Death & Taxes: Bloomberg BNA’s 2015 Trust Nexus Survey Highlights the Only Consistent Thing in State Trust Taxation Is Inconsistency

In our highly mobile society, multistate taxation of trusts is becoming an increasingly important issue, as highlighted by Bloomberg BNA’s 2015 Trust Nexus Survey.  A state taxes a “resident trust” on all income wherever received.  A nonresident trust is only taxed on state-sourced income.  States vary on how they define a “resident trust.”   As a result, it is possible to be deemed a resident trust in multiple states, which means that more than one jurisdiction will impose tax on 100 percent of the trust’s income.

Bloomberg BNA is hosting a webinar “Learning from the Bloomberg BNA 2015 State Trust Nexus Survey,” on October 15.  The webinar will highlight the survey results, highlight the latest developments, including Residuary Trust A v. New Jersey Div. of Taxn. and examine the trends that emerged from the states’ responses.  Presenting are Alan S. Gassman of Gassman Law Associates, P.A., Lila Disque of the Multistate Tax Commission and Lauren Colandreo, of Bloomberg BNA. 

Bloomberg BNA’s 2015 Trust Nexus Survey asked jurisdictions their positions on activity-based factors that will determine resident trust status in their state.  Forty-four jurisdictions impose an individual income tax, of which 35 participated in the survey.  The results of the survey were compiled and analyzed in a Special Report.  This year a new category based on constitutional limitations placed on a state’s ability to tax residents was added.  States were asked whether they apply Quill Corp. v. North Dakota or any other binding judicial precedent dealing with the state’s constitutional ability to tax trusts. 

States consider one or more of the following factors in determining whether a trust has sufficient nexus with the state to be considered a resident trust:  whether the trustor was domiciled or lived in the state; where the trust is administered; whether a trustee lives in the state; whether a beneficiary lives in the state or whether the trust owns assets located in the state. 

The varied application of these factors across states can lead to multistate taxation of the trust.  For example, a trust that was created in one state with a beneficiary domiciled in another, can be deemed a resident trust in two different states.  “Now that people are moving between states easily, all of the parties involved can shift so quickly,” said Lauren Colandreo, a Bloomberg BNA State Tax Law Editor who helped develop the survey.    

A majority of jurisdictions responded that only one category is used in determining resident trust status.   The trustor’s domicile or residency is the driving factor in finding nexus, according to the survey.  This presents tax planning strategies because one can control his or her domicile or residency when a trust is created.  However, “that really is a challenge because if a trust has been around for 50 years and there hasn’t been any ties to that state, it brings up constitutional issues that trust administrators and practitioners are starting to raise,” said Colandreo.  This issue is highlighted in McNeil v. Pennsylvania, which involved a trust created in Pennsylvania in 1959.  The court required Pennsylvania to look at other factors beyond the trustor’s residence at the time of establishing the trust. 

Trust nexus issues are picking up speed.  This past August, two states issued guidance on trust nexus issues.  Virginia issued a ruling  that found that the fact that one trustee (out of three) is a Virginia resident will not by itself cause a trust to be considered a resident trust.  Michigan issued a bulletin, which replaces 1988 guidance on estate and trusts, and provides for criteria of a resident trust.

To help practitioners navigate the sea of state trust taxation rules, Bloomberg BNA offers a comprehensive Trust Nexus Evaluator Tool.  The Trust Nexus Evaluator Tool provides guidance by allowing users to generate a customized report or chart on whether trust activities in a state will subject their trust to tax as a resident trust.

To register for the October 15, 2015 “Learning from the Bloomberg BNA 2015 State Trust Nexus Survey” Webinar, sign up here.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn:  Which activity-based factors should guide a state’s determination of a resident trust? 

For more information about income taxes on trusts and estates, check out Bloomberg BNA’s Estate, Gifts and Trust Tax Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.