Q. I have a client with a Credit Shelter Trust under California law which gives her all of the income and principal for health, education, maintenance, and support. She has hundreds of thousands of dollars of cash flow from assets outside the trust and doesn’t need any of the income from the Credit Shelter Trust. How do we save state income tax on the trust income?
A: California taxes income that is either sourced to California or based on a proration taking into consideration whether there are any non-discretionary California beneficiaries versus discretionary beneficiaries and non-California beneficiaries, as well as California fiduciaries versus non-fiduciaries.
Therefore, in this case, take a look at the trust agreement and see if it allows the trustee to change the situs. Assuming so, change it to Nevada by appointing Premier Trust as a co-trustee. Then decant the trust under Nevada law to pour the assets from the current trust into a new trust that is fully discretionary (i.e., no “health, education, maintenance and support” language) as to both income and principal and that has no California trustees. This will save the California taxes of up to 13.3%.
If the client wants to maintain direct control, then decant into a trust such that the California resident (i.e., the client) is one of a few trustees so that you can take advantage of California’s proration rule and thereby only subject the trust income to a tiny percentage of California state income tax. This is a viable trade-off in exchange for maintaining control. Many people don’t realize that this can be done so easily