Individual Taxation

The United States imposes an income tax on citizens and residents and certain income of non-resident “aliens”. California (otherwise, CA) imposes an annual income tax based on California residency and based on certain other contacts with California. In 2023, California income tax rates ranged from 1% to 12.3%. An individual is a California resident if he or she is present in California for other than a temporary or transitory purpose, or is domiciled in California, but is outside of California for a temporary or transitory purpose. Residents are taxed on all income, including income which has its source outside of California. Non-residents are taxed only on income which has its source in California, while part-year residents are taxed on all worldwide income received during the portion of the year they were California residents and on California-source income during the portion of the year they were non-residents. California’s residency scheme poses special challenges related to “declared” and “factual” intent to establish residence when clients desire to sever ties with California. The California Franchise Tax Board conducts residency audits regularly.

The US annual income tax rates range from 10% to 37%. In addition, there are add-on rates in certain investments. Long-term capital gains and qualified dividends may be subject to an additional net investment income tax of 3.8% when net investment income or the excess of the modified adjusted gross income exceeds USD250,000 (married filing jointly), USD250,000 (single), or USD125,000 (married filing separately). Net investment income includes gross income from interest, dividends, non-qualified annuities, royalties, and rents that are not derived from the ordinary course of a trade or business, plus net gain from the disposition of property not used in a trade or business. Gross income and net gain (or loss) from a trade or business may be included in net investment income if it is a passive activity or its source is from trading financial instruments or commodities. The net investment income tax is also known as the Medicare contribution tax.

California imposes a tax on all income to a decedent’s estate if the decedent was a California resident at the time of death. The rule applies regardless of the residence status of the fiduciary or beneficiary. (California Revenue and Taxation Code, Section 17742.)

Alternative Minimum Tax

California residents are also subject to the 7% California alternative minimum tax on the calculated alternative minimum tax income which exceeds an exempt amount, before credit reductions. The California alternative minimum tax income is calculated starting with the taxpayer’s federal taxable income, then adds back certain deductions which are typically itemised, and adjustments. The existence of long-term capital gains and qualified dividends increases the likelihood that the California alternative minimum tax will apply. There are no exemptions and no phase-outs. (California Revenue and Taxation Code, Section 170062(b)(3)(A)(iv). See 1.2 Exemptions.)

US taxpayers are subject to federal alternative minimum tax of 26% or 28%. The US alternative minimum tax income is calculated starting with adjusted gross income, then adds back tax preference items and deductions, then is reduced by the alternative minimum tax exemption up to a phase-out amount. The federal alternative minimum tax income includes income from incentive stock options that were exercised and state and local tax refunds.

Mental Health Services Tax

California imposes a 1% Mental Health Service tax on taxable income more than USD1 million. There is no equivalent federal tax. The California Mental Health Services Act of 2020, in which Section 17043 is added to the California Revenue and Taxation Code. (See 1.2 Exemptions.)

Estate Taxation

The US does not have an inheritance tax, but imposes an estate tax on the assets of a decedent’s estate. The US federal estate tax is calculated based on the fair market value of the assets owned by the decedent at death, net of any debts and applicable deductions and exclusions. It is payable by the decedent’s estate. (See the discussion on exclusions in 1.2 Exemptions.)

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 beneficiary, except for a contingent beneficiary, is a California resident. The rule applies regardless of the residence status of the settlor. The residence of a corporate fiduciary is where the corporation transacts the major portion of its administration of the trust. California Revenue and Taxation Code, Section 17742. California trust tax rates are the same as individual taxation rates. Distributions from a trust are generally 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 be “carried out” to a trust beneficiary with a distribution. Accordingly, capital gains would be taxed at the trust level, and subject to California 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 consistently, 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 organisations which have a charitable purpose. Once established, 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 Internal 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 federal annual gift tax exclusion allows the taxpayer to transfer tax-free gifts to any number of individuals up to USD17,000 in 2023 and USD18,000 in 2024 per individual recipient. Married 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 USD12.92 million in 2023 or USD13.61 million in 2024. 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 transfers 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 transferor. 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 generation). California currently does not impose a generation-skipping transfer tax on any generation-skipping transfers made after 31 December 2004.

