State Income Taxation of Trusts and Estates and Grantors and Beneficiaries of Trusts: State Law Limitations and Pitfalls to Avoid

The majority of states impose an income tax on resident trusts and state-sourced income of nonresident trusts, what makes a trust a “resident” of a particular state. Estates and trusts counsel must understand the complexities of state tax law and available planning techniques for structuring trusts in certain jurisdictions.

State income tax treatment of trust income is often complicated and an unanticipated expense. Calculating and reporting the taxable income becomes an even more significant challenge where the trust has multistate contacts, either because of different residences of settlors, beneficiaries, and fiduciaries, or because of business operations in more than one state.

Navigating the rules determining when the income of a trust is taxable to the settlor or the trust instead of its beneficiaries, specifically when a nonresident trust has gain or loss from multiple states, can be daunting. Estate planners must consider other issues, such as establishing a place of administration and residence of future beneficiaries, income sourcing, self-settled trust options, etc.

Listen as our experienced panel will analyze available structuring and planning techniques to minimize, avoid, and/or defer state income taxation of trusts and provides guidance on some of the specific challenges of multistate income taxation of nonresident trusts.

1. State taxation of resident trusts
   1. Determining whether a trust is a resident or nonresident
   2. Determining whether a state's taxation of a trust is constitutional
2. Planning techniques for drafting new trusts and administering existing trusts
3. Allocation and distribution of trust income
4. State apportionment of business income
5. Best practices and planning steps for trust and estates counsel

The panel will review these and other relevant topics:

• Various state approaches to the taxation of trusts, with particular focuses on California and Georgia
• Determining whether a state's taxation of a trust is constitutional
• Critical factors in determining whether a trust is a resident or nonresident for state income tax purposes
• Planning considerations for drafting new trusts and administering existing trusts
• Challenges in allocating income between a nonresident trust, its settlor, and its beneficiaries
• Issues when trusts receive active business income from multiple states outside of its resident state