Tax Planning Opportunity for Trusts?

In deciding the Appeal of the Yolanda King Family Trust and the Appeal of Mary L. Tunney Junior Trust, the State Board of Equalization may have highlighted a tax-planning opportunity for trusts to avoid paying California taxes, according to BOE Member Judy Chu. At issue in the case was whether the California resident trustees of the Yolanda King Family Trust and the Mary L. Tunney Junior Trust were resident fiduciaries. If not, the trust administered out of state by J.C. Morgan-Chase would not be taxable in California. The board, meeting in Culver City on October 3, voted 3-2 to grant the appeal (aye: Yee, Leonard, Steel; no: Chu, Mandel for Chiang).

Jon Sperring, of PricewaterhouseCoopers, representing the King and Tunney trusts, said the trustees never exercised any authority over the trusts. J.P. Morgan-Chase had sole discretion over the trusts. In fact, a recommendation from former U.S. Senator John Tunney to buy Berkshire-Hathaway stock was rejected by J.P. Morgan.

FTB Tax Counsel John Penfield said that a trust is taxable if one or more of the fiduciaries reside in California. He said that the trustees had the power to revoke the delegation of administration of the trusts. He added that Yolanda King is not only a trustee, but sole beneficiary of the trust.

In discussion of the case, BOE Chair Betty Yee said she had questions on the workability of the existing statute. BOE Member Michelle Steel questioned why the FTB would go after the King and Tunney trusts, saying they delegated everything to J.P. Morgan. BOE Member Bill Leonard said under FTB's position, there would be an advantage for trusts not to have California trustees.

Ms. Chu said tax planning could occur under the decision by the board. She pointed out that the only thing a trust would have to do to avoid California taxes would be to have a form relinquishing control to out-of-state management.

Of note, former Senator Tunney was present at the witness table during the hearing.

Cal-Taxletter October 5, 2007

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