SB 376 revises California personal income tax treatment for trusts created when a transferor makes an 'incomplete gift' to a nongrantor trust. As a default rule, the bill requires a qualified taxpayer (the grantor) to include trust income in their California gross income to the extent the income would be taken into account if the trust were treated entirely as a grantor trust under California law.
The rule applies retroactively to taxable years beginning on or after January 1, 2023.
The bill creates a narrow exception: a trust can avoid inclusion in the grantor's California gross income if the fiduciary timely files an original California Fiduciary Income Tax Return and irrevocably elects to be taxed as a resident nongrantor trust, the trust is in fact a nongrantor trust, and at least 90% of distributable net income (DNI) is distributed or treated as distributed to a 501(c)(3) charity. The Franchise Tax Board may issue regulations and other guidance to implement the rule and those materials are exempt from the state Administrative Procedure Act's notice-and-comment requirements.
At a Glance
What It Does
The bill makes a transferor of an 'incomplete gift nongrantor trust' includible in California taxable income for trust income as if the trust were a grantor trust, except where the fiduciary files an original California fiduciary return, makes an irrevocable election to be taxed as a resident nongrantor trust, and 90% or more of the trust's DNI goes to a 501(c)(3). It excludes charitable remainder trusts under IRC §664.
Who It Affects
Private wealth clients who funded nongrantor trusts with transfers treated as incomplete gifts, their fiduciaries and trustees, estate planners and tax counsel advising on trust design, California 501(c)(3) charities that might receive large distributions, and the Franchise Tax Board (FTB).
Why It Matters
The bill closes a state tax mismatch that let some transferors avoid California tax on trust income while reaping estate-planning benefits. It forces concrete administrative choices (an irrevocable election on the original fiduciary return) and creates a narrow charitable pathway — and it gives the FTB expedited authority to provide binding implementation rules without formal APA rulemaking.
More articles like this one.
A weekly email with all the latest developments on this topic.
What This Bill Actually Does
SB 376 targets a specific planning posture: when a taxpayer transfers assets into a nongrantor trust but the transfer is an 'incomplete gift' under federal tax law. Under the bill's default rule, the income produced by that trust will be taxed to the transferor on their California return to the extent the income would be included if the trust were treated as a grantor trust under California's Chapter 9 trust rules.
That means California can depart from a purely federal trust characterization and reach income the transferor effectively retains economic benefit from.
The bill does not leave one outcome in stone. It builds a compliance path: the trust's fiduciary can avoid causing the grantor to include the trust income by filing an original California Fiduciary Income Tax Return and making an irrevocable election on that return for the trust to be taxed as a resident nongrantor trust.
That election must be made in the form and manner the Franchise Tax Board prescribes; once made it is irrevocable and shifts California tax liability onto the trust rather than the grantor (provided the trust otherwise qualifies as a nongrantor trust).There is a substantive carve-out tied to philanthropy. Even with the election route, the trust only escapes grantor-inclusion if 90% or more of its distributable net income — calculated under California Chapter 9 rules — is distributed or treated as distributed to a charitable organization within the meaning of IRC §501(c)(3).
The bill explicitly excludes charitable remainder trusts under IRC §664 from the definition of 'incomplete gift nongrantor trust.'Finally, the bill gives the Franchise Tax Board broad implementation authority: the FTB may adopt any regulations necessary and may issue rules, guidelines, or other guidance to carry out the section; those materials are exempt from the Government Code's standard Administrative Procedure Act process (Chapter 3.5). The statute is written to apply to taxable years beginning on or after January 1, 2023, so it operates retroactively to earlier filings and tax years.
The Five Things You Need to Know
Effective for taxable years beginning Jan. 1, 2023, SB 376 directs California to include income from an 'incomplete gift nongrantor trust' in the transferor's gross income to the extent it would be treated as grantor trust income under Cal. §17731.
A fiduciary can avoid grantor inclusion only by timely filing an original California Fiduciary Income Tax Return and making an irrevocable election on that return to be taxed as a resident nongrantor trust.
To qualify for the non-inclusion exception, at least 90% of the trust's distributable net income (DNI) must be distributed or treated as distributed to a §501(c)(3) charitable organization.
The bill excludes trusts (or trust portions) that qualify as charitable remainder trusts under IRC §664 from the 'incomplete gift nongrantor trust' definition.
The Franchise Tax Board may issue regulations and other guidance to implement the law, and that guidance is exempt from the state Administrative Procedure Act (Gov. Code §11340 et seq.).
Section-by-Section Breakdown
Every bill we cover gets an analysis of its key sections.
Default rule: include trust income in grantor's California gross income
This subsection is the statute's core: it instructs that the income of an 'incomplete gift nongrantor trust' be included in a qualified taxpayer's California gross income to the degree the income would be taken into account if the trust were treated as a grantor trust under Section 17731. Practically, California uses its own grantor-trust framework to pull trust income up to the transferor, closing a gap where federal characterization or economic reality had prevented state-level inclusion.
Distribution rules remain governed by existing Section 17745
SB 376 makes clear that existing state rules governing distributions from trusts (Section 17745) continue to apply to distributions from incomplete gift nongrantor trusts. That preserves California's current mechanics for computing distributable net income and how distributions flow through to beneficiaries for tax purposes, preventing an otherwise novel computation method for these trusts.
