The FTB issues its own equivalent of IRS Revenue Rulings, known as Legal Rulings. Unlike Revenue Rulings, Legal Rulings are rare, with only four Legal Rulings since 2022, including the latest one issued on July 7, 2026, Legal Ruling 2026-01.
A trust is taxable by the FTB if it has a resident fiduciary, California-source income, or a resident noncontingent beneficiary. Legal Ruling 2026-01 discusses when a resident is a contingent beneficiary. The regulations provide that “[a] noncontingent beneficiary is one whose interest is not subject to a condition precedent.”[1] The regulations do not define “condition precedent” for these purposes, but the FTB supplied a definition derived from the Bouvier Law Dictionary: “An event or condition that must occur before the ripening of an interest, right, or claim. If the event or condition does not occur, the interest does not vest.” In turn, the FTC defines “vested” from the same dictionary as: “Having become an unconditional and immediate interest or right.”
It would appear that a beneficiary with an interest of less than an unconditional and immediate right to trust income or corpus is a contingent beneficiary. Yet the Legal Ruling attempted to counter that conclusion, asserting that complete trustee discretion results in a contingency and that “[i]n each case, the trust document should be reviewed to determine any limitations on the trustee’s discretion to accumulate income rather than to distribute it to the beneficiary.” This comment was spurred by the Supreme Court’s 2019 narrow ruling in N.C. Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust that “the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.” The three situations reviewed in this Legal Ruling all had a trustee with complete discretion. Consequently, the result was the same regardless of whether there was a potential right to either income or corpus. The contingent beneficiary becomes a noncontingent beneficiary, and therefore taxed, only on the amount actually distributed to them and not on the undistributed trust income or corpus.
Legal Ruling 2026-01’s conclusions seem unremarkable in a comparatively settled area of tax law. Both its point that “[w]here a trustee has absolute discretion to allocate net trust income to the beneficiary, the beneficiary has a contingent interest in the distribution,” and its emphasis on the trustee’s limitations are directly from a prior case, Steuer v. Franchise Tax Board.[2] Legal Ruling 2026-01 is substantially similar, if not fully the same, as TAM 2006-0002, which Steuer drew upon in its opinion. The purpose of Legal Ruling 2026-01 appears to be to restate TAM 2006-002 as a Legal Ruling, because a Superior Court accused the FTB of generating “underground” regulations through Technical Advice Memorandums (TAMs).[3] Seemingly in response, the FTB omitted all TAMs from public view on its website.
Regardless of the reasons for Legal Ruling 2026-01’s issuance, the FTB’s ready reliance on secondary sources for definitions in its analysis undermined the ruling’s implicit message. Instead of a contingent beneficiary primarily occurring only when the trustee has unfettered discretion (which was not explicitly stated), the FTB seemingly and unwittingly provided the premises for the syllogism that a beneficiary is a contingent one whenever the beneficiary lacks limits. Legal Ruling 2026-01 instructs the reader to examine the trustee’s powers when the definitions it endorsed shift the analysis from the trustee’s limits to the beneficiary’s limits. A beneficiary is noncontingent because they have an absolute right to receive the distribution, not because the trustee has absolute power to make the distribution.
[1][1] 18 CCR § 17742(b).
[2] “[W]e review the trust document to determine whether there are any limitations on a trustee’s discretion to distribute income to a beneficiary.” Steuer v. Franchise Tax Bd., 51 Cal. App. 5th 417, 431-32 (2020).
[3] American Catalog Mailers Association v. Franchise Tax Board, San Francisco Superior Court No. CGC-22-601363 (2023).