Capital Gains Taxation

California imposes a tax on net capital gains, regardless 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 capital gains are subject to tax at between 0% and 20%.

Federal Estate Tax Exclusion and Spousal Portability

The US federal estate exemption limit is USD12.92 million in 2023 and is USD13.61 million in 2024. 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 to decrease to USD5 million in 2025, indexed for inflation. The unused portion of a deceased spouse’s or registered domestic partner’s federal exemption is portable to the survivor, the deceased spouse unused exemption (DSUE) amount. The survivor elects portability by reporting the value of the deceased spouse’s or partner’s estate on the date of death, less taxable gifts, on IRS Form 706.

Alternative Minimum Tax Exemption

The federal AMT exemption amount for tax year 2024 starts at USD85,700 and begins to phase out at USD609,350 for married/registered domestic partners filing separately, estates, and trusts, and for registered domestic partners filing jointly and surviving spouses starting at USD133,300, with phase-out beginning at USD1,218,700. The 2023 exemption amount was USD81,300 and phased out at USD578,150, and for married couples filing jointly, was USD126,500 with phase-out beginning at USD1,156,300.

California exempts up to USD40,000 of alternative minimum taxable income from the alternative minimum tax.

Annual Gift and Estate Tax Exclusion

California does not impose a gift tax. However, there is a substantial federal gift tax. The United States federal annual gift tax exclusion allows the taxpayer to transfer tax-free gifts to any number of individuals up to USD17,000 in 2023 and USD18,000 in 2024 per individual recipient. If the recipient receives more than the exclusion, the excess is charged against the lifetime gift and estate tax exemption of USD12.92 million in 2023 or USD13.61 million in 2024. Gifts are reported on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. The tax rate on gifts exceeding the lifetime gift and estate tax exemption is between 18% and 40%. The lifetime gift exemption and the estate tax have a single combined exclusion. Accordingly, lifetime gifts will reduce the exemption remaining to be applied against estate taxes at death.

California Capital Gain or Loss Adjustment

California capital gains are taxed at ordinary income tax rates. Appreciated assets receive a step up in basis to their fair market value at the time of death. In California, a special planning opportunity exists that property held as community property will receive a full step up on the entire property upon the death of the first spouse to die, even though that spouse is only deemed to own one-half of the community property assets.

Non-resident aliens and non-citizens are subject to United States and California income tax on income generated by real property located in the US, or California, respectively. The US tax is a flat 30% flat rate, or lower treaty rate of the resident country, if the property is not effectively connected with a US trade or business. Non-resident aliens can elect to treat all income from US real property as effectively connected income with a trade or business, which then allows deductions related to the property to be used to reduce taxable income. At sale, capital gains are taxed in the same manner as if it were sold by a US citizen. Non-residents are also subject to a 15% non-resident withholding tax on the gross sales proceeds unless the non-resident seller is exempt from the withholding, either because it is a low-value sale (under USD300,000) or if withholding is reduced or eliminated under a treaty between the non-resident jurisdiction and the US. To request a reduction or dispensation from withholding on dispositions of US real property use IRS Form 8288-B.

In California, non-resident aliens and non-citizens are taxed on real estate income and may take advantage of deductions, exemptions and other rules to reduce taxable income from real property in the same manner as US citizens.

In 2021, 2022, and 2023, California lawmakers proposed a bill (most recently, California AB 259) that would impose a 1% annual wealth tax on households with a net worth of more than USD50 million and 1.5% on households worth more than USD1 billion. A version of the bill seeking to tax extreme wealth has been introduced multiple times. Some versions include an “exit tax,” seeking to collect the wealth tax even after a taxpayer relocates to a new residence outside California. This has caused some uncertainty, and may be one factor for private wealth clients to establish residency outside California. Another factor is the very high state income tax rates in California compared with other states, such as Wyoming and Florida, which have a zero income tax rate.

