Legislative History of Cal. Rev. & Tax Code Section 17082:
In 2020 the Franchise Tax Board ("FTB") released a legislative proposal, which recommended treating INGs as grantor trusts for state income tax purposes. The FTB’s proposal suggested that the change in the law could result in an additional $17-23M in annual revenue for California. The FTB’s proposed legislation was modeled after New York’s anti-ING law (New York Tax Law Section 612(b)(41)), which took effect in 2014 and resulted in New York treating INGs as Grantor Trust’s for state income tax purposes.
On January 10, 2023, Governor Newsom indicated that California was intending to go after ING income in the proposed 2023-2024 Governor’s Budget for California. Shortly thereafter, on January 18, 2023, S.B. 131 was introduced. On June 26, 2023, an amended version of S.B. 131 was released, which included the proposed language of California Revenue & Taxation Code Section 17082. S.B. 131 was signed into law by Gov. Newsom on July 10, 2023.
California Revenue & Taxation Code Section 17082:
Under the newly enacted Cal. Rev. & Tax. Code Section 17082, for taxable years beginning on or after January 1, 2023, income from an ING will be included in the Grantor’s gross income, as if the ING was a Grantor Trust. For a California-resident Grantor, all of the ING’s income, regardless of whether it is California-source, will be included in the Grantor’s California income tax return and will be subject to California income tax.
The language of Section 17082 is not exclusive to California-resident Grantors. If a non-resident of California is a Grantor as to California-source income producing property to an ING, Section 17082 appears to require that non-resident Grantor to individually file a California income tax return and pay California income taxes on that California-source income. There may be constitutional concerns relating to this that are still to be evaluated.
There is a limited exception to Section 17082, which requires, in part, that the ING file a California Fiduciary Income Tax Return and make an irrevocable election to be taxed as a resident non-grantor trust, and that 90 percent or more of the DNI of the ING is distributed (or treated as distributed) to a charitable organization. If an ING can meet this exception, then the ING will not be treated as a Grantor Trust for California income tax purposes.
California’s new law does not impact the federal income tax treatment of INGs. Federally, an ING’s income will still be reported on the ING’s Federal Income Tax Return, to the extent that the income is not DNI that was actually distributed to a beneficiary during the tax year. A Grantor of an ING will not report the ING’s income on their Federal Income Tax Return.
Conclusion
Grantors of INGs should evaluate whether their California income tax obligations are impacted as a result of the enactment of Cal. Rev. & Tax. Code Section 17082. A California-resident who is a Grantor of an ING will be required to report the ING’s income on their individual California income tax return, as if the ING was a Grantor Trust. A non-California-resident who is a Grantor of an ING should evaluate whether the ING produces any California-source income, and consider consulting with a California tax professional as to whether the Grantor is required to report that income on a California individual income tax return.