This article is included for the benefit of tax return preparers. The California taxation of trust accumulation distributions is complex and not something that is important for most clients to understand. The rules are generally designed to tax a beneficiary who receives a distribution of income that a trust accumulated in prior tax years as though the beneficiary received the income in the same year the trust received it.
Under the California Revenue and Taxation Code provisions, no exception to the California throwback taxes exists for accumulations in a trust during a period when a California resident beneficiary was under the age of 21 (even though there was such a rule under the repealed federal throwback tax statute). However, in the past, the instructions to the California fiduciary income tax return (Form 541) have stated something different. Specifically, the instructions for years prior have stated that a beneficiary may exclude amounts accumulated before the beneficiary becomes age 21.
The instructions have changed on the 2013 California Schedule J (Form 541). They state that “California R&TC Section 17779 specifically excludes from conformity IRC Section 665. Therefore, California law does not conform to federal law to exempt from taxation those accumulations occurring prior to a beneficiary turning 21.” We also note that the current instructions reiterate that the trustee must report the total amount of all accumulations, regardless of the beneficiary’s age at the time of accumulation.