Will California Tax Your Trust?
California takes the position that any trusts that (1) have income from California sources, (2) the trustee of the trust is a California resident or (3) a beneficiary of the trust is a resident of California, then the income may be taxable in the state of California.
Why is this important? Here is an example: George sets up a Trust in Idaho. George is the original trustee (money manager) of that Trust. George dies and he has nominated his sister, Carol, who lives in the state of California to step in as Trustee, manage the Trust, pay the bills and distribute the assets equally to his three children. California has the power to tax the income of the Trust because Carol is a resident of California.
What can be done to avoid this potential problem? For some the answer is easy, don’t use a California Trustee. In the situations where a California Trustee is most appropriate, consult with a Certified Public Accountant or estate planning attorney to determine any steps to be taken to minimize the additional California tax.
 Franchise Tax Board, Legal Division MS A260, PO Box 1720, Rancho Cordova, California 95741-1720, April 21,2015, Information Letter 2015-02