The United States is not a signatory to the OECD’s CRS.

California-based entities with business units that engage in multinational tax arrangements between any EU country and the US must comply with the EU DAC 6.

FATCA and FinCEN

Under FATCA US/California entities, individuals, institutions, and trusts who hold financial assets outside the US and meet the income tax reporting threshold are required to report the assets on IRS Form 8938. In 2023 the reporting threshold ranges from USD50,000 to USD150,000 for individuals living in the US and USD200,000 to USD600,000 for individuals living outside the US.

In addition, if a US person, resident alien, trust, estate, or domestic entity has a financial interest in or signatory authority over an offshore financial account, the account must be reported on FinCEN Form 114, Report of Foreign Bank and Financial Accounts, or FBAR. The information requested on each form is different, thus due to the different rules and differences in the definition of “financial account,” not every taxpayer will need to file both forms or report the same foreign financial accounts. Reporting is required if the aggregate value of any one or more financial accounts exceeds USD10,000 at any time during the calendar year. Notably, residents of US territories are not included in the definition of “United States” for Form 8938 reporting, while resident aliens of US territories and US territory entities are subject to FBAR reporting.

The United States Corporate Transparency Act

As of 1 January 2024, California corporations, limited liability companies, and other entities which are registered to do business in the United States are subject, unless one of the 23 exemptions applies, to reporting requirements of the Corporate Transparency Act. Entities electronically report beneficial ownership information (BOI) about individual persons who directly or indirectly own or control the entity to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). A “beneficial owner” is “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 per cent of the ownership interests of such reporting company.” BOI is not public, but FinCEN will disclose BOI to US, state, local, Tribal, and foreign officials for national security, intelligence, and law enforcement related purposes. Financial institutions may have access to BOI with the consent of the reporting company. The primary purpose of the CTA is to combat money laundering, drug trafficking, terrorism, and corruption.

Companies created or registered to do business in the US before 1 January 2024 must file a BOI report by 1 January 2025. Companies created or registered after 1 January 2024 have 90 days after notice of creation to file. A reporting company created or registered after 1 January 2025 will have 30 days.

Generally, non-exempt reporting entities must report the name, date of birth, address, and upload an image of an unexpired identity document for each beneficial owner of the entity. The entity must also report its name, address, and for entities created after 1 January 2024, information about who formed the company. In FinCEN’s ongoing efforts for gatekeeper compliance, legal counsel and staff who assist in the formation of the company may fall within the definition of company applicants who are required to report. As implementation of the CTA rolls out, entities and counsel are keenly focused on these obligations. Although one court recently found the CTA requirements to be unconstitutional in National Small Business United v Yellen, No 22-cv-01448 (N.D. Ala.), this may be overturned on appeal.

In the US and California, high-net-worth families often engage in strategies with skilled advisers to seek to reduce the high transfer tax, which can decimate their family’s often hard-earned assets. Many such strategies, when correctly implemented, can be very effective. However, there is concern in that younger generations may become disincentivised to work if they receive too much gratuitous wealth, and trusts are often used to limit unfettered access to inherited wealth, while also protecting assets from potential attacks from third party creditors or others seeking to obtain the assets. As the cost of living, education, and taxes continues to escalate, many families in the US tend to have fewer children than was historically the case.

Individuals and entities subject to California law routinely have businesses and families in multiple other jurisdictions. Planning for succession and wealth transfer for these family members is done in compliance with the laws of the relevant jurisdictions, and in consultation with local counsel as required.

California does not have a forced heirship regime, however, in some cases, California courts may apply the law of another jurisdiction to an estate administered in California which may include a forced heirship regime. For example, the State of Louisiana has rules to prevent a testator from disinheriting his or her children. California’s community property laws essentially entitle a spouse to one half of the other spouse’s assets earned during marriage, whether at death or in a divorce. In addition, one spouse generally cannot sell the primary residence which is community without the consent of the other spouse.

