IS YOUR TRUST SUBJECT TO STATE INCOME TAXES?

Billy Thomas, CPA

There are four (4) main questions to determine whether the Trust is subject to state income taxes as a resident trust.

  • Was the grantor domiciled within the state at the time of creation?
  • Where does the trust document or agreement indicate the trust is to be governed?
  • What state does the trustee(s) reside?
  • What state does the beneficiary(s) reside?

A Trust may be considered a non-resident trust. Generally, if a Trust is not considered a resident trust, then it is a non-resident trust which is subject to income tax to the extent the Trust generates state sourced income from an activity earning income within the state, such as a rental activities or business interests.

There are a couple states worth highlighting here:

Maryland (MD) –

  • Was the grantor domiciled within Maryland at the time of creation?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Is the trust document or agreement governed by the laws of Maryland?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Does the trustee(s) reside in Maryland?
    • YES, then the trust is subject to fiduciary income tax filing requirements when the trust is principally administered within the state.
  • Does the beneficiary(s) reside in Maryland?
    • NO, resident beneficiaries do not give rise to fiduciary income tax filing requirements for the Trust in Maryland.

Virginia (VA) –

  • Was the grantor domiciled within Virginia at the time of creation?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Is the trust document or agreement governed by the laws of Virginia?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Does the trustee(s) reside in Virginia?
    • YES, then the trust is subject to fiduciary income tax filing requirements when the trust is principally administered within the state.
  • Does the beneficiary(s) reside in Virginia?
    • NO, resident beneficiaries do not give rise to fiduciary income tax filing requirements for the Trust in Virginia.

D.C. (DC) –

  • Was the grantor domiciled within D.C. at the time of creation?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Is the trust document or agreement governed by the laws of D.C.?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Does the trustee(s) reside in D.C.?
    • NO, the residence of the fiduciary or trustee does not determine whether the trust is a resident of the District.
  • Does the beneficiary(s) reside in D.C.?
    • NO, resident beneficiaries do not give rise to fiduciary income tax filing requirements for the trust in D.C.

California (CA) –

  • Was the grantor domiciled within CA at the time of creation?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Is the trust document or agreement governed by the laws of CA?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Does the trustee(s) reside in CA?
    • YES, the residence of the fiduciary or trustee does dictate whether the trust is a resident of CA.
  • Does the beneficiary(s) reside in CA?
    • YES, resident beneficiaries result in a fiduciary income tax filing requirements for the trust in CA.

A resident trust is one where a non-contingent (current) beneficiary or resident fiduciary considers CA his or her residence. The trust is only subject to the proportioned amount of income of CA resident beneficiaries or trustees. Certainly this can be an unintended consequence for having CA residents named as trustees or beneficiaries.

New York (NY) –

  • Was the grantor domiciled within NY at the time of creation?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
    • Special exclusions may apply to resident trusts of NY when all trustees are non-residents of the state and the income earned by the trust is not connected with NY source income.
  • Is the trust document or agreement governed by the laws of NY?
    • YES, then the trust is subject to fiduciary income tax filing requirements.
  • Does the trustee(s) reside in NY?
    • NO, the residence of the fiduciary or trustee does not determine whether the trust is a resident of NY.
  • Does the beneficiary(s) reside in NY?
    • NO, resident beneficiaries do not give rise to fiduciary income tax filing requirements for the trust in NY.

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