This week, the Federal Estates, Gifts, and Trusts group has released a new portfolio, Portfolio 869-1st: State Income Taxation of Trusts.   The portfolio is written by one of the foremost experts in the field, Richard W. Nenno.  Mr. Nenno has written extensively on the subject and is one of the leading speakers in the area.  In conjunction with the release of Portfolio 869, the Bloomberg BNA State Tax Group is unveiling its new State Tax Trust Nexus Evaluator, which provides subscribers with easy-to-use charts detailing how states are currently taxing the income of trusts at the state level.

The varying patchwork of state standards for taxing trust income can result in unexpected liabilities for the unwary, a new special report by Bloomberg BNA finds.

Some factors that the states use to justify the imposition of income tax can extend beyond events that could have been contemplated when the trust was created. For example, a trust could become subject to tax in some jurisdictions as the sole result of having a beneficiary move there.

"One problem for those administering trusts is that trustees and beneficiaries have become highly mobile," Christine Albright a partner with Holland & Knight in Chicago told Bloomberg BNA. "Is the fiduciary of the trust asking if a trustee or beneficiary has moved during the year? In an ideal world, this conversation would be taking place before a trustee or beneficiary has moved," she said.

It is important for the trustee to be involved with the planning process, implementing the trust, and performing due diligence once the trust has been established, Richard W. Nenno told Bloomberg BNA. During each phase, the trustee should ensure that the attorney is considering where the trust might be subject to tax and whether it is possible to legally avoid tax in certain jurisdictions, Nenno said. "With planning, you can save a lot of money," he said.

Some attributes of a trust that could affect a state's imposition of tax are more controllable than others, Aen Walker Webster with Buchanan Ingersoll & Rooney LLP in Washington D.C. told Bloomberg BNA. Characteristics of a trust such as the trust's governing law, the state where it is administered, and the location of the trustee can be changed at any point after the trust's inception, some more easily than others, she said. But changing other characteristics of the trust could be more difficult, depending on the circumstances. This would include the location of a trust's fixed assets, source of trust income, or residence of a beneficiary.

For a complete and comprehensive look at the various factors that each state considers when determining whether to tax a trust, check out the 2013 Trust Nexus Survey, found in this week's issue of the WSTR.