I am a CA resident. My Father is a FL resident and has a revocable living trust RLT drawn up in the state of FL. As with most RLTs, my Father's RLT is a also a qualified revocable trust (QRT). My Father has no CA sourced income. My Father and I are co-trustees of his trust. When my Father passes, I will become sole trustee of his trust and executor of his estate. All of his assets are in his trust.
While my Father is living assets in his RLT are not subject to CA income taxes. He has been a full-time FL resident for decades. All income from assets held in his RLT are taxed using his SSN on his individual tax return.
I have been doing some research to better understand if my Father's estate will be subject to CA taxes when he passes. When my Father passes, his trust becomes irrevocable and an EIN must be allocated for his trust. Here is what I believe to be true about CA taxation of his trust when he passes:
1) If a 1041 is filed for the trust, his trust will be subjected to CA taxes because the trustee (me) is a CA resident.
2) However, if an IRC section 645(a) election is used to report all trust income in my Father's "estate" 1041 return, than the income from his trust will not be subjected to CA taxation because the 645(a) election moves the trust income into the estate 1041 return and CA only taxes estates if the decedent is a CA resident.
I have some references discussed below that led me to these conclusions.
Here is a link from a 2015 article: https://www.sflaw.com/wp-content/uploads/2020/05/California-Income-Taxation-of-Trusts-and-Estates-20... Page 7 has a good discussion on how IRC section 645(a) election can be used to avoid CA taxation. " if the deceased settlor was a non-resident of California but all of the trustees or all of the beneficiaries are residents of California, none of the trust's non-California source income will be taxable by California if an IRC section 645(a) election is made because the trust will be taxed as a non California estate"
Here is a link from a 2011 Q&A with the FTB: https://www.calcpa.org/~/media/california%20cpa%20magazine/files/2011cotftbliaisonqa.pdf Page 10-11 discusses the use of an IRC section 645(a) election. The relevant 645 election is a bit long winded, but appears to also support the conclusion that an IRC section 645(a) election will avoid the need to pay CA income taxes for my Father's estate.
I'd like to know if others agree with my conclusion that an IRC section 645(a) election will keep my Father's trust from being subject to CA taxes.
It would be great to find some more information on the use of the 645 election for this purpose. Something from the FTB web site would be ideal, but I have not been able to find any documentation on this from the FTB web site.
Another question is that the calcpa.org article recommends you still file a 541 when the IRC section 645(a) election is made. I wonder if this is really necessary since no taxes will be paid. Why stir curiosity?
