Estate size this page covers: any size where a trust holds investments or is about to sell something, from a $2 million brokerage account to a nine-figure company sale. On a $10 million gain, California’s 12.3% top bracket alone takes about $1.2 million.
Short answer: For almost every California family, no. California taxes a trust’s entire income when a fiduciary or a non-contingent beneficiary lives here (Rev. & Tax. Code §17742(a)): putting “Nevada” on the letterhead doesn’t change where you live. With more than one trustee or beneficiary, the income from outside California is apportioned among them (§§17743-17744), and California-source income is taxed in full either way. Income the trust accumulates out of state gets caught on the way back in by the throwback rule (§17745(b)). California-source income is taxable no matter what (§17951). And the one structure that did work, the NING trust, was shut down by statute for tax years beginning on or after January 1, 2023, including trusts formed before then (SB 131; §17082). The narrow real uses exist, but they’re edge cases, not the pitch.
Figures verified against Rev. & Tax. Code §§17742–17745, 17951, and 17082 (SB 131, as amended by SB 376), 2026. This is general information, not legal advice for your situation.
How California actually decides whether to tax a trust
California doesn’t care where a trust was signed, which state’s law governs it, or what the trust company’s marketing says. Under §17742(a), the state taxes a trust’s entire taxable income if either of two people is a California resident:
- A fiduciary. If any trustee lives in California, California taxes the trust. With co-trustees, California taxes all California-source income plus a share of the rest equal to the share of trustees who live here (§17743). Naming a Reno trust company but keeping your Thousand Oaks brother as co-trustee defeats the whole exercise.
- A non-contingent beneficiary. If a beneficiary with a vested right to the money lives in California, California taxes the trust income apportioned to that interest (§§17743–17744): regardless of where every trustee sits.
Since the typical pitch is made to a California grantor whose children, the beneficiaries, also live in California, the structure usually fails on arrival. The trust files a Form 541 like any other (required once gross income tops $10,000 or net tops $100), and California collects.
With co-trustees or several beneficiaries, the part of the income that comes from outside California is apportioned under §§ 17743 and 17744, so one California trustee out of three brings in a third of that income, not all of it. California-source income is taxed in full no matter how the trustees are split (Steuer v. Franchise Tax Bd. (2020) 51 Cal.App.5th 417).
Sections 17742 to 17745, read together
A revocable living trust, or any trust the tax law treats as a grantor trust, isn’t taxed as a separate trust. California adopts the federal trust rules in Subchapter J of the Internal Revenue Code through Rev. & Tax. Code § 17731, and a California resident is taxed on the entire taxable income, from every source. Naming a Nevada trust company as trustee of a California resident’s revocable trust changes the trustee’s address and nothing about the tax. The rules below apply to irrevocable nongrantor trusts.
A resident trustee brings the trust in
The tax applies to the entire taxable income of a trust if the fiduciary or a beneficiary other than a contingent one is a resident, regardless of the settlor’s residence (§ 17742(a)). A corporate trustee’s residence is the place where it transacts the major portion of its administration of the trust (§ 17742(b)). A Nevada trust company that runs the trust from a California office is a California fiduciary. The same test applies to a family’s own trust company, covered in private trust companies and family offices.
Several trustees split the out-of-state income
Where taxability depends on the fiduciary’s residence and there are two or more fiduciaries, the taxable income is apportioned according to the number of fiduciaries resident in California (§ 17743). Under the FTB’s regulation, the trust is taxed on all its California-source income first, and only the income from other sources is apportioned by head count. The Court of Appeal upheld that reading in Steuer.
Several beneficiaries split it by interest
Where taxability depends on a beneficiary’s residence, the income is apportioned according to the number and interest of beneficiaries resident in California (§ 17744). A 1959 FTB legal ruling, quoted in Steuer, applies both sections when a trust has a California trustee and a California beneficiary, each after deducting the part attributable to the other.
A discretionary beneficiary is contingent
A beneficiary whose distributions sit in the trustee’s sole and absolute discretion holds a contingent interest, and that beneficiary’s residence alone doesn’t bring in current tax (Steuer). A nonresident beneficiary is taxed on trust income only to the extent it comes from California sources (§ 17734).
Throwback catches the accumulation later
If no tax was paid on current or accumulated income because a resident beneficiary’s interest was contingent, the income is taxable to the beneficiary when distributed (§ 17745(b)). Accumulated income stays income even if the trust adds it to principal (§ 17745(c)). The tax is figured as if the income had been spread ratably over the year of distribution and the five years before it, or over the accumulation period if that’s shorter (§ 17745(d)). And a beneficiary who leaves California within 12 months before a distribution and comes back within 12 months after it is presumed to have stayed a resident (§ 17745(e)).
