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The California Throwback Tax Applicable to Distributions of Previously Untaxed Accumulated Trust Income to California Resident Beneficiaries
Trusts and Estates Quarterly - Volume 26, Issue 4
Credit(s):
1 Legal Specialization in Estate Planning; Trust & Probate Law
1 Self-Study Credit
When an irrevocable, non-California resident, non-grantor trust distributes current net income to a California beneficiary, that beneficiary generally pays income tax on that income—both federal tax and California tax, up to the amount of the trust’s distributable net income (“DNI”), and any undistributed net income in excess of DNI is accumulated and not currently taxable by California. If the trust later distributes the undistributed net income to a California resident beneficiary, that beneficiary will not owe federal tax on that income. However, the beneficiary will owe California tax on the income if: 1) the beneficiary was also a California resident during the year that the income was accumulated; and 2) the income was not previously taxable by California because the resident beneficiary had a contingent interest in the trust (i.e., in the accumulated income). This tax on distributions of accumulated income is known as the “throwback tax,” because California is effectively “throwing” the income back to the prior period in which it was accumulated, or deemed to have been accumulated, for the benefit of a California beneficiary.
1 Legal Specialization in Estate Planning; Trust & Probate Law
1 Self-Study Credit
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