California Community Property

In California, all property earned by either spouse during the marriage is presumed to be community property, owned 50/50 by each spouse. The presumption is rebuttable. The spouses may agree in writing to transmute separate property to community property or vice-versa. Separate property includes property acquired before the marriage and separate during the marriage, gifts and bequests made to only one spouse, and a portion of personal injury settlements. Separate property that has been comingled with marital assets can become community property.

In California one spouse cannot transfer marital property outside the community without the consent of the other spouse.

California Prenuptial Agreements

California prenuptial and postnuptial agreements are governed by the California Uniform Prenuptial Agreement Act. This prescribes the requirements for how such agreements may be created and addresses what can and cannot be set forth the contract. As long as the parties have drafted and executed their prenuptial agreement in compliance with the Act, and a California court finds no fraud, duress, non-disclosure of assets, or unconscionable terms, then the prenuptial agreement is enforceable. A California matrimonial attorney should be consulted before entering into such an agreement, as certain terms are advisable to include, to ensure the agreement is enforceable and not deemed to be unconscionable.

Reassessment on Transfer Taxes

In California, real property is reassessed at its fair market value when it is sold, transferred by gift, or inherited at death. It may be deemed to be sold and therefore subject to being re-assessed upon transfer of a certain percentage of ownership if held in certain entities and under certain fact patters. Complex rules apply to such transfers and to requirements for filing various informational returns such as the Form BOE100-B with the California Board of Equalization.

Parent–Child and Grandparent–Grandchild Exclusion

California real property owners may avoid the property tax increases for certain transfers between family members. Transfers of real property which are the primary residences, and which are a result of a sale, gift, or inheritance between parents and children or between grandparents and grandchildren, only if the parents of the grandchildren are deceased, are fully exempt from reassessment up to any value. In the case of transfers by trust qualify for the exclusion when beneficial ownership changes from parent to child.

In addition, under the same rules, the first USD1 million of real property other than primary residences is excluded. The amount is cumulative over the lifetime of the transferor. It is not always beneficial to claim the exemption because depending on market conditions, it is possible that the relevant FMV of a primary residence could be below the code-defined base value determined as of the date just prior to the date of transfer, typically the most recent tax assessment value. For detailed information see California Revenue and Taxation Code, Section 63.1.

California public policy is designed to prevent trusts from existing indefinitely to encourage money to be used and to circulate in commerce rather than remain in a trust. A California trust is subject to the Rule Against Perpetuities, and therefore exists for the lifespan of the youngest individual alive at the time the trust is established, plus an additional 21 years, which results in a trust duration of approximately 90 to 100 years. At the end of the period, the trust assets must be distributed and the trust ends. State laws differ regarding the permissible duration of an irrevocable trust, for example, Wyoming allows an irrevocable trust to last for 1,000 years, and in Delaware personal property may be held in trust indefinitely. California families often opt for Wyoming and Delaware trusts to take advantage of this, combined with zero state income tax rates there.

Transfer of Digital Assets

California and most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) (2015), which applies to wills executed and trusts created before, on, or after 1 January 2017. Under the rules, a custodian of the digital asset may disclose information in a decedent’s (a “user’s”) account to the decedent’s fiduciary or settlor, in other words, the personal representative or trustee. The fiduciary has the right of access to any digital asset in which the decedent or settlor had an interest and is an authorised user. A digital assets is defined as an electronic record in which an individual has a right or interest, and generally does not include the underlying asset or liability. The disclosure may include the content or a catalogue of the user’s electronic communications but does not include digital assets deleted by the user. A fiduciary, the custodian, or the ultimate recipient of the digital asset may obtain an order limiting the custodian from disclosing all or part of the decedent’s asset if the user directs it, or if it is provided in a trust to limit disclosure. The fiduciary may request an in camera review of the digital asset. The fiduciary is subject to the same duties as are imposed on fiduciaries when they manage tangible property: the duty of care, duty of loyalty, and the duty of confidentiality. California does not explicitly address the transfer of cryptocurrency for purposes of succession. For detailed information see California Probate Code, Sections 870–884.

