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

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.

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

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?

Learning Objectives

After completing this course, you will be able to:

• Determine whether a trust is a resident or nonresident trust for state tax purposes
• Establish states' approach to allocating income between a nonresident trust and its beneficiaries
• Distinguish the various types of trusts
• Identify the tax treatment of trusts administered within a state
• Understand the U.S. Supreme Court holding in the Kaestner case
• Recognize multistate trust tax planning opportunities

• 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.