PORTFOLIO

State Income Taxation of Trusts (Portfolio 869)

Managing state income tax liability is a critical aspect of planning and administering a trust.

Price: $400 Print Only

GET MORE WITH THE FULL PORTFOLIO LIBRARY

This Portfolio is part of the Estates, Gifts & Trusts Portfolio Library, a comprehensive resource including nearly 100 estate tax Portfolios, practice tools, primary sources and timely news.

FREE TRIAL

DESCRIPTION

Managing state income tax liability is a critical aspect of planning and administering a trust. If done properly, the planner may provide substantial benefits to the beneficiaries. If done poorly, the trust may be subjected to significant cost. Tax Management Portfolio 869, State Income Taxation of Trusts, covers how all 50 states and the District of Columbia tax trust income, how tax often may be avoided, how substantial the potential tax savings are, and why a trustee might be surcharged for failing to take steps to avoid tax.
This Portfolio may be cited as Nenno, 869 T.M., State Income Taxation of Trusts.


Buy State Income Taxation of Trusts (Portfolio 869) now


AUTHORS

RICHARD W. NENNO, ESQ.
Richard W. Nenno, Esq., is a Managing Director and Trust Counsel in Wealth Advisory at Wilmington Trust Company, Wilmington, Delaware. Dick has over 35 years of estate planning experience and is admitted to the practice of law in Delaware and Pennsylvania. He is a Fellow of the American Bar Foundation, a former Commissioner of the American Bar Association Commission on Mental and Physical Disability Law, a Distinguished Accredited Estate Planner, and a Registered Trust and Estate Practitioner. Prior to joining Wilmington Trust in 1982, he was an associate in the Estates Department of the Philadelphia law firm of Ballard, Spahr, Andrews & Ingersoll.
Dick is a cum laude graduate of Princeton University with an A.B. degree from the Woodrow Wilson School of Public and International Affairs, and he earned his J.D. degree from Harvard Law School.
Dick is recognized as a national speaker and published authority on estate planning issues. He has spoken at the University of Miami Institute on Estate Planning, the ALI-ABA Planning Techniques for Large Estates Conference, the IBA/ABA International Wealth Transfer Practice Conference, the Notre Dame Tax and Estate Planning Institute, the AICPA Advanced Estate Planning Conference, the NYU Institute on Federal Taxation, the Southern California Tax and Estate Planning Forum, and the Practising Law Institute Estate Planning Institute. He is a member of the American Bar Association, Section of Real Property, Trust & Estate Law (Member of Council) and Section of Taxation; Delaware State Bar Association (Past Chair: Estates and Trusts Section); Estate Planning Council of Delaware, Inc. (Past President); Philadelphia Bar Association.
Dick is the author or co-author of “New York State and City Income Taxation of Nongrantor Trusts: Rules and Opportunities,” 37 Tax Mgmt. Est., Gifts & Tr. J. 279 (Sept. 13, 2012); “A Comparison of the Leading Trust Jurisdictions,” 37 Tax Mgmt. Est., Gifts & Tr. J. 233 (July 12, 2012); “Delaware Trusts 2012,” Asset Protection: Domestic & Int'l Law & Tactics Chap. 14A (2012); “Let My Trustees Go!: Planning to Minimize or Avoid State Income Taxes on Trusts,” 46U. Miami Inst. on Est. Plan. ¶ 1500 (2012); 867 T.M., Choosing a Domestic Jurisdiction for a Long-Term Trust (2010); 868 T.M., Domestic Asset Protection Trusts (2010); “Proposed New York Fiduciary Income Tax Changes: Let My Trustees Go!,” 35Tax Mgmt. Est., Gifts & Tr. J. 147 (May 13, 2010); “The Reinstated Delaware Estate Tax,” 34 Tax Mgmt. Est., Gifts & Tr. J. 195 (Sept. 10, 2009); “Terrors of the Deep: Tax Dangers When Exercising Powers Over Trusts — The GST Regulations and the Delaware Tax Trap,” 34 Tax Mgmt. Est., Gifts & Tr. J. 76 (Jan. 8, 2009); “Planning to Minimize or Avoid State Income Tax on Trusts,” 34 ACTEC J. 131 (Winter 2008); “The Trust From Hell: Can It Be Moved to a Celestial Jurisdiction?,” 22 Prob. & Prop. 60 (May/June 2008); “Directed Trusts: Can Directed Trustees Limit Their Liability?,” 21 Prob. & Prop. 45 (Nov./Dec. 2007); “DAPT Lite: A Practitioner-Friendly Guide to the Delaware Asset Protection Trust,” 32 Tax Mgmt. Est., Gifts & Tr. J. 227 (Sept. 13, 2007); “Choosing and Rechoosing the Jurisdiction for a Trust,” 40 U. Miami Inst. on Est. Plan. ¶ 400 (2006); “Delaware Asset Protection Trusts Should Survive Bankruptcy,” 33 Est. Plan. 31 (Jan. 2006); “Delaware Asset Protection Trusts Create Obstacles for Creditors,” 32 Est. Plan. 3 (December 2005).
This Portfolio is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. This Portfolio is for informational purposes only; it is not intended as a recommendation, offer, or solicitation with respect to the purchase or sale of any security.