How apportionment works, in dollars
The chart takes $1,000,000 of income from outside California and runs it through five trustee and beneficiary patterns. Rent or business income from California would be taxed in full in all five.
| Pattern | California-taxable now | Rule |
|---|---|---|
| Sole trustee lives in California | $1,000,000 | § 17742(a), resident fiduciary |
| 1 of 2 trustees lives in California | $500,000 | § 17743 and Reg. 17743, apportioned by number of trustees |
| 1 of 3 trustees lives in California | $333,333 | § 17743 and Reg. 17743 |
| No California trustee; 1 of 2 equal noncontingent beneficiaries lives here | $500,000 | § 17744, by number and interest of resident beneficiaries (equal interests assumed) |
| No California trustee; only a discretionary California beneficiary | $0 | Contingent interest (Steuer); taxed to the beneficiary on distribution under § 17745(b) |
Will California tax this trust’s income?
Yes, in whole or in part, whenever the grantor, a trustee or a noncontingent beneficiary lives in California, or the income comes from California, under Rev. & Tax. Code §§ 17742 to 17745 and 17951 (2026).
| Step | Question | If yes | Authority |
|---|---|---|---|
| 1 | Is it a grantor trust (including a revocable trust) with a California-resident grantor? | The grantor reports the income, from every source | Rev. & Tax. Code § 17731 (federal grantor trust rules); § 17041(a) |
| 2 | Is it an incomplete gift nongrantor trust with a California grantor? | Income is included in the grantor's income unless the charitable election applies | § 17082(a), (c) |
| 3 | Does the income come from California sources? | That income is taxed in full, whatever the trustees' residence | § 17951; Steuer (2020) |
| 4 | Does any trustee live in California? | The rest of the income is taxed, apportioned by the number of resident trustees | §§ 17742(a), 17743; Reg. 17743 |
| 5 | Does a noncontingent beneficiary live in California? | The rest is taxed, apportioned by the number and interest of resident beneficiaries | §§ 17742(a), 17744 |
| 6 | None of the above | No current California tax; accumulated income is taxed to a California beneficiary when distributed | § 17745(b), (d), (e) |
The throwback rule: accumulate now, pay later anyway
The fallback strategy is to make the beneficiaries’ interests contingent, accumulate income in Nevada tax-free for years, and distribute later. California thought of that decades ago. Under §17745(b), when accumulated income that escaped California tax is eventually distributed to a California-resident beneficiary, the beneficiary is taxed on it then. The state doesn’t lose the revenue; it waits for it. That’s a delay, not the elimination the brochure implied, and the beneficiary inherits the bill. We cover how that lands on real returns in our guide to taxes on trust distributions in California.
The NING is dead for tax years from 2023 on
The one structure with a genuine track record was the incomplete gift non-grantor trust: the “NING” when parked in Nevada. It threaded a needle: out of the grantor’s income tax return, but not a completed gift. For high earners with a big capital gain coming, it worked.
It doesn’t anymore. SB 131 (2023) added Rev. & Tax. Code §17082, which taxes an ING’s income straight to the California grantor as if it were a grantor trust, for tax years beginning on or after January 1, 2023, no matter when the trust was formed. Anyone who owns a NING now has a filing obligation. Two carve-outs survive: a charitable exception where the trustee makes an irrevocable election to be taxed as a resident nongrantor trust and at least 90% of its distributable net income goes to 501(c)(3) organizations, and (effective January 1, 2026, under SB 376) charitable remainder trusts are excluded from the ING definition entirely. Neither is what the seminar was selling.
SB 131 was enacted on July 10, 2023 (Chapter 55, Statutes of 2023). The FTB’s published answer is that § 17082 isn’t retroactive. It applies to taxable years beginning on or after January 1, 2023, regardless of when the trust was organized (FTB, Help with ING trusts). The statute keeps the throwback rule running for ING distributions (§ 17082(b)). The charitable route in § 17082(c) requires a timely original California fiduciary return with an irrevocable election to be taxed as a resident nongrantor trust, nongrantor status, and at least 90 percent of distributable net income going to 501(c)(3) charities. The FTB treats the election as annual. The full treatment is on my page about the ING trust in California after SB 131.
