A California trustee paying a nonresident beneficiary must withhold 7% of the California-source portion of the distribution once annual payments to that beneficiary cross $1,500, remit the withheld amounts to the Franchise Tax Board (FTB) quarterly, and report them on year-end returns. California withholding on trust distributions is a trustee-level obligation under Revenue and Taxation Code Section 18662, and the trustee is personally liable if it is not done correctly.1California Legislative Information. California Revenue and Taxation Code 18662 Three questions decide what you owe: is the beneficiary a nonresident, is the income sourced to California, and do you have the paperwork that would reduce or eliminate the withholding?
When the Obligation Kicks In
Section 18662 reaches anyone who controls or pays out certain income to a nonresident, and the statute explicitly includes fiduciaries. For withholding purposes a trust is treated as a pass-through entity.2Franchise Tax Board. 2024 Instructions for Form 592-PTE Two conditions have to be met before you withhold:
- The beneficiary is a nonresident. For an individual, that means someone who does not reside in California. For a business entity beneficiary, it means the entity has no permanent place of business in California and is not registered with the Secretary of State.
- California-source payments to that beneficiary exceed $1,500 in the calendar year. There is no catch-up on the earlier payments, but every payment after the threshold is subject to withholding.3Franchise Tax Board. FTB Publication 1017 – Resident and Nonresident Withholding Guidelines
The $1,500 threshold is tracked per beneficiary, so one nonresident beneficiary may cross it while another does not. Distributions of trust principal or corpus are not taxable income and are not subject to withholding. Income on which the trust already paid California tax generally does not get withheld on a second time when distributed.
What Counts as California-Source Income
Only the California-source portion of a distribution is subject to withholding. The statute covers interest, dividends, rents, prizes, annuities, compensation for services, partnership income, and other recurring gains or profits.1California Legislative Information. California Revenue and Taxation Code 18662 In practical trust administration, the recurring California-source items are rents from in-state real property, income from a business operated in California, and gain from the sale of California real estate. Interest and dividends from a California bank or corporation are generally sourced to the recipient’s state of residence, so distributing those to a nonresident typically does not trigger withholding.
If the trust holds a mix of California and out-of-state assets, you have to allocate each distribution and withhold only on the California piece. Nonresident beneficiaries are taxed only on their California-source income, and your allocation determines what the beneficiary ends up owing and what you have to send in.
The Rates
Standard Distribution: 7%
The default rate is 7% of the California-source income distributed to the nonresident beneficiary once the $1,500 threshold has been met.4Franchise Tax Board. Form 589 – Nonresident Reduced Withholding Request
Sale of California Real Estate: 3⅓%
When the trust sells California real property, the buyer or escrow agent withholds 3⅓% (0.0333) of the total sales price rather than the gain. The seller can elect an alternative calculation based on the estimated gain, which may produce a smaller withholding.5Franchise Tax Board. FTB Publication 1016 – Real Estate Withholding Guidelines No real estate withholding is required when the sales price is $100,000 or less.
Backup Withholding: 7%
If a beneficiary fails to give you a valid Taxpayer Identification Number, provides an incorrect one, or will not certify that they are not subject to backup withholding, you must apply backup withholding at 7%.6Franchise Tax Board. Backup Withholding Backup withholding is harsher than standard withholding: it ignores the $1,500 threshold, replaces other withholding categories, and cannot be waived or reduced.
How a Beneficiary Can Avoid or Reduce Withholding
Your protection as trustee is paperwork, and it has to be in hand before you pay. A form received after the distribution does not relieve the obligation that attached when you cut the check.
Form 590: Exemption Certificate
A beneficiary who qualifies for an exemption completes FTB Form 590 and gives it to you.7Franchise Tax Board. 2025 Instructions for Form 590 Withholding Exemption Certificate The common qualifying statuses are:
- A California resident individual, who agrees to notify you if that changes.
- A California trust with at least one California-resident trustee and one California-resident noncontingent beneficiary.
- A business entity with a permanent place of business in California or that is registered with the Secretary of State.
- An entity tax-exempt under California Revenue and Taxation Code Section 23701.
