CA form 541 filing requirement for non CA sourced income

[garys_lucyl]

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!

[Anonymous_]

I was able to glean the following from the California FTB web site:

The trustee may have to file a return if the trust meets any of these:

• The trustee or beneficiary (non-contingent) is a California resident
• Gross income is over $10,000
• Net income is over $100
• The trust has income from a California source
• Income is distributed to a beneficiary

Of course, you stated that you, yourself, are a California resident and are the fiduciary (trustee).

[garys_lucyl]

Yes, I have seen that section on the web site at FTB:  https://www.ftb.ca.gov/file/personal/filing-situations/estates-and-trusts/index.html#Filing-requirem...

Of course they use the word "may" have to file a return which is so helpful.  

I downloaded the 541 Instruction Booklet from FTB and this is the entire section of Who Must File.  There is similar language about the gross and net income under the Trust section, but no mention of trustee or beneficiary residency.  So my thinking is the first sentence is the first test to pass.  (I feel that sentence could be worded better!).  But using elementary logic to parse the sentence ...Do Not File if A or B or C. 

C  Who Must File
Do not file Form 541 if there are no California fiduciaries, California noncontingent beneficiaries, or California sourced income.
Nonresidents or Part-year Residents. See the instructions for Schedule G, California Source Income and Deduction Apportionment, on page 14. Also, get FTB Pub. 1100, Taxation of Nonresidents and Individuals Who Change Residency.
Foreign Estates or Trusts. If the estate or trust filed a federal Form 1040-NR, U.S. Nonresident Alien Income Tax Return, do not file Form 540NR, California Nonresident or Part-Year Resident Income Tax Return. File Form 541 and allocate the income and deductions where there is a California resident fiduciary or resident non-contingent beneficiary. See the Schedule G instructions on page 14 for more information.

Decedent’s Estate. The fiduciary (or one of the fiduciaries) must file Form 541 for a decedent’s estate if any of the following apply:
• Gross income for the taxable year of more than $10,000 (regardless of the amount of net income)
• Net income for the taxable year of more than $1,000
• An alternative minimum tax liability

Trust. The fiduciary (or one of the fiduciaries) must file Form 541 for a trust if any of the following apply:
• Gross income for the taxable year of more than $10,000 (regardless of the amount of net income)
• Net income for the taxable year of more than $100
• An alternative minimum tax liability

[Anonymous_]

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@garys_lucyl wrote:

Trust. The fiduciary (or one of the fiduciaries) must file Form 541 for a trust if any of the following apply:
• Gross income for the taxable year of more than $10,000 (regardless of the amount of net income)
• Net income for the taxable year of more than $100
• An alternative minimum tax liability

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Do you still have a question? Clearly, you are a fiduciary who is a California resident so you need to file a return for the trust if any of the other criteria are met.

[garys_lucyl]

Actually, my main question is how to interpret the first sentence.  As a software engineer by trade, I read this like a logic expression.  If A is true OR B is true OR C is true then do not file.  If the  intent is that all three conditions must be true to omit filing, then I agree that the since the trust has a CA fiduciary then form 541 should be filed if the criteria you listed are met.

Do not file Form 541 if there are no California fiduciaries, California noncontingent beneficiaries, or California sourced income.

[Anonymous_ · Accepted solution]

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@garys_lucyl wrote:

Do not file Form 541 if there are no California fiduciaries, California noncontingent beneficiaries, or California sourced income.

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It is in the disjunctive (OR), not the conjunctive, and note the negative ("if there are NO").

For example, if the trust had California sourced income, the trust would have to file a return if the income threshold was met, even if there were no California noncontingent beneficiaries or a California fiduciary. 

Since you are a California fiduciary, that sentence has no applicability (i.e., you must file a return for the trust if it meets the other criteria).

[Pindaro44]

Do you think a NJ trust with the only trustee residing outside California that makes a distribution of current year income to a California resident contingent beneficiary is required to file 541 or just give a K-1 to the beneficiary?  

[Anonymous_]

Check: https://www.ftb.ca.gov/file/personal/filing-situations/estates-and-trusts/index.html

[Pindaro44]

Hello @Anonymous_,

thank you for your reply. I did check that and it seems to require that the Non-CA trust has to file  since the beneficiary is CA resident (contingent) but he got a 2021 distribution. however, do not see why trust couldn't just give a K-1.

Trusts

The trustee may have to file a return if the trust meets any of these:

• The trustee or beneficiary (non-contingent) is a California resident
• The trust has income from a California source
• Income is distributed to a California resident beneficiary

And the trust has:

• Gross income is over $10,000
• Net income is over $100

[Anonymous_]

Hello @Pindaro44:

That does not make much sense to me either since the CA resident will have the income/gain transfer from his K-1 to his CA return, regardless, I am not sure why they would want a return from the trust itself.