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Is a Trust Taxable in More than One State?

The short answer is, yes. Many people mistakenly believe that because they created a trust in their resident state, the trust is taxable in that resident state and no other state. This is often not true. Every state has its own rules for when a trust is considered a resident of that state and, therefore, taxable in that state.

Generally, a state might tax the trust based on one or more of the following considerations:

• The residence of the grantor when the trust becomes irrevocable
• The residence of the grantor upon death when a testamentary trust is created
• The residency of the trustee
• The residency of the beneficiary
• The state where trust assets are held (where the trust is administered)

It is common for many of the above residency rules to be different amongst the states and for a trust to be taxable in more than one state. The above factors should be considered and state statute referred to in order to determine where your trust is taxable.

Examples of some states and their determination

California: Will tax the trust if either the trustee or beneficiary is a resident of California.

Florida: Has no income tax on trusts and no longer has a franchise tax on trusts.

Illinois: Will tax the trust if Illinois is the domicile of the grantor (settlor) upon creation of an irrevocable trust (whether inter vivos or upon death).

Indiana: Will tax the trust if Indiana is the state where the trust is administered.

New York: Will tax the trust if a trust is created upon the death of a New York resident, an irrevocable trust is created by a New York resident, or a trust became irrevocable while the creator was a New York resident. However, there is an exception. New York will not tax the trust if all three of the following criteria are met:

• All trustees are domiciled outside of New York
• All assets of the trust are held outside New York
• All income/gains come from sources outside New York

Note: Be aware that New York has recently introduced a bill to eliminate this exception effective as of January 1, 2010.

Texas: Has no income tax on trusts.

Wisconsin: Will tax the trust if the grantor is a Wisconsin resident upon death and the trust is created by the decedent's will. Wisconsin will also tax the trust if it was funded with property by a Wisconsin resident and the trust became irrevocable on or after October 29, 1999, or became irrevocable before October 29, 1999 and was first administered in the state of Wisconsin on or after October 29, 1999.

Example of double taxation

Trust A has a beneficiary residing in California but is administered in Indiana. Based on the discussions above, both California and Indiana will tax Trust A as a resident. California will tax the trust because the beneficiary is a resident of California and Indiana will tax the trust because the