Yikes! That sounds ominous. Well it may be depending on certain factors including where one or more of your beneficiaries live. If you die and leave a trust for your three children, those kids grow up and move to a state other than Washington, your trustee may find him or herself filing and paying trust income tax not only to the federal government, but to various states as well. That’s because some states will tax income in a trust based on a few inconvenient facts. Since many Washington residents either move to or come from California we’ll discuss having a trust created in the state of Washington but with some tie to California.
The State of California will impose an income tax on a trust if one (or more) of four factors are met:
1) the trustee is a resident of the state;
2) a beneficiary is a resident of the state;
3) the trust owns assets in the state; or
4) the trust receives state-source income.
If the child you select to oversee the trust lives in California, even if no other beneficiary lives there, California would tax the trust. Conversely, if the trust has a Washington based trustee and there are one or more beneficiaries residing in California, or there are trust assets located in California, such as a house or a business, the trust will pay taxes there, even though no taxes would be due in Washington (we currently have no income tax).
At present the other locations where trust income tax would be due based on residence of a beneficiary (among other factors) are: the District of Columbia, Hawaii, Illinois, New Hampshire, North Dakota, Tennessee, Utah and West Virginia. So if you have children or grandchildren living in different states, it will pay to take a look at whether and how that state may tax your trust.
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