State Income Tax Treatment of Nonresident Trusts: Compliance Challenges and Planning Opportunities

Determining Residency, Allocating Income Between Trust and Beneficiary, Apportionment Questions

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A


Conducted on Tuesday, June 25, 2019

Recorded event now available

or call 1-800-926-7926
Program Materials

This webinar will provide tax professionals and advisers with a practical guide into various states' rules governing the income tax treatment of nonresident trusts with multistate income or beneficiary connections. The panel will address state taxation of trusts in light of the Supreme Court's grant of certiorari to North Carolina Department of Revenue v. the Kaestner 1992 Family Trust. The panel will discuss critical topics relevant to resident and nonresident trusts, with a particular focus on allocation of state-sourced income between trust and beneficiaries in nonresident trusts with resident beneficiaries. The webinar will also identify states that deviate from federal treatment and those states whose definitions conform to federal but have different calculation bases.

Description

State income tax treatment of trust income is often considerable and an unanticipated expense. Calculating and reporting these expenses becomes an even more significant challenge for tax advisers where the trust has multistate contacts, either because of different resident states for settlors, beneficiaries or trustees, or because of business operations in more than one state.

The majority of states impose an income tax on resident trusts and state-sourced income of nonresident trusts. As with virtually all multistate taxation issues, the variety of conflicting state laws creates tremendous tax compliance issues for tax advisers. Just determining whether a trust is resident or nonresident can present a severe challenge.

Additional complexity arises in navigating the rules determining when to allocate income to a trust as opposed to its beneficiaries. Most states tax nonresident trusts and nonresident beneficiaries only on income sourced to the state. However, when a nonresident trust has income or loss from multiple states, determining the amounts taxed at trust vs. beneficiary level is not clear.

Listen as our experienced panel provides a practical guide to some of the specific challenges of multistate income taxation of nonresident trusts.

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Outline

  1. State taxation of resident trusts
    1. Which states impose an income tax on resident nongrantor trusts
    2. Filing requirements
    3. Grantor vs. nongrantor trust tax treatment
  2. Determining whether a trust is resident or nonresident
  3. Key issues for nonresident trusts
    1. Allocating income between nongrantor trust and beneficiaries in multistate contact situations
    2. State apportionment issues for trusts holding active business income
    3. States that deviate from federal treatment of grantor trust income
  4. Potential trustee issues in determining trust resident status
  5. Possible impact of federal tax reform on state taxation of resident and nonresident trusts
  6. Planning steps
    1. Avoiding issues with multiple settlors where settlors live in different states
    2. Establishing separate trusts in cases where beneficiaries are based in different states

Benefits

The panel will discuss these and other relevant topics:

  • Critical factors in determining whether a trust is resident or nonresident for state income tax purposes
  • How do some key states approach allocating income between a nonresident trust and its beneficiaries?
  • Issues when trusts receive active business income from multiple states outside of its resident state
  • Which states deviate from the federal tax treatment of grantor trusts?
  • How does North Carolina Department of Revenue v. the Kaestner 1992 Family Trust impact residency?

Faculty

Eberl, Catherine
Catherine B. Eberl

Partner
Hodgson Russ

Ms. Eberl regularly advises clients on all aspects of estate planning, including estate, gift, and fiduciary income tax...  |  Read More

Pascal, Elizabeth
Elizabeth Pascal

Partner
Hodgson Russ

Ms. Pascal concentrates her practice in tax law with a focus on New York State, New York City, and multistate tax...  |  Read More

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