Narrow exception: irrevocable election to be taxed as resident nongrantor trust plus 90% charitable DNI test
This subsection creates the statutory exception to the default inclusion rule. To use it, the trust fiduciary must timely file an original California Fiduciary Income Tax Return and make an irrevocable election on that return to be taxed as a resident nongrantor trust under Chapter 9. The trust itself must be a nongrantor trust under California law and must distribute — or be treated as distributing under specified code sections — at least 90% of its DNI to a §501(c)(3) charity. The practical effect is a narrow charitable pathway that moves tax liability off the grantor only if the trust commits almost all its income to charity and follows a strict procedural election.
Definitions and exclusions: what counts as an 'incomplete gift nongrantor trust' and who is a 'qualified taxpayer'
This subdivision defines key terms. An 'incomplete gift nongrantor trust' is one that is not a grantor trust under federal grantor-trust rules (Subpart E of Subchapter J) and whose transfer is an 'incomplete gift' under IRC §2511. The bill excludes charitable remainder trusts under IRC §664 from that label. 'Qualified taxpayer' is the transferor (grantor), and a 'resident nongrantor trust' is defined by the state rule that ties the trust's full taxable income to residency of the fiduciary or beneficiary under Section 17742. These definitions anchor the statute to both federal characterization (for the 'incomplete gift' concept) and California's Chapter 9 trust-tax framework.
FTB rulemaking and guidance with APA exemption
Subdivision (e) authorizes the Franchise Tax Board to issue regulations, rules, guidelines, procedures, or other guidance necessary to implement the section and explicitly exempts any such guidance from the procedural requirements of California's Administrative Procedure Act (Chapter 3.5, Gov. Code §11340 et seq.). That accelerates the FTB's ability to provide binding implementation materials but reduces formal notice-and-comment and judicial review channels associated with conventional rulemaking.
This bill is one of many.
Codify tracks hundreds of bills on Finance across all five countries.
Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- California General Fund — The default rule allows the state to tax income that previously might have escaped California taxation, increasing state revenues from wealthy transferors who used incomplete-gift trusts.
- 501(c)(3) charities — The statute incentivizes large, near-complete income distributions to charities (the 90% DNI threshold), which could increase charitable receipts from affected trusts.
- Franchise Tax Board (FTB) — The FTB gains broad, expedited authority to prescribe implementation rules and guidance, allowing faster operational response and uniform enforcement.
- Trusts and fiduciaries choosing the charitable pathway — Trusts that want to shift tax liability off the grantor while delivering most income to charity gain a clear statutory route, provided they comply with the election and DNI distribution tests.
Who Bears the Cost
- Grantors of incomplete gift nongrantor trusts — Under the default rule, these transferors may have to include trust income on their California returns, increasing personal tax liability and altering tax forecasts for estate plans.
- Fiduciaries and trustees — The statute imposes procedural obligations (timely filing the original fiduciary return and making an irrevocable election) and new compliance tasks to monitor DNI distributions and meet the 90% test, increasing administrative costs and malpractice risk for trustees.
- Estate planners and tax advisers — Advisers must revisit planning strategies, rework trust documents, and advise clients about retroactive exposure, creating advisory workload and potential liability for prior planning that did not anticipate the state rule.
- Smaller charities and intermediate service organizations — They may face pressure to accept or manage large, concentrated income flows or donor-directed trust distributions, which can create operational and fiduciary challenges.
Key Issues
The Core Tension
The bill balances two legitimate objectives — preventing state-tax avoidance by transferors who retain economic benefit while preserving an elective, charitable pathway — but the balance comes at the cost of retroactivity, procedural traps, and concentrated administrative authority: it remedies a perceived revenue gap but risks disrupting settled estate plans and shifting discretion to the FTB without traditional notice-and-comment safeguards.
SB 376 creates several implementation and interpretive pressure points. First, the statute links state treatment to federal concepts (an 'incomplete gift' under IRC §2511 and the federal grantor-trust rules) while simultaneously instructing California to include income as if the trust were a grantor trust under California §17731.
That cross-reference invites disputes about characterization: whether a transfer is an 'incomplete gift' and whether specific trust powers or provisions create grantor status under federal or California rules. Expect litigation or lengthy audits around trust-form provisions and valuation of retained rights.
Second, the exception depends on a narrow, procedural path — an irrevocable election made on an original California fiduciary return — and a bright-line 90% DNI test measured under California rules. Those requirements create traps: a missed or late original return, a defective election form, or differences between federal and California DNI computations could deny the exception and produce retroactive tax exposure back to 2023.
The statute's retroactivity raises practical fairness and compliance concerns, especially where taxpayers relied on prior understandings of trust tax treatment.
Finally, the FTB's ability to issue guidance and rules outside the state's usual APA process shortens the calendar for implementing regulations but reduces formal public scrutiny. Rapid guidance may be necessary to operationalize the law, but it also concentrates interpretive power in the agency and may invite challenges on administrative-law or constitutional grounds.
The combination of substantive complexity, procedural traps, and expedited guidance authority makes predictable compliance difficult without early, clear FTB guidance.
Try it yourself.
Ask a question in plain English, or pick a topic below. Results in seconds.