A wide variety of trusts are recognised and respected in California including revocable trusts, irrevocable trusts, and Foundations. In 2018, California enacted the California Uniform Trust Decanting Act (2018) (California Probate Code, Section 19501 (2023)), which allows trustees and authorised fiduciaries to modify the terms of a California certain trusts without the consent of the beneficiaries, and of revocable trusts where revocation requires the consent of a trustee or third person with a right contrary to the interest of the settlor. Most California residents whose assets indicate the need for estate planning utilise a revocable trust, to avoid the need for probate which can be costly and burdensome.

A wide variety of trusts are recognised and respected in California including revocable trusts, irrevocable trusts, and Foundations. In 2018, California enacted the California Uniform Trust Decanting Act (2018) (California Probate Code, Section 19501 (2023)), which allows trustees and authorised fiduciaries to modify the terms of a California certain trusts without the consent of the beneficiaries, and of revocable trusts where revocation requires the consent of a trustee or third person with a right contrary to the interest of the settlor. Trusts often used in California for estate and tax planning purposes include intentionally defective grantor trusts (IDGT), a qualified personal residence trust (QPRT), a grantor retained annuity trust (GRAT) and a spousal lifetime access trust (SLAT).

California imposes an income tax on a trust where a trustee or non-contingent beneficiary is a resident of California. Thus, for settlors who do not reside in California, care is often taken to ensure the fiduciary is not a resident of California. Conversely, California resident Settlors often establish non-grantor trusts in other states such as Wyoming or Delaware to take advantage of the zero income tax rate in those states on the income of the trust. Similarly, planning may be done, with experienced California tax advice, for an owner of a business to relocate to another state prior to the sale of a business.

The California Uniform Trust Decanting Act (2018) (California Probate Code, Section 19501 (2023)) allows trustees and authorised fiduciaries to modify the terms of a California certain trusts without the consent of the beneficiaries, and of revocable trusts where revocation requires the consent of a trustee or third person with a right contrary to the interest of the settlor. A California trust which could take advantage of these decanting provisions must have its principal place of administration in or changed to California, and contain a provision that the it is governed by the laws of California. (California Probate Code, Section 190501, 19505.)

The ability of a trustee or authorised fiduciary to exercise the decanting power depends on the terms of the trust and the trustee’s power to make distributions to the beneficiaries. A trustee needs to have “expanded distributive discretion”, which includes the ability to modify administrative (which requires only “limited dispositive discretion”) and dispositive terms, such as changing a beneficiary’s interest, in the first trust to exercise the decanting power. In exercising the decanting power, a trustee may not (i) include as a current beneficiary a person that is not a current beneficiary of the first trust, (ii) include as a presumptive remainder beneficiary or successor beneficiary a person that is not a current beneficiary, presumptive remainder beneficiary, or successor beneficiary of the first trust, or (iii) reduce or eliminate a vested interest. (California Probate Code, Section 19511.)

Generally, a trustee may decant to change the situs and governing law of the trust out of California as long as there is sufficient nexus to the new jurisdiction. For example, bypass marital trusts can be decanted by giving the surviving spouse a power of appointment over the trust property after the death of the first spouse to step up the value of the property, thereby reducing capital gains tax. An irrevocable trust may be decanted to improve administrative provisions, or modify outdated provisions. Decanting is an opportunity to add significant protections, such as expanded trustee discretion, to California special needs trusts. Further, the ability to decant and modify a provision to convert a mandatory distribution to a discretionary distribution enhances protection of the trust’s assets from creditors.

Although consent and court approval are not required, the trustee or authorised fiduciary must give notice of the intent to exercise the decanting power to each settlor, qualified beneficiaries, holders of presently exercisable powers of appointment, persons with a current right to remove or replace the fiduciary, all fiduciaries of the first and second trusts, and in certain cases, the Attorney General.

