On February 6, 2023, Bloomberg Law quoted Kevin Ghassomian regarding Governor Newsom’s proposal to target Californians who have trusts set up out of state to avoid state income tax.
According to the article, the proposal would mitigate a tax strategy that allows California residents to transfer assets into out-of-state incomplete non-grantor trusts and potentially avoid state taxation. If enacted, California would join New York in ending a tax planning strategy the wealthy have used for about 20 years.
Wealthy individuals have many reasons for setting up these trusts, said Ghassomian. People typically want to protect their assets so they can pass them on to children and grandchildren, they want the privacy protections of a trust, and they may have reached the federal lifetime limit on tax-exempt gifts. “They’re not always only driven by the state tax benefit,” he said.
The retroactive 2023 effective date in Newsom’s proposal differs from New York’s approach and the California tax board’s 2020 proposal, making it more vulnerable to lawsuits, said Ghassomian. In New York, trust holders had a five-month window to liquidate or move these accounts into another type of trust without incurring tax on the current income. The California tax board proposed that the measure would take effect in the calendar year after its enactment.