Death & Taxes: Bloomberg Tax’s 2018 Trust Nexus Survey Highlights Frightening Factors Causing Trust Taxation


As Halloween quickly approaches, people everywhere are preparing for the scariest night of the year by compiling their costumes and stocking up on candy. For trusts, however, planning to minimize income taxation should start early and be revisited often in order to work around the many factors leading to taxation as a resident trust, according to the Bloomberg Tax 2018 Trust Nexus Survey.

Whether a trust is taxed on all of its income, no matter where it’s earned, or only on the portion of its income earned in a particular state depends on whether the trust is considered a resident of the state. While this may seem simple, each state has its own set of rules governing trust residency. This variety in trust residency definitions leads to a scary reality: a trust can be considered a resident of multiple states and, as a result, be taxed on more than 100 percent of its income!

To help taxpayers and practitioners navigate the complexities of the states’ varying trust residency rules, the Bloomberg Tax survey asks the states whether a trust is a resident based on each of the following categories: 

  • Using the state’s law as the governing law of the trust;
  • Administering the trust in the state;
  • Having a trustor that is domiciled in or a resident of 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.

In 13 states, including Illinois, New Jersey, and Pennsylvania, taxpayers can sleep easy knowing that their state only determines trust residency based on one of these categories. Taxpayers in Idaho, Montana, North Dakota, Virginia, and West Virginia, on the other hand, may have nightmares about the fact that trust residency is created based on any one of these six categories.

Where Is My Trust Most Likely to Be Taxed?

Of the six factors, 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. Administering the trust in the state is also highly likely to cause residency. 

Until the time comes when all, or at least most, states use the same definition of residency, the  Bloomberg Tax trust nexus survey and careful monitoring of trust activities will help taxpayers and practitioners better plan for, and respond to, the lack of uniformity when determining what constitutes a resident trust. 

To learn more about the terrifying taxation of trusts, register for our webinar: Learning from the Bloomberg Tax 2018 State Trust Nexus Survey, Wednesday, Nov. 18, 2018, at 1 p.m. EST.

Continue the discussion on Bloomberg Tax'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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