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Why is a Trust Tax Attorney Essential to the Health of Your Trust?

The expertise of a trust tax attorney should be a part of every trustee's considerations both when setting up a trust, and when dealing with the tax liability issues. This is especially true in California because of California's complex and unique rules for taxing trusts. There are several reasons why consulting with a trust tax attorney is wise when preparing a trust in California. To avoid tax liability, or the imposition of substantial penalties, estate planners should be mindful of the California rules when selecting fiduciaries or considering the impact of future distributions to beneficiaries. The penalties for failing to report income tax in California are severe. In addition, failure to file tax returns in California keeps the statute of limitations open for audit.

As an example of the uniqueness of California's trust tax laws, whether a trust must file an income tax return annually in California does not depend on the grantor's residence, as in other states, but on whether the fiduciary of the trust or a non-contingent beneficiary is a resident of California. If a trust has only one fiduciary and that fiduciary is a California resident, then the entire taxable income of the trust is taxable by California. If a trust has multiple fiduciaries, the income taxable to California is apportioned according to the number of fiduciaries who are California residents.

The taxation of a trust may also depend on the residence of the non-contingent beneficiaries. A non-contingent beneficiary is a beneficiary whose interest in the trust is not subject to a condition precedent, such as surviving beyond a life in being or reaching the age of majority. The rules regarding contingent vs. non-contingent interests are complex. California law provides that when a trust has several beneficiaries, the income is allocated according to the number and respective interests of beneficiaries that are California residents. A trust tax attorney is instrumental in understanding and applying California's rules to avoid negative tax implications.

In addition, California has a retroactive tax on California beneficiaries who receive trust distributions if the trust has not complied with paying California income taxes that were previously due or the beneficiary currently receives income that was not previously taxed in California because the beneficiary had a contingent interest at the time the income was accumulated.

A trust tax attorney also serves as a financial expert in trust litigation. As an example, if a beneficiary sues a trustee for his or her mismanagement of the trust assets, the amount that the trustee must pay depends on the extent of the damage he allegedly caused to the trust and/or the beneficiary's interests in the trust. A trust tax attorney will determine the monetary value of the damage that results from a trustee's breach of fiduciary duty and can testify as an expert as to his opinions on this subject.

Tucker Cheadle is an attorney and a tax expert. He has acted as a fiduciary, trustee, executor, and administrator on more than 70 trusts and wills. Cheadle Law continues working with clients year over year because of the skill and expert handling of all trust matters including tax returns, administrating trusts and the overall management of the clients' trust.

With over 30 years of experience, Tucker Cheadle and his team of accountants and paralegals will help you make the best decisions as to the creation of a trust and distribution of trust assets while considering the implications of the California tax law. Call Tucker Cheadle at 949-553-1066. He will go over your options, and help you get clarity to make wise future decisions about how to do your estate planning to make sure that you get the best tax benefits that you can. The difference a trust tax attorney can make could save you and your family thousands of dollars over the life of the trust.

A review of any materials on this web page, any preliminary comments or an introductory meeting does not constitute legal, income tax or accounting advice upon which reliance can be placed. The attorney client relationship can only be created by a written retainer agreement following a check of potential and actual conflicts of interest with other clients.
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