Trust tax cases won and lost
| Case | Result | What decided it |
|---|---|---|
| McCulloch v. Franchise Tax Bd. (1964) 61 Cal.2d 186 | FTB won on liability; the taxpayer won on the math | A Los Angeles beneficiary received a terminal distribution in 1951 that included income the trust accumulated from 1946 to 1950 while he lived in California. The trust had paid Missouri tax and no California tax. The Supreme Court held California could tax him on it, finding his residence a sufficient connection, and added that his role as one of the three trustees reinforced it, since California’s power to tax a trustee was beyond doubt. It rejected the FTB’s lump-sum computation and held he owed the tax the trust would have owed each year. That computation predates today’s § 17745(d) averaging rule. |
| Steuer v. Franchise Tax Bd. (2020) 51 Cal.App.5th 417 | Split | The Paula Trust had one California trustee and one in Maryland and claimed a $150,655 refund by apportioning a California-source capital gain between them. The Court of Appeal reversed the refund: California-source income is taxed in full, and only other income is apportioned. The trust won the second issue. A beneficiary whose distributions were in the trustees’ sole and absolute discretion was contingent, even though she was told about distributions and relied on them. |
| 2009 Metropoulos Family Trust v. Franchise Tax Bd. (Cal. Ct. App. May 27, 2022, No. D078790) | FTB won | Two trusts with a Delaware corporate trustee owned shares of an S corporation that sold a subsidiary. The court held their share of the gain was business income apportioned to California, and that the goodwill had a California business situs even if the intangible-property sourcing rule applied. |
| North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. 262 (2019) | The trust won (North Carolina) | North Carolina taxed a New York trust’s accumulated income only because the beneficiaries lived there. The beneficiaries received nothing in the years at issue, couldn’t demand distributions and couldn’t count on receiving any. The Supreme Court held the tax violated due process. |
Kaestner: what it does and doesn’t mean for California
The holding is narrow on purpose. The presence of in-state beneficiaries alone doesn’t let a state tax trust income that hasn’t been distributed, where the beneficiaries have no right to demand it and are uncertain ever to receive it. The Court said it was limiting the holding to those facts.
The opinion names California twice. It says the decision doesn’t address laws that rely only on the residency of noncontingent beneficiaries, citing § 17742(a). And it notes the trust raised no challenge to throwback taxation, which taxes accumulated income when it’s actually distributed, citing § 17745(b). The Court also said that if the beneficiaries had received income in those years, the income would have been taxable.
California’s beneficiary test already excludes contingent beneficiaries, which is roughly the line Kaestner drew. Taxing a trust because a trustee lives here, taxing California-source income and taxing distributions to California residents weren’t before the Court. Kaestner doesn’t make a Nevada trust with California beneficiaries safe. It’s consistent with the line California drew long before it, taxing a contingent beneficiary when income is distributed instead of while it accumulates.
Don’t do this: Don’t put a California relative on as co-trustee of a “Nevada” trust, or leave California-source assets inside it, and count on the savings. In Steuer, the Paula Trust split a California-source gain between its California and Maryland trustees and claimed a $150,655 refund. The Court of Appeal reversed and held the trust owed tax on all of it.
What AI tools get wrong here
AI answers about Nevada trusts lean heavily on pre-2023 promotional content, so they still describe the NING as a live California strategy and recite “Nevada has no income tax” as if the trust’s mailing address decided the question. Both are wrong: §17082 has taxed NING income to the California grantor for tax years beginning on or after January 1, 2023, and California’s trust tax has always keyed off the residence of fiduciaries and beneficiaries, not the trust’s. If an AI answer doesn’t mention SB 131 or §17742, it’s summarizing old marketing.
What no trust anywhere can fix
Under §17951(a), income from California sources (rent from a Camarillo fourplex, income from a California business) is taxable by California regardless of where the trustee, the beneficiaries, or the trust reside. You cannot move California real estate to Nevada by moving its paperwork. This is the same arithmetic that sinks the out-of-state-LLC pitch, which we’ve written up in why out-of-state entities won’t save you in California.
| Trigger | Statute | Result |
|---|---|---|
| A trustee lives in California | Rev. & Tax. Code § 17742(a) | California taxes the trust’s entire taxable income if it’s the only trustee. With co-trustees, California-source income is taxed in full and the rest is apportioned by the number of resident trustees (§ 17743) |
| A non-contingent beneficiary lives in California | Rev. & Tax. Code §§ 17742(a), 17743-17744 | California taxes the income apportioned to that interest, wherever the trustees sit |
| Income accumulated out of state, later distributed to a California-resident beneficiary | Rev. & Tax. Code § 17745(b) | The beneficiary is taxed on it when distributed (throwback) |
| California-source income, such as rent from California real estate | Rev. & Tax. Code § 17951(a) | Taxable by California regardless of where the trustee, beneficiaries or trust reside |
| An incomplete gift non-grantor trust (NING) | Rev. & Tax. Code § 17082 | Income is taxed to the California grantor for tax years beginning on or after January 1, 2023, whenever the trust was formed |
The verdict, and the narrow real uses
For almost every California family, the Nevada trust pitch is an upsell: you pay setup fees and annual trustee fees to a Nevada trust company for a structure that either gets taxed by California anyway (resident fiduciary or vested resident beneficiary), gets caught later (throwback), or has been taxed to the grantor since 2023 (NING). The people reliably making money on Nevada trusts are the people selling them.
