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

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

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

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Conducted on Wednesday, June 21, 2023

Recorded event now available

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This course will provide tax professionals and advisers with a practical guide to various states' rules governing nonresident trusts' income tax treatment with multistate income or beneficiary connections. The panel will discuss critical topics relevant to resident and nonresident trusts, focusing on the 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 if 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, various conflicting state laws create 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 instead of 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 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 the federal treatment of grantor trust income
  4. Potential trustee issues in determining trust resident status
  5. The impact of federal tax reform on state taxation of resident and nonresident trusts
  6. Planning steps
    1. Avoiding issues with multiple settlors where settlers 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 their 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

Edmondson, S. Gray
S. Gray Edmondson
Partner
Edmondson Sage Allen

Mr. Edmondson practices in partnership, corporate, and individual tax planning; business transactions, including...  |  Read More

Wolff, Kirsten
Kirsten Wolff
Partner
Sideman Bancroft

Ms. Wolff represents individual clients in the areas of estate planning, estate and trust administration, estate and...  |  Read More

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