TABLE OF CONTENTS

Portfolio 869-1st: State Income Taxation of Trusts

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Introduction

A. Background

B. The Opportunity

1. Introduction

2. The Stakes Are High

3. The Opportunities Are Great

4. People Are Doing It

5. The Risks of Inaction Are Real

C. How To Approach The Issue

D. Scope

II. State Approaches to Taxation of Trust Income

A. Introduction

B. Bases of Taxation

C. Trust Created by Will of Resident

D. Inter Vivos Trust Created by Resident

E. Trust Administered in State

F. Resident Trustee

G. Resident Beneficiary

III. Determining Whether Imposition of Tax Is Constitutional

A. Introduction

B. Early United States Supreme Court Cases

1. Introduction

2. Safe Deposit and Trust Co. v. Virginia — Setting Constitutional Standards for Nexus to Impose Tax on Trustee

3. Guaranty Trust Co. v. Virginia — Taxing Resident Beneficiaries Not Nonresident Trustee

4. Greenough v. Tax Assessors of Newport — Taxing Resident Trustee

C. State Court Cases Before Quill

1. Introduction

2. Mercantile-Safe Deposit and Trust Co. v. Murphy — No Income Taxation of Nonresident Inter Vivos Trust Funded During Life and by Pourover Solely Based on Domicile of Trustor and Income Beneficiary

3. McCulloch v. Franchise Tax Board — Taxation in State of Residence of Co-Trustee/Beneficiary

4. Taylor v. State Tax Commissioner — No Income Taxation of Nonresident Testamentary Trust Solely Based on Domicile of Testator

5. Pennoyer v. Taxation Div. Dir. — No Income Taxation of Nonresident Testamentary Trust Based Solely on Residence of Testator

6. Potter v. Taxation Div. Dir. — No Income Taxation of Nonresident Inter Vivos Trust Funded During Life and by Pourover Based Solely on Residence of Trustor

7. In re Swift — No Income Taxation of Nonresident Trust Created by Deceased Domiciliary Permitted

8. Blue v. Dep't of Treasury — No Income Taxation of Nonresident Trust Based Solely on Domicile of Trustor

9. Westfall v. Dir. of Revenue — Swift Permits Income Taxation of Trust Based on Residence of Testator and In-State Source of Trust Income

D. Quill Corp. v. North Dakota — Reducing Level of Contacts Required by Due Process Clause — But Leaving Commerce Clause Requirements Intact

1. The Case

2. Implications of the Case

E. Post-Quill State Court Cases

1. Introduction

2. District of Columbia v. Chase Manhattan Bank — Taxation of Nonresident Trustee Based on Residence of Testator Passes Due Process Test

a. The Case

b. Analysis of the Case

3. Chase Manhattan Bank v. Gavin — Taxation of Testamentary Trusts and Inter Vivos Trust Based on Residence of Testator/Trustor Passes Both Due Process and Commerce Clause Tests

a. The Case

b. Analysis of the Case

F. J. McIntyre Machinery, Ltd. v. Nicastro — Explaining Limits of Personal Jurisdiction

1. The Case

2. Implications of the Case

G. 2013 State Court Cases

1. Introduction

2. Residuary Trust A v. Director, Div. of Taxation — New Jersey Tax Court Holds Testamentary Trust with Trustee and Administration Outside New Jersey Not Taxable

a. The Case

b. Analysis of the Case

3. McNeil v. Commonwealth — Pennsylvania Commonwealth Court Holds that Nonresident Trustees of Trusts Created by Resident Trustor Not Taxable Notwithstanding Resident Discretionary Beneficiaries

a. The Case

b. Analysis of the Case

H. Constitutional Analysis of Taxation Based on Residence of Testator/Trustor

I. Taxation of Trust Administered in State

1. Wisconsin Dep't of Taxation v. Pabst

2. Pabst v. Wisconsin Dep't of Taxation

J. Taxation of Resident Trustee

K. Taxation of Trustee of Trust Having Resident Beneficiary

1. McCulloch v. Franchise Tax Board

2. In the Matter of the Appeal of the First National Bank of Chicago

3. In the Matter of the Appeal of C. Pardee Erdman

IV. Specific State Considerations

A. New York

1. Introduction

2. History

3. Current Rules

a. New York State

(1) General

(2) Nonresident Resident Trust Exemption

b. New York City

c. New York State and City

d. Charitable Remainder Trusts

4. Cases and Rulings

a. Introduction

b. In the Matter of Joseph Lee Rice III Family 1992 Trust — Trustee Denied Refund for Closed Years Based on Change of Residence of Trustee

c. In the Matter of the Petition of the Amauris Trust — Trusts Created at End of Grantor Retained Income Trust Term Not Resident Trusts

d. N.Y. TSB-A-04(7)I — Rules Set for Determining Residence of Corporate Trustee and for Evaluating Role of Advisor, Committee, Etc.