Legitimate edge cases do exist:
- Permanently nonresident beneficiaries. If your children have left California for good, a properly built out-of-state trust with no California fiduciary can accumulate non-California-source income without California tax, and if the beneficiaries are still nonresidents when it’s distributed, the throwback never bites.
- Post-death accumulation with non-California fiduciaries. After the grantor dies, a trust with out-of-state trustees, contingent or nonresident beneficiaries, and non-California assets can sit outside California’s reach for years. And if you’re the one leaving, moving doesn’t automatically take your trust with you: see what happens to your trust when you move out of California.
Notice what both scenarios have in common: somebody actually left California. The tax follows the people, and no document changes where the people live.
| Setup | Works or fails | Why |
|---|---|---|
| Revocable trust with a Nevada trustee, California grantor | Fails | Grantor trust income is taxed to the California grantor |
| Nevada trustee plus a California co-trustee | Fails in part | Out-of-state income is apportioned by head count; California-source income is taxed in full |
| Nevada trust holding a California rental or business | Fails | California-source income is taxed regardless of residence |
| NING formed before or after 2023 | Fails | § 17082 taxes the income to the California grantor for tax years from 2023 on |
| Accumulate in Nevada, distribute later to a California child | Defers, then fails | Throwback taxes the child on distribution, averaged over up to six years |
| Out-of-state trustees, discretionary beneficiaries who have left California, non-California assets | Works | No resident fiduciary, no noncontingent resident beneficiary and no California-source income |
If the family is the one leaving, the trust is only part of the question. Residency, sourced income and the timing of a sale are covered in leaving California and the taxes that follow you, and the rate tables are in trust tax rates for 2026. For the larger planning picture, see ultra-high-net-worth estate planning in California and the list of strategies that backfire.
Working with Ridley Law
I review out-of-state trusts that California families already own, and I design trusts for families whose children or trustees live outside California. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts.
The first call is free and runs 30 minutes, by phone or Zoom. Book my 30-minute call or call 805-244-5291.
Frequently asked questions
Does a Nevada trust avoid California state income tax?
Generally no. California taxes the trust’s entire income if any fiduciary or any non-contingent beneficiary is a California resident (§17742(a)), and California-source income is taxed no matter what (§17951). When there are several trustees or beneficiaries, the part of the income that comes from outside California is apportioned under §§17743 and 17744. A Nevada trustee only helps if no beneficiary with a vested interest lives in California, which rules out the typical family.
What is California’s throwback rule for out-of-state trusts?
Rev. & Tax. Code §17745(b). Income a trust accumulated free of California tax, usually because the trustees were out of state and beneficiaries’ interests were contingent, is taxed to a California-resident beneficiary when it’s finally distributed. Accumulating in Nevada defers California tax; it doesn’t erase it.
Are NING trusts still legal in California?
You can still create one, but it no longer does the job. SB 131 added §17082, which taxes an incomplete gift non-grantor trust’s income directly to the California grantor for tax years beginning on or after January 1, 2023, regardless of when the trust was formed. The exceptions are narrow: trusts that elect to be taxed as resident nongrantor trusts and distribute at least 90% of DNI to charity, and (effective January 1, 2026, under SB 376) charitable remainder trusts, which are carved out of the ING definition.
Can a Nevada trust protect my California rental property from taxes?
No. Income from California real estate is California-source income, taxable under §17951 regardless of who the trustee is or where the trust claims to live. Retitling a Camarillo rental into a Nevada trust changes the paperwork and the fees, not the tax.
When does an out-of-state trust actually make sense for a California family?
Mainly when the beneficiaries actually aren’t (or won’t stay) Californians: nonresident kids, or post-death trusts with out-of-state fiduciaries accumulating non-California-source income for nonresident or contingent beneficiaries. Those are real but narrow cases that turn on where people actually live, not on which state’s trust company you hire.
Does the Kaestner case mean California can’t tax my family’s trust?
No. Kaestner struck down North Carolina’s tax on undistributed income of a trust whose only link to the state was beneficiaries who couldn’t demand anything. The Court said it wasn’t addressing laws like California’s that rely on noncontingent beneficiaries, and California also taxes trusts with resident trustees, California-source income and distributions to residents.
Does a Nevada trust company with a California office count as a California trustee?
It can. California treats a corporate trustee as resident where it transacts the major portion of its administration of the trust (Rev. & Tax. Code § 17742(b)). If the trust is really run from a California office, the trust has a California fiduciary.
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