I am the trustee/fiduciary of a trust that has a single beneficiary. I live in California. The beneficiary lives in Washington. All the income in the trust is derived from a brokerage account and I believe is considered intangible income. There is no CA sourced income. The beneficiary is entitled to the income from the trust and therefore all income is allocated from the trust to the beneficiary as distributed net income on the federal form 1041. A Schedule K-1 (Form 1041) is produced for the beneficiary to complete his Federal taxes.
The question I have is whether the CA 541 form is required to be filed. My interpretation is NO based on this section of the instruction booklet. My reasoning is the third item is true - no CA sourced income is earned by this trust? Hence no filing requirement.
C. Who Must File
Do not file Form 541 if there are no California fiduciaries, California noncontingent beneficiaries, or California sourced income.
I prepared the 2018 returns myself using Turbo Tax business and filed both 1041 and 541 returns. I am now thinking the 541 was in error. I also had the beneficiary file a CA 540-NR return which I also think was an error as the income is not CA sourced and should be taxed to the beneficiaries state of domicile (WA) according to the Schedule K-1 (541) instructions I found via another post on the forum. (In this case WA has no state income tax.)
I would appreciate comments on whether my current understanding is correct that no CA Form 541 is required and therefore the non-resident beneficiary also does not have to file a CA 540-NR return.
If it turns out my understanding is correct, I'll skip the 541 from now on, and also tell the beneficiary to file an amended return for 2018 540-NR return to get back what was paid.
Thanks!