Separately, most estate planning includes opportunities for the grantor and/or his or her spouse to receive some financial benefit from the transferred assets, should unforeseen circumstances mandate a need for this. For example, in an IDGT, the spouse of one grantor may receive some trust assets as a discretionary beneficiary; a GRAT includes a specified return to the grantor, and a sale of an asset for a note to an IDGT provides a deferred return to the grantor, and many corporate arrangements may include indirect control in the grantor over assets transferred to a trust, taking into account evolving tax law in this area, which is designed to prohibit the grantor retaining control over transferred assets, the penalty being inclusion in the estate of the grantor for estate tax purposes.

In California, trusts are a popular and effective mechanism for protecting assets from unforeseen creditors of the beneficiaries.

In California, selection of the situs for asset protection is a critical strategy in establishing a trust. Generally assets transferred to a trust are exempt from the creditor of the beneficiary, except to the extent the beneficiary has the “right” to receive them. Accordingly, discretion for a trustee as to how much, if any, to distribute is often preferred, compared to giving the beneficiary the “right” to receive trust assets for his or her health, education, maintenance or support (HEMS). Certain states, such as Wyoming and Delaware, have self settled trust laws providing that an individual may transfer assets in trust for himself or herself and avoid creditors. In general, a transfer to a trust will not provide protection against the claims of an existing creditor. This dates back to the English Statute of Elizabeth (“A transfer to evade, defraud, or delay a [known] creditor is void.”) as a fraudulent transfer. Once the situs of a trust is established, the creation of an entity, such as a private trust company or a family office, to manage family holdings is an effective tool for asset management and planning. The office can be used to manage and administer financial matters, attend to administrative matters relating to tangible assets, and manage who uses shared assets. A family office creates a clear framework for managing the complexities of owning, maintaining and growing a diversity of assets, as well as attending to succession planning.

In California, trusts are a popular method for family business transfer tax and succession planning.

In California, selection of the situs for asset protection is a critical strategy in establishing a trust. A limited liability company (LLC) is often used to own a business; membership interests in the LLC can then be transferred to a trust to reduce income and transfer tax. Trusts can be tailored to accommodate family goals, in terms of decision making, distributions and investments. The family office or a private trust company is often used for extremely valuable family enterprises or assets.

Transfers of partial interests in an entity such as a partnership or an LLC are often discounted to reflect lack of marketability and lack of control, which can result in transfer tax savings.

The high concentration of wealth in California often leads to trust disputes and will contests. Trust lawsuits encompass claims against a trustee regarding the administration of a trust, lack of capacity of a testator, violation of trust terms, and undue influence. More frequently, litigants sometimes assert exaggerated (or unfounded) claims, seeking a settlement, or aggressively use tactics such as bringing a conservatorship action to gain control over the person and property of another person.

California’s heightened court involvement makes the probate process arduous. This process typically ranges from 12–24 months.

Mechanisms for compensating aggrieved parties include:

• compelling trustee to perform specified duties;
• seeking a court order to prevent the trustee from furthering a breach of trust;
• appointing a temporary trustee;
• removing the trustee; and
• imposing an equitable lien or a constructive trust on trust property.

The basic objective of damages is compensation, and the theory is that the party injured by breach should receive the equivalent of the benefits of performance. A petitioner can seek the disgorgement of the trustee’s profits through a money judgment against the trustee or seek to establish a rightful claim to specific assets. Punitive damages are awarded to discourage oppression, fraud or malice, further punishing the wrongdoer on top of the actual damages that were suffered. Ultimately, compensation hinges on a loss stemming from a recognised breach.

The prevalence of corporate fiduciaries in California is directly related to the concentration of wealth. It is common for a grantor of a trust with substantial capital and assets to involve these corporate fiduciaries. These entities often possess specialised expertise and can help shield trustees from personal liability. When considering what constitutes ordinary care and diligence, a professional representative (corporate fiduciary) is held to a higher standard of care based on their presumed expertise. This higher standard of care applies to all professional personal representatives, whether individual or corporate. Note that California recently enacted both a California Uniform Directed Trust Act statute and a Professional Fiduciaries Act, CA AB-2148, providing much needed guidance.

