State Income Taxation of Non-Grantor Trusts: Residency, Income Sourcing Issues, Planning Opportunities

State income tax treatment of non-grantor trust income is often a considerable and unanticipated expense. Calculating and reporting these expenses is a 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.

Non-grantor trusts and their beneficiaries are subject to federal income tax and state income tax depending upon the residency of the trust. Whether a trust and its beneficiaries are subject to state income taxation will depend upon individual state law, resulting in high tax liabilities. However, proper planning and trust administration can minimize or eliminate state income taxes on non-grantor trusts.

Most 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. 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, determining the amounts taxed at the trust vs. beneficiary level is not clear when a nonresident trust has income or loss from multiple states.

Listen as our experienced panel addresses various state tax law issues, trust and trustee residency, and income sourcing challenges, as well as offers planning strategies to avoid or minimize state taxation of non-grantor trusts.

1. Nongrantor vs. grantor trust tax treatment
2. Determining whether a trust is resident or nonresident
3. State taxation of resident trusts
4. Key issues for nonresident trusts
   1. Allocating income between non-grantor trust and beneficiaries in multistate contact situations
   2. State apportionment issues for trusts holding active business income
5. 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

The panel will review 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
• What strategies are available to minimize or eliminate state income taxes for non-grantor trusts?

Learning Objectives

After completing this course, you will be able to:

• Ascertain how some key states approach allocating income between a nonresident trust and its beneficiaries
• Identify issues when trusts receive active business income from multiple states outside their resident state
• Determine whether a trust is resident or nonresident for state income tax purposes
• Recognize states that deviate from the federal tax treatment of grantor trusts

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, dealing with complex multi-state trust and estate tax calculations and reporting; supervisory authority over other preparers/accountants. Specific knowledge of basic apportionment methods, understanding of differences between tangible and intangible property for state income tax purposes; familiarity with trustee powers and residency rules.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.