Bloomberg BNA’s 2017 Trust Nexus Survey Tackles Tricky Issues Surrounding Taxation of Trusts


The arrival of Halloween brings with it a plethora of ghosts, zombies, and other spooky creatures coming back from the dead to haunt us. For most, the screams are quickly replaced with sugar highs and candy hangovers as the devilish decorations are packed away for another year. For trusts, however, the ghosts of long-dead trustors may continue to haunt them for years to come.

A trust is most likely to be subject to state income tax as a resident trust if the trust has a trustor who is domiciled in, or a resident of, the state at some point in time, according to Bloomberg BNA’s 2017 Trust Nexus Survey. For many trusts, this means that it will be taxed on all of its income simply because the trustor was domiciled in the state when the trust was created, even if the trust was created decades ago or if the trust has no other ties to the state.

As if this wasn’t scary enough, the same trust could be considered a resident trust based on five additional categories:

  • Using the state’s law as the governing law of the trust;
  • Administering the trust in the state;
  • Having a trustee that is domiciled in or a resident of the state;
  • Having a beneficiary that is domiciled in or a resident of the state; and
  • Owning assets located in the state.

For example, if a trust was created by a domiciliary of Illinois, was governed under D.C. law pursuant to the document, but was administered in Maryland by a trustee domiciled in Virginia, and had a beneficiary in California and assets in Louisiana, the trust would be considered a resident trust in each of these six jurisdictions.

As a result, the trust would be taxed on a startling 600 percent of its income each year, since all six jurisdictions told Bloomberg Tax that a resident trust is taxed on its worldwide income, not just income earned in the state.

Other frightening factors that may lead to taxation as a resident trust are:

  • Being registered in the state (five states);
  • Storing the trust’s official books and records in the state (12 states);
  • Being created by someone who only spent one to 182 days in the state (testamentary trust: seven states; irrevocable inter vivos trust: five states)
  • Having a corporate trustee with an in-state call center (11 states); and
  • Being administered by a corporate trustee whose only ties to the state are working with an in-state point of contact (one state).

To learn more about the terrifying taxation of trusts, register for our webinar: Learning from the Bloomberg BNA 2017 State Trust Nexus Survey, Thursday, Nov. 16, 2017, at 1 p.m. EST.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: What is the scariest scenario surrounding the state taxation of trusts that you’ve seen?

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