State Tax Snapshot: Is Your Trust Subject to State Tax? It Depends

Trust and estate tax planners can rest assured that there are seven states that do not impose income tax on trusts (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). But few other things are certain when it comes to the manner in which the remaining states impose income tax on trusts.

The state income tax treatment of trusts is primarily driven by whether it is classified as a “resident” or “nonresident trust.” For resident trusts, the computation of a state’s income tax usually begins with federal gross income. For nonresident trusts, the computation of income tax is limited to items that are sourced to the state, such as the sale of land within the jurisdiction’s borders.

The factors the states have adopted to distinguish between resident and nonresident trusts can vary dramatically.

For instance, the states take different positions on whether a trust that is administered within their borders will be deemed a “resident trust.” Hawaii defines a “resident trust” as one for which administration is carried out in the state. For Idaho, administration within the state is a factor that would cause the state to define a trust as a “resident trust” so long as at least two other factors exist, such as if the grantor was a resident of the state, or the trust was governed by Idaho law.

Arkansas law specifies that a nonresident trust administered by a resident trustee or personal representative is subject to tax only on Arkansas-source income.

Many other states do not address the question of whether administering a trust within their borders is a factor that they would consider in classifying the trust as a resident or nonresident.   

By Steven Roll                                                                          

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