Discussion:Trust: State Level Taxation

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Discussion Forum Index --> Basic Tax Questions --> Trust: State Level Taxation


Discussion Forum Index --> Tax Questions --> Trust: State Level Taxation

Bktenney (talk|edits) said:

13 November 2008

My Client's Parents set up an A-B Trust years ago. Mom passed away in 1998 and 1/2 of the assets went into her trust, and were used to buy California Muni Bonds. The entire family has now moved out of California to various places around the country, including dad, who just moved in 2008. Trust was set up in California. Which state gets the 1041 equivalent now?

My client's questions is: Should we sell the CA muni bonds and buy bonds in the state where we now reside to avoid paying state tax?

Riley2 (talk|edits) said:

13 November 2008
Where does the trustee live?

Blrgcpa (talk|edits) said:

13 November 2008
Yes.

KatieJ (talk|edits) said:

13 November 2008
It all depends on the answer to Riley's question, plus the states where the beneficiaries now reside.

States generally tax trusts in the same way they tax individuals. A resident trust is taxable on all of its income, regardless of source, whereas a trust that is not a resident is taxable only on income with a source in that state. States' definitions of a "resident" trust vary widely, and you really have to look at each individual state to determine where the trust is required to file returns.

In California, a trust is taxed on all of its income if either the fiduciary or the (noncontingent) beneficiary is a California resident. So even if all of the beneficiaries have become nonresidents of California, if the fiduciary is a California resident, the trust is still taxable on all of its income and must file a return. (Of course there is no tax if the corpus is all invested in California munis.)

The states where the beneficiaries now reside may define a resident trust differently. There is no way to answer your question without knowing where the fiduciary (or fiduciaries) and the beneficiaries are residents.

Bktenney (talk|edits) said:

14 November 2008
Thanks for the valuable info. One beneficiary is in Idaho, the other is in Utah. Trustee is in Idaho. So, similar to how I handle Individuals who move during the year, I will do a multi-state trust return for 2008, and "bifurcate" the income (hooray, i got to use that word), based upon move date. does that sound right?

Foolmeonce (talk|edits) said:

14 November 2008
You should probably carefully examine the laws of each state involved, and confirm with the Trust's attorney. I have a Testamentary trust of individual who died while a New York state resident. Income beneficiary and one co-trustee (of 3), the surviving spouse, lived in New York for many years post death and trust filed New York state tax returns and paid tax on any income not distributed and on all capital gains. Other 2 co-trustees lived in SC and FL. Residuary beneficiaries lived in NY and CT. All income from intangibles - interest, dividends and capital gains.

Trustee/income beneficiary moved to CT a couple years ago, so I had to research this. Trust was, and always will be a NY resident trust - this can never change. New York will not tax the trust (and no filing is required)if:

(1) all the trustees are domiciled in a state other than New York State; (2) the entire corpus of the trust, including real and tangible property is located outside of New York State; and (3) all income and gains of the trust are derived or connected from sources outside of New York State, determined as if the trust were a nonresident.

...The situs of intangible assets of a trust are deemed to be at the domicile of the trustee.

See TSB-A-94(7)I

For CT, the trust is always a non-resident trust. See Conn. Agencies Regs. § 12-701(a)(6)-1(d).

For CT income tax purposes, filing requirements and taxation of the non-resident trust is determined acccording to the rules for non-resident:

Conn. Agencies Regs. § 12-713(a)-4. Items derived from or connected with Connecticut sources of a nonresident trust or estate. (a) The source of items of income, gain, loss and deduction of a nonresident trust or estate is determined in accordance with the applicable regulations of Part II as in the case of a nonresident individual. Thus, an item of income, gain, loss or deduction, including any item comprising income in respect of a decedent, is considered derived from or connected with Connecticut sources when the item is attributable to (1) the ownership by the trust or estate of any interest in real or tangible personal property in Connecticut; (2) a business, trade, profession or occupation carried on in Connecticut by the trust or estate; or (3) the ownership of shares in an S corporation by the trust or estate, to the extent determined under §12-712(a)(2)-1 of Part VII.

Connecticut Regulation, Reg. Sec. 12-711(b)-5. Income from intangible personal property.-- (a) Items of income, gain, loss and deduction derived from or connected with Connecticut sources do not include such items attributable to intangible personal property of a nonresident individual, including annuities, dividends, interest, and gains and losses from the disposition of intangible personal property, except to the extent attributable to property employed in a business, trade, profession or occupation carried on in Connecticut.

So, this particular trust files no state tax return and pays no state income tax. I forwarded my research to the attorney and discussed it with him. He agreed with me, and was as surprised as I was.

It seems illogical, but that is the result here.

Other state trustees: FL - no income tax, no problem. SC research showed no problem, I don't recall specifics, but I believe similar to CT.

Same year, my partner had similar issue with several testamentary trusts in NJ. The NJ resident co-trustee passed away, no beneficiaries or trustees left in NJ. Co-trustees and beneficiaries in NY and PA. Same result, no state taxation anywhere, attorney agreed. NJ does require a statement to be filed each year (no form available) as to why the resident trust is not required to file a tax return.

There is an excellent article on this subject here:

http://www.fulbright.com/images/publications/NYSitus.pdf

[My thanks to the authors at Fulbright & Jaworsky]

Sorry for the length of this, but it was easier to cut/paste from my research that to try and explain.

I hope this helps, as this is one of those thing that if missed, can be a costly malpractice issue down the road.

Riley2 (talk|edits) said:

15 November 2008
In this case, Idaho wants a return since the fiduciary is located in Idaho. Ohio wants a return unless the trust was set up through a will.

KatieJ (talk|edits) said:

15 November 2008
I'm not sure how Riley got Ohio into this, but maybe there is information in another thread that I haven't seen. Anyway, Utah would require a trust return if the property was transferred to the trust by the will of a decedent who was domicilied in Utah at the date of death, or if the trust is administered in Utah. The residence of the beneficiary doesn't signify there.

Any income that is distributable to the beneficiaries is going to be taxable income to them. Since neither of them is a California resident any longer, it may be a good idea to sell the California munis and buy bonds that would be tax exempt in their states of residence.

Kevinh5 (talk|edits) said:

22 July 2010
link to New York TSB cited by Foolmeonce: TSB-94-7i

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