USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Ashley Huh and Matthew Perotti, Pillsbury Winthrop Shaw Pittman LLP
California does not have an inheritance tax or an estate tax. Trust Taxation California requires that a trust pay California income tax on all income of the trust if the fiduciary or ben - eficiary, except for a contingent beneficiary, is a California resident. The rule applies regardless of the residence status of the settlor. The residence of a cor - porate fiduciary is where the corporation transacts the major portion of its administration of the trust. Cali - fornia Revenue and Taxation Code, Section 17742. California trust tax rates are the same as individual taxation rates. Distributions from a trust are gener - ally considered taxable income to the beneficiary and would be taxed in the state where the beneficiary resides. However, capital gains are not included in the distributable net income (DNI) of the trust, and therefore would not be “carried out” to a trust ben - eficiary with a distribution. Accordingly, capital gains would be taxed at the trust level, and subject to Cali - fornia income tax if for example, the trustee resides in California. Note, however, trust capital gains may be added to DNI in the trustee’s discretion, if done con - sistently, which may alleviate this issue. On the other hand, distributing all the capital gains may not be in the best long-term interests of the trust beneficiaries. Foundation Taxation California state law governs the establishment of nonprofit corporations either as a non-profit public- benefit corporation, non-profit religious corporation, or a charitable trust. There are two categories of non- profit corporations: private foundations and organisa - tions which have a charitable purpose. Once estab - lished, the entity applies for tax exemption with the Internal Revenue Service and the California Franchise Tax Board for a determination that the entity is tax- exempt. Federal tax-exempt status under the Inter - nal Revenue Code (IRC), Section 501 (c)(3) permits a charitable organisation to pay no tax on the income from its investments, subject to certain parameters (such as prohibitions on self-dealing and unrelated business taxable income) and permits donors to claim a charitable deduction for their contributions. The charitable contribution deduction for donors to a private foundation is limited to a lower percentage of adjusted gross income than for a public charity and
may restrict the value of the asset being contributed which can qualify for the deduction. Gift Tax California does not impose a gift tax. However, all US citizens and residents are subject to US federal gift and estate taxation. However, the United States fed - eral annual gift tax exclusion allows the taxpayer to transfer tax-free gifts to any number of individuals up to USD19,000 in 2025 per individual recipient. Mar - ried spouses may “split” a gift and thereby utilise the annual exclusion or exemption(s) of the non-donor spouse. If the donor gives more than the exclusion amount, the excess is charged against the lifetime gift and estate tax exemption of USD13.99 million in 2025. The tax rate on gifts exceeding the lifetime gift and estate tax exemption is between 18% and 40%. Generation-Skipping Transfer Tax The federal transfer tax system imposes a wealth transfer tax at each generation. This is known as the gift tax for transfers during life, the estate tax for trans - fers at death and the generation-skipping transfer tax (GST) for transfers of property at death or during life to persons two or more generations below the trans - feror. It applies to trusts when trust distributions are made to the grantor’s grandchildren (or subsequent generation) or when the beneficial interest passes to the grantor’s grandchildren (or subsequent genera - tion). California currently does not impose a genera - tion-skipping transfer tax on any generation-skipping transfers made after 31 December 2004. Capital Gains Taxation California imposes a tax on net capital gains, regard - less of the holding period, at the same rates as the taxpayer’s ordinary income. The US taxes short-term capital gains as ordinary income, and long-term capi - tal gains are subject to tax at between 0% and 20%. 1.2 Exemptions Federal Estate Tax Exclusion and Spousal Portability The US federal estate exemption limit is USD13.99 million in 2025. The federal estate tax is imposed only on amounts which exceed the exemption and rates range from 18% – 40% plus a base tax between USD0 and USD345,800. The exemption is scheduled
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