Keeping on top of federal tax laws concerning trusts is relatively simple. However, when it comes to state tax laws on trusts, staying on top of them can be an entirely different matter, especially since many trusts might be subject to taxation in several states.
If things were simple, then a trust could be created under the laws of a given state and would only be subject to taxation in that state. Everyone knows, however, that nothing is that simple when it comes to taxes.
Trusts are sometimes subject to taxation in the state in which they were formed, the state where the trust creator lives, the state where the trustee lives, the state where a beneficiary lives and the state where trust property is held.
In a recent article titled "Can Another State Tax Your Trust?," Barron's points out how confusing and difficult it can be to navigate the tax laws of many different states that might want to claim the right to tax a trust.
The problem is that there are no standard, nationwide rules about which states can tax a trust.
If the trust is deemed to have a close enough connection to a state, a "nexus" in legalese, then a state can tax the trust.
What constitutes a close enough connection to any given state depends on the laws and court rulings of the state that wishes to impose a tax on a trust.
Nevertheless, with states often facing revenue shortfalls, it is no surprise that legislatures are continuously passing laws in an attempt to mandate that more and more trusts can be taxed by their states.
Because of these state tax issues, it is very important that you have your trust created/reviewed with an eye toward navigating these and other tax issues. If you are considering an estate plan including a trust or if it's been a few years since your estate plan has been a review, please consider scheduling a consultation.
When it comes to any government and taxes, you need to stay involved to minimize the tax burdens on your trust.
Reference: Barron's (May 16, 2015) "Can Another State Tax Your Trust?"