744, and FTB Legal Ruling 238.

Additional forms the fiduciary may have to file

In addition to Form 541, the fiduciary must file a separate Schedule K-1 (541) or FTB approved substitute for each beneficiary. See the Form 541 booklet under "General Information," section E.

For more information, call us at (916) 845-7057 (not toll-free).