State Jurisdictional Rules on Taxing Trusts Present Planning Opportunities, Traps for Unwary, BBNA Special Report Finds


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 Surveyfound in this week's issue of the WSTR.

In other developments…

Long-standing Regulation Exempting Private Schools from Sales and Use Tax Held Invalid , Bradley Arant Boult Cummings LLP reports

Exempting taxable services from Texas sales and use taxes under the multi-state benefit test , by the Texas State and Local Tax Law Blog

State Budgeting and Lessons Learned from the Economic Downturn , by the National Association of State Budget Officers

Why Legal Marijuana is a Good Argument for Tax Reform, by the Tax Policy Center , a joint venture of the Urban Institute and Brookings Institution

Compiled by Priya D. Nair
Follow us on Twitter at:  @BBNATax
Join BNA's State Tax Group on LinkedIn here.