When a personal representative, including a trustee of a trust or a foundation, breaches his or her fiduciary duty, he or she may:

• be responsible for any resulting loss incurred by the omission;
• be forced to disgorge profits or compensation; and/or
• be responsible for profit that would have accrued in the absence of this negligence.

The fiduciary may avoid or minimise these liabilities by acting reasonably and in good faith given the circumstances. A trustee may delegate investment functions as prudent under the circumstances. A trustee that properly selects an agent, establishes the scope of delegation, and periodically reviews the agent’s performance will not be liable to the beneficiaries for actions/decisions of the agent. Many trusts include exculpatory clauses, providing for no trustee liability except for fraud or wilful misconduct, and the trustee may obtain directors’ and officers’ liability insurance. Self-dealing can result in the fiduciary insuring a positive outcome in the related investment (becoming personally liable for any loss).

California law provides that a trustee shall invest and manage trust assets as a prudent investor would. The trustee must exercise reasonable care, skill, and caution. A single investment or action is not inherently prudent or imprudent. Rather, the whole portfolio is considered a part of an overall investment strategy with a relative risk and return objective. In general, the obligation to diversify assets is a tenet of prudent investment.

The trustee has a duty to diversify the investments unless, under the circumstances, it is prudent not to do so. Investments should be guided by the following criteria:

• economic conditions;
• risk management practices;
• possible effect of inflation or deflation;
• tax consequences;
• expected total return of income and appreciation of capital;
• needs for liquidity; and
• other resources of the beneficiaries.

The trustee can operate a business within the trust property, and he or she can change its structure (ie, incorporation or dissolution). However, this is only permitted if the trust document or court allows it.

Someone is a resident of CA if they are (i) present in CA for other than a temporary purpose or (ii) domiciled in CA, but outside CA for a temporary purpose. Factors used to determine the strength of one’s ties to CA include, but are not limited to, the:

• amount of time spent in CA versus other states;
• location of spouse and children;
• location of principal residence;
• state of issued driver’s licence;
• state where one is registered to vote;
• location of banks where accounts are maintained; and
• permanence of one’s work assignments in CA.

Rather than relying on a single factor or a fixed number of ties, CA considers the strength of connections to the state. (State of California – Franchise Tax Board).

There is a specified process for gaining US citizenship. An immigration attorney should be consulted.

It is relatively easy to become a resident in California. For example, buying or renting a permanent residence in California, combined with being employed in California and sending children to school in California should suffice. Conversely, it can be difficult to cease to be treated as a California resident. In order to effectively do so, as many of the domicile factors listed as possible should be established in the desired new state of residence and a California state tax attorney should be consulted.

In California, a special needs trust may be established if:

• the incompetent person has a disability that substantially impairs their ability to care for themselves;
• the incompetent person has special needs that will not be met without the trust; and
• the assets transferred to the trust do not exceed the amount reasonably necessary to meet the special needs.

A special needs trust (SNT) is designed to preserve public assistance benefits for a disabled beneficiary. A first party SNT is funded with assets that belong to the beneficiary or which the beneficiary is legally entitled. A third party SNT is funded with the assets of anyone other than the disabled beneficiary or their spouse.

Ultimately the trust enables the special needs beneficiary to receive assets while also staying eligible for supplemental security income, Medi-Cal, and other government benefits.

California requires a court proceeding to oversee the appointment of a guardian. The goal of this procedure is to ensure that the guardian is suitable to maintain the best interests of the person under guardianship.

Guardians are required to annually submit a status report to the court, providing information regarding the guardianship. This includes details such as the guardian’s address, the child’s current residence location, reasons for changes, and other factors. If this report is not submitted by the guardian, the court may order the guardian to make themselves available for purposes of investigation of the guardianship.

