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State Tax Nexus and Trusts

Posted Tuesday, June 28, 2011 by Michael A. Larson

alt text Jeremiah Doyle, an estate planning strategist at BNY Mellon, delivered an interesting presentation to our partner group today on state taxation of trusts. This is a very complicated area that is often overlooked in trust and estate tax planning. The session was enlightening and Mr. Doyle covered a number of the more technical issues in his presentation. However, there were a couple of points that stood out during the presentation of which all estate and trust planners should be aware.

The first point was that rules regarding which state can exert their power to tax income from the intangible assets of trusts can vary significantly from state to state. With proper planning, state income taxation of trusts can be avoided entirely. With improper planning, trust income can be subjected to state income tax in more than one state. When you consider that a state such as California can tax income at rates as high as 10.3%, improper planning can be very costly.

The second point was that an action as simple as a trustee changing their residence from Washington to California can cause the income of the trust to be taxed by California. In other states, such as New York, the creation of an irrevocable trust by a grantor while resident in New York can cause that trust to be taxed in New York regardless of the location of the trust administration, the beneficiaries or a change in residence by the grantor. Too often trustees and administrators are appointed with little thought as to the implications of these actions on the income taxation of the trust.

We are lucky that in Washington there is no state income tax and the appointment of trustees and administrators located in Washington is beneficial. However, it is important to recognize that factors such as the location of trustees and administrators can be a crucial factor in avoiding the payment of unnecessary state income taxes. Should you have any questions regarding how these rules might affect you and your estate plans, contact Mike Larson or Ron Bueing.

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