People in California and readers of the blog know that there are a number of tools available to estate planners looking to maximize their assets for the good of their heirs or favorite charities. However, what many people do not realize is that state laws can have serious estate planning implications, especially when state tax agencies come to exact their pound of flesh.
"Part of the problem we're faced with is that the 51 jurisdictions that we're dealing with don't play by the same rules," said one CPA. This is particularly unfortunate for people looking to set up a trust in California, which can have some pretty burdensome tax implications, depending on the type of trust.
California taxes trust income whenever there are trustees who are California residents or if the vested beneficiaries are California residents, which is another hurdle for people looking for asset protection in the state. To make things worse, California beneficiaries also have to pay a "throwback" tax if they receive a distribution from the trust, expanding their tax liability to previous years.
The good news is that Californians do have options for creating trusts that provide substantial asset protection and peace of mind without subjecting themselves to unnecessary and burdensome state taxation. People in California should not be scared of setting up a trust, it is still a great financial and legal tool, but they should make sure that they are getting the most out of their trust.
The only way to ensure that a trust is optimally set up and administered is by understanding the laws. Knowledge of these important state and federal laws and the knowledge to legally use them is key to ensuring that estate planning is done correctly.
Source: On Wall Street, "Trust, but Verify your Estate Tax Planning," March 22, 2013.