- An insurance company, IRA, or qualified pension plan.
Form 590 stays valid until the beneficiary’s status changes. Keep a copy for at least five years after the last payment it covers, and produce it on request from the FTB.
Form 588: Full Waiver
If no Form 590 category fits but the beneficiary expects little or no California tax, either the beneficiary or the trustee can file Form 588 asking the FTB to waive withholding. The FTB generally responds within 21 business days, so build that lead time into any distribution schedule.8Franchise Tax Board. 2025 Instructions for Form 588 Nonresident Withholding Waiver Request Form 588 is not available to foreign (non-U.S.) partners or members, sellers of California real estate, or payments subject to backup withholding.
Form 589: Reduced Rate
Form 589 asks the FTB to approve a reduced withholding amount, usually by itemizing expenses against the California-source income to show a lower net taxable figure. The beneficiary files it electronically; the FTB sends both of you a letter stating the approved amount. Processing takes roughly 10 business days.4Franchise Tax Board. Form 589 – Nonresident Reduced Withholding Request
Without a valid Form 590, an approved Form 588, or an approved Form 589 in your file before the distribution goes out, you are on the hook for the full 7% regardless of what the beneficiary actually owes California.
Remitting and Reporting the Withholding
Quarterly Payments on Form 592-Q
You send the withheld money to the FTB each quarter with Form 592-Q.9Franchise Tax Board. Pass-Through Entity Withholding The due dates follow the federal estimated-tax calendar:
- January 1 through March 31: due April 15
- April 1 through May 31: due June 15
- June 1 through August 31: due September 15
- September 1 through December 31: due January 15 of the following year
Late quarterly payments draw penalties and interest. The FTB’s underpayment interest rate for the period from July 2025 through June 2026 is 7%.10Franchise Tax Board. Interest and Estimate Penalty Rates
Annual Return on Form 592-PTE
After year-end you file Form 592-PTE, which summarizes total California income, total withholding, and allocates the withholding credit to each beneficiary. It is due no later than January 31 of the following year.9Franchise Tax Board. Pass-Through Entity Withholding
Beneficiary Statement on Form 592-B
Each beneficiary gets a Form 592-B from you by January 31 of the year following the withholding, showing the amount subject to withholding and the tax remitted on their behalf.11California Franchise Tax Board. 2026 Instructions for Form 592-B Resident and Nonresident Withholding Tax Statement Without it, the beneficiary cannot cleanly claim the credit on their California return, which tends to produce the kind of phone calls no trustee enjoys.
Passing Through Credits From Lower-Tier Entities
If the trust holds an interest in a California partnership, LLC, or S corporation, that entity may already have withheld California tax on the trust’s share. When you then distribute to your own beneficiaries, you need to push those credits through on Form 592-PTE so the beneficiaries can claim them. The FTB requires this allocation whether the beneficiary is a California resident or a nonresident.9Franchise Tax Board. Pass-Through Entity Withholding Skip the allocation and the credits sit stranded at the trust level, and the beneficiaries effectively pay California tax twice on the same income.
Trustee Personal Liability
A trustee who fails to withhold or fails to remit withheld amounts is personally liable for the tax that should have been withheld, plus the penalties set out in Revenue and Taxation Code Section 18668.1California Legislative Information. California Revenue and Taxation Code 18662 Once the money is in a beneficiary’s hands in another state, the FTB’s practical collection target is the trustee who was supposed to hold it back. Interest accrues at the current 7% underpayment rate.10Franchise Tax Board. Interest and Estimate Penalty Rates Separate penalties apply for late information returns and for failing to furnish correct Forms 592-B.
The habit that keeps trustees out of trouble is straightforward. Before any distribution to a nonresident beneficiary, confirm whether California-source income is in the mix, confirm whether the $1,500 threshold has been crossed, and confirm whether a current Form 590, an approved Form 588, or an approved Form 589 covers the payment. If none of those apply, withhold the 7%, send it in with the next 592-Q, and reconcile on the 592-PTE and 592-B in January. Done in that order, the paperwork protects you.