e. N.Y. TSB-A-03(6)I — Rules Set for Powers of Appointment

f. Cases and Rulings Recognizing Nonresident Resident Trust Exemption

(1) N.Y. TSB-A-94(7)I — Resident Trust Not Taxable Once Trustee Became Nonresident

(2) N.Y. TSB-A-96(4)I — Resident Trust Not Taxed on Capital Gain

(3) N.Y. TSB-A-00(2)I — Resident Trust Not Taxable Even Though It Held Interest in LLC Managed by New York City Resident

(4) N.Y. TSB-A-04(7)I — Resident Trust Not Taxable If Corporate Trustee and Committee Members Are Not Residents

(5) In the Matter of the Petition of the John Heffer Trust — Resident Trust Not Taxable Once Resident Trustee Resigned in Accordance With Governing Instrument

(6) In the Matter of Joseph Lee Rice III Family 1992 Trust — Resident Trust Not Taxable Once Trustee Became Nonresident

(7) N.Y. TSB-A-10(4)I — Resident Trust No Longer Taxable Upon Death of Resident Trustee

(8) N.Y. TSB-A-11(4)I — Resident Trust No Longer Taxable When Resident Trustee Resigns

g. Matter of Michael A. Goldstein No. 1 Trust v. Tax Appeals Tribunal of the State of New York — New York Intermediate Appellate Court Holds that Interest on New York Income Tax Refund Runs From Date of Filing of Amended Return Not From Date of Filing of Original Return

5. Source Income

a. Introduction

b. Contributing Tangible Personal Property or Real Property to an Entity to Escape Source-Income Classification

c. In re Ittleson — An Example of Source Income

6. Planning

B. Northeast (Other Than New York)

1. Connecticut

2. Delaware

3. District of Columbia

4. Maine

5. Maryland

6. Massachusetts

7. New Hampshire

8. New Jersey

9. Pennsylvania

10. Rhode Island

11. Vermont

C. South

1. Alabama

2. Arkansas

3. Florida

4. Georgia

5. Louisiana

6. Mississippi

7. North Carolina

8. Oklahoma

9. South Carolina

10. Tennessee

11. Texas

12. Virginia

D. Midwest

1. Illinois

2. Indiana

3. Iowa

4. Kansas

5. Kentucky

6. Michigan

7. Minnesota

8. Missouri

9. Nebraska

10. North Dakota

11. Ohio

12. South Dakota

13. West Virginia

14. Wisconsin

E. West (Other Than California)

1. Alaska

2. Arizona

3. Colorado

4. Hawaii

5. Idaho

6. Montana

7. Nevada

8. New Mexico

9. Oregon

10. Utah

11. Washington

12. Wyoming

F. California

V. Planning Considerations for New Trusts

A. Introduction

B. Testamentary Trust Created by Resident

C. Inter Vivos Trust Created by Resident

D. Trust Administered in State

E. Resident Trustee

F. Resident Beneficiary

VI. Planning Considerations for Existing Trusts

A. Introduction

B. Testamentary Trust Created by Resident

C. Inter Vivos Trust Created by Resident

D. Trust Administered in State

E. Resident Trustee

F. Resident Beneficiary

G. Effecting the Move

1. Introduction

2. Changing Place of Administration

3. Changing a Resident Trustee to a Nonresident Trustee

H. Duty to Minimize Tax

I. Federal Transfer-Tax Consequences

VII. Reliance on Availability of Home State Courts Is Misplaced

A. Exercise of Jurisdiction

I. Introduction

2. Restatement Approach

3. Uniform Trust Code Approach

4. Uniform Probate Code Approach

5. Comment

B. Full Faith and Credit

VIII. Other Issues

A. Simply Paying Tax Is Risky

B. Filing Position

C. Establishing Residence of Future Beneficiaries

D. Establishing Place of Administration

E. Choosing a Jurisdiction for a Long-Term Trust

F. Source Income

G. Combining Nonresident Trustee With Resident Advisor, Protector, or Committee

H. Changing Testator or Trustor by Exercise of Trustee Power

I. State Income Taxation of Charitable Remainder Trusts

J. Self-Settled Trust Option — The “DING Trust”

K. Ethical Concerns

L. Practical Concerns

M. What Can States Do?


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Bases of State Income Taxation of Nongrantor Trusts*

Worksheet 2 Bases of State Income Taxation of Nongrantor Trusts—Statutes and Regulations*

Worksheet 3 State Income Tax on $1 Million Capital Gain Incurred by Nongrantor Trust in 2012*

Worksheet 4 Definitions of “Resident Trust” for State Income-Tax Purposes*

Worksheet 5 State Uniform Trust Code Statutes*

Bibliography

Books and Treatises

Articles

1937

1991

1997

1998

2002

2004

2005

2006

2008

2010

2012

2013