Six months after the appointment of a conservator, a court investigator must visit the conservatee and assess the appropriateness of the conservatorship. The investigator then reports to the court on the conservatee’s placement, quality of care, and finances. This procedure occurs annually thereafter. The court will consistently review if less restrictive alternatives or terminating the conservatorship is appropriate. The court, on its own motion or by request of interested parties, may schedule a hearing or request an accounting for further review. A spouse ceases to have standing to bring a conservatorship proceeding if a divorce is pending. This mitigates against the risk of the conservatorship proceeding being used as an offensive weapon in a divorce, where the moving party wishes to gain control of the other person’s property or “personal protection” for their own benefit, rather than for the benefit of the proposed conservatee.

California’s Department of Aging has set forth the Master Plan for Aging (MPA) initiative. One of the goals is entitled “Affording Aging”. California is currently analysing the impact of job loss on older workers’ employment, retirement, and health. Additionally, the state has implemented CalSavers, a state sponsored retirement plan, to help employees prepare for the future. MPA has also invested in programmes to address issues of hunger and homelessness amongst aging adults. The presence of an initiative displays that financial preparation for longer lives is topical and will continue to be addressed.

For purposes of intestate succession, a parent-child relationship exists if that child is:

• a natural child; or
• an adopted child.

Adopted Children

Adoption severs the relationship between an adopted person and their natural parents unless:

• the natural parent and adopted person lived together as parent and child, or the natural parent was married to or cohabitating with the other natural parent at the time the person was conceived and died before the person’s birth; and
• the adoption was by the spouse of either natural parents or after the death of either natural parents.

Children Born Out of Wedlock

The marital status of one’s parents does not affect the child’s classification. A child born out of wedlock is considered a natural child.

Posthumously Conceived Children

These children are eligible for any of the deceased parent’s property if:

• the father, in a signed and dated writing, makes the specified birth of the child clear; and
• the conceived child is in utero within two years after the father’s death.

Surrogacy

In California, intended parents may establish their legal parental rights before the birth of the child without formal adoption proceedings. Upon birth of the child, the intended parents are encouraged to secure a parentage order from the court. This establishes the legal parental rights and terminates rights of the surrogate.

Same-sex marriage is recognised in California. Currently, legislators in California are seeking to include the right to marriage equality in the California Constitution. Domestic partners may file a Declaration of Domestic Partnership with the Secretary of the State. Registered domestic partners are afforded the same rights, protections, and benefits as a married couple in the State of California.

Federal tax law limits charitable contributions of cash to a public charity to 60% of the donor’s federal adjusted gross income (AGI). California limits contributions of cash to a public charity to 50% of the donor’s federal AGI. The federal and California limit on non-cash contributions, such as stocks, to a public charity is 30% of AGI. The federal and California limit on contributions of cash to a private foundation is 30% of AGI. The federal and California limit on noncash contributions to a private foundation is 20% of AGI. If a person has insufficient income in a given year to maximise the contribution, the person has five additional years to apply any unused portion of the deduction as a carry-forward. Deductions for charitable giving is designed to encourage individuals to support goals which benefit the public good. Given California’s high state income tax and the concentration of wealthy individuals there, charitable giving is an important component of estate planning for wealthy Californians.

Charitable Trust

• A charitable remainder trust (CRT) allows the beneficiary of the trust to receive payments for a set number of years or for the remainder of their life. At the end of the term, the remaining assets are transferred to the public charity of the donor’s choice.
• A charitable lead trust (CLT) enables the charity to receive income from the trust for a set term, after which the remaining assets are distributed to the non-charitable beneficiaries.
• Charitable trusts offer immediate tax deductions on the assets contributed. Additionally, highly appreciated assets can be transferred to a trust and diversified, while deferring some of the capital gain tax.

Donor-Advised Funds (DAFs)

• DAFs provide donors with an investment account solely for the goal of charitable giving. This irrevocable charitable gift is tax deductible and any investment growth within the account is tax free. Unlike private foundations which are required to distribute a minimum of 5% of their assets each year, a DAF may continue indefinitely, despite the charitable contribution deduction having been received upon transfer of assets to the DAF.