How California Taxes a Trust: The Residence of the Trustee and Beneficiary, Not the Settlor

California's starting point runs against the intuition. The state does not tax a non-grantor trust based on where the settlor resides. It taxes based on the residence of the trustees and of the non-contingent beneficiaries. If at least one trustee, or at least one non-contingent beneficiary, is a California resident, the state may tax the trust's income, regardless of where the settlor lives. The idea is that the connection to the state is formed through those who administer the trust and those who benefit from it, not through the person who created it.

From this flows the planning room. Someone who wants to reduce California exposure can appoint trustees who are not residents of the state, sometimes in a state with no income tax at all, and can shape the beneficiary structure so that the California connection is reduced. The top marginal state rate reaches roughly 13.3%, so the dollar significance of this distinction is large.

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Contingent Versus Non-Contingent Beneficiaries: The Central Planning Lever

The most important distinction is between a non-contingent beneficiary and a contingent one. A non-contingent beneficiary is one whose right to receive income or principal is not subject to a condition precedent. A contingent beneficiary is one whose right is subject to discretion. California case law has held that where the trustee has absolute discretion whether to distribute income to a beneficiary, that beneficiary is treated as contingent, and therefore does not on its own create a taxing connection to the state.

The planning implication is clear. A trust in which distributions rest in the trustee's full discretion, and in which the California beneficiary has no vested right to demand a distribution, may not be treated as a California trust on the basis of the beneficiary alone. Where there are several trustees or several beneficiaries, some resident and some not, the state attributes to itself a proportional share of the income, according to the ratio of resident trustees or beneficiaries.

For practitioners: the drafting of beneficiary rights in the trust instrument is not merely a family matter. It directly determines the scope of California tax.
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The Throwback Tax: The Limit on Deferral

Accumulating income in the trust rather than distributing it is meant to defer state tax. California blocks much of that incentive through its throwback tax. When income accumulated in the trust is later distributed to a California resident beneficiary, the state may tax it at the time of distribution, as if it had not been deferred. This prevents the outcome in which income accumulated for the benefit of a state resident escapes state tax entirely.

Even so, there is room to plan. Income accumulated during a period in which the beneficiary was not a California resident is not subject to the throwback tax. The timing of beneficiaries' residence changes, and the timing of distributions, are therefore a material part of the picture.

For practitioners: accumulation is not exemption. Check when the income was accumulated, and who was a resident at the time of accumulation and at the time of distribution.
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ING Trusts, and How California Closed the Door

A well-known planning tool was the ING trust, a non-grantor trust in which the gift to the trust is treated as incomplete. The idea was to establish such a trust in a state with no income tax, such as Nevada or Delaware, so that trust income not sourced to California would not be taxed by the state. The variants were named after the place of formation, for example a NING in Nevada or a DING in Delaware.

In 2023 California closed this route. New legislation added a provision under which the income of an ING trust is attributed to a California resident settlor as if the trust were a grantor trust, effective retroactively from the start of that year. A narrow exception exists for a trust that distributes most of its income, ninety percent or more, to charity, subject to an appropriate election. Beyond that, the old route ceased to be effective for residents of the state. Remaining alternatives include a genuine change of residence out of the state, or the use of a completed-gift non-grantor trust that does not fall within the new provision.
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The Israeli Mirror: Chapter Fourth 2 and the Settlor-and-Beneficiary Test

Here the picture reverses. Israel's trust taxation regime, set out in Chapter Fourth 2 of the Income Tax Ordinance, does not rest on the residence of the trustee, but primarily on the Israeli residence of the settlor and the beneficiaries. A trust all of whose connections are foreign may sit outside the Israeli tax net, but the moment a substantial Israeli connection is formed, mainly through the settlor, the picture changes. This difference is the heart of the matter. In California one asks who the trustee is and who the beneficiary is. In Israel one asks first and foremost who the settlor is, and whether the settlor is an Israeli resident.
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The Returning Resident's Trigger: Reportable Position 114/2025

The most sensitive point for the returning Israeli with a foreign trust concerns precisely the moment of return. Reportable tax position 114/2025, published at the end of 2025, provides that when a relatives' trust becomes an Israeli-residents' trust because one of the settlors immigrated or returned to Israel and became an Israeli resident, whether a first-time resident, a long-term returning resident, or a returning resident, the provisions of section 75Z(e) of the Ordinance apply in full. Moreover, according to the position, the settlor may not sidestep that outcome by electing to be treated as the assessable settlor under section 75Z(h).

In other words, the settlor's becoming an Israeli resident is the trigger that pulls the trust into the Israeli-residents' regime, and the Tax Authority closes a possible escape route in advance. This is the mirror image of the California logic, in which the identity of the settlor is not the decisive factor at all.

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Anti-Fragmentation and Transparency: Position 115/2025 and Amendment 272

Alongside position 114, position 115/2025 blocks fragmentation among trusts. Under it, all trusts created by the same Israeli resident, for different or identical beneficiaries, are treated as related to one another within the meaning of the term relative in section 88 of the Ordinance. One practical consequence is that, in testing whether the settlor is a material shareholder in a body of persons, the holdings of all the trusts the settlor created must be aggregated. This prevents spreading holdings across several trusts in order to fall below a threshold.

A broader transparency drive runs in the background. Amendment 272 to the Ordinance, enacted in April 2024, abolished the reporting exemption that had been available to new immigrants and returning residents for their income from outside Israel, imposed additional reporting duties concerning trusts and controlling persons, and allowed information to be used for exchange with foreign tax authorities. As a result, Israel passed the OECD Global Forum review and avoided inclusion on the European Union blacklist. The Form 150 circular adds a further reporting layer regarding holdings in foreign bodies of persons.
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One Person, Two Systems: What to Do in Practice

Now back to the returning Israeli with the American trust. On the California side, the planning room exists but has narrowed. It is possible to influence the taxation through the identity of the trustees, the definition of beneficiaries as contingent, and the timing of distributions, but the ING route is closed, and a genuine change of residence is usually the condition for real savings. On the Israeli side, the very return to Israel may pull the trust into the Israeli-residents' regime, with no easy way around it, and accompanied by full reporting duties.

It follows that the real work is not choosing between the systems, but coordinating them. The change of residence must be timed with a simultaneous eye on the Israeli trigger and on the California exit. Reporting duties on both sides must be mapped, including dedicated forms. And attention must be paid to structural mismatches, for example where a trust is classified differently for federal, California, and Israeli purposes, which can produce double taxation or a missing credit. This is precisely the field in which cross-border advice, familiar with both systems in depth, prevents costly mistakes.
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Summary

California trust tax planning rests on a single principle: the state looks at the trustee and the beneficiary, not the settlor. From this flows a planning space of trustee residence, contingent beneficiary definitions, and the timing of distributions, a space that narrowed when ING trusts were shut down in 2023. Israel presents the opposite mirror. Chapter Fourth 2 asks who the settlor is and who the beneficiaries are, and positions 114 and 115 of 2025, together with Amendment 272 of 2024, narrow planning and expand reporting, especially for new immigrants and returning residents. For someone returning to Israel with an American trust, the conclusion is not to pick a side but to coordinate the two, with advice that knows both systems. This is exactly the point at which international depth separates clean planning from double taxation and surprises.
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Frequently Asked Questions

On what basis does California tax a trust, and how is that different from Israel? California looks at the residence of the trustee and of the non-contingent beneficiary, not the settlor. Israel, under Chapter Fourth 2, looks mainly at the Israeli residence of the settlor and the beneficiaries. So planning built on the trustee's residence, effective in California, is not necessarily effective in Israel.

What happened to ING trusts? In 2023 California shut down the route, and the income is attributed to the resident settlor as if the trust were a grantor trust, other than a narrow charitable exception.

What does this mean for a new immigrant or returning resident with a foreign trust? Under position 114/2025, the settlor's becoming an Israeli resident may pull the trust into the Israeli-residents' regime, with no easy way around it, and since Amendment 272 full reporting duties apply.
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Holding a Foreign Trust, or Returning to Israel With an Existing Structure?

Are you planning a trust connected to California or another American state, and want to do it right on both sides of the ocean Are you immigrating or returning to Israel with an existing foreign trust, and concerned about double taxation or reporting duties?

KLF Law specializes in international taxation, trust taxation, and tax litigation. We examine the trust structure on both sides, map the reporting duties and the points of friction, and make sure you pay only the tax you truly owe.
For an initial consultation: Royk@klf.co.il
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Sources and Further Reading

California law

• Cal. Rev. & Tax. Code section 17742: taxation of a trust based on the residence of the trustee and the non-contingent beneficiary, regardless of the settlor's residence.
• Cal. Rev. & Tax. Code sections 17743-17744: proportional attribution of income by resident trustees and beneficiaries.
• Cal. Rev. & Tax. Code section 17745: the throwback tax on income accumulated and distributed to a California resident beneficiary.
• Cal. Rev. & Tax. Code section 17082 (added by SB 131, 2023): attribution of ING trust income to a California resident settlor.
• Paula Trust (Steuer v. Franchise Tax Board), California Court of Appeal, 2020: on the contingent beneficiary.
• North Carolina Dept. of Revenue v. Kaestner 1992 Family Trust, U.S. Supreme Court, 2019: constitutional limits on taxation based on beneficiary residence alone.

Israeli law

• Income Tax Ordinance, Chapter Fourth 2 (taxation of trusts), and in particular section 75Z.
• Reportable Tax Position 114/2025: section 75Z(e) and a relatives' trust that became an Israeli-residents' trust.
• Reportable Tax Position 115/2025: aggregation of a settlor's trusts as a relative under section 88.
• Amendment 272 to the Income Tax Ordinance (April 2024): abolition of the reporting exemption for new immigrants and returning residents, and expanded trust reporting.
• Israel Tax Authority announcement on the OECD Global Forum review (July 2024).
• Income Tax Circular 4/2026: declaration of holdings in a foreign body of persons, Form 150.

Further reading Reefe & Nenno, "Managing California Income Taxes With Trusts," Tax Notes.

Nothing in this article constitutes legal or tax advice, and every case requires individual analysis under both systems.

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