June 26, 2014. We have covered it before, but estate planning has evolved into more than avoiding estate taxes. It now encompasses income tax planning as well. Most discussion on this subject, though, covers basis management—essentially limiting capital gains tax exposure. It is certainly true for myself. To a lesser extent, there is some focus on denting the tax liability of IRD (Income in Respect of a Decedent) assets, which usually correlates into charitable bequests.
The other issue that we need to be concerned about is state income taxation of Trusts. There are currently forty-three states that have an income tax on Trusts, and this tax can be assessed for reasons other than the Trust being administered in the state. There are a number of triggers, again varying by state, that can cause the income earned inside a trust to become subject to another state’s income tax.
(1) The Trust is administered in the state
(2) A Trustee resides in the state
(3) A Trustee does business in the state
(4) A beneficiary lives in the state
(5) A settlor creating a Trust lived in the state at the time
(6) A settlor of a Testamentary Trust died in the state
It is possible then that a single Trust could be subject to the income tax of several different states. Some of these are difficult to plan around, such as where a beneficiary might live or where a settlor might pass away. Other aspects we have far greater control over, such as the location of Trustees and the administration of the Trust. In any instance, this is an issue that requires careful analysis and consideration. There are aspects that we naturally consider when establishing the Trust, such as situs, but we can very easily to overlook the other aspects, such as the location of the settlor’s children. And this can have ramifications.
For more information about estate planning and which states tax your trust, contact the Goosmann Trust Law Counsel at info@goosmannlaw.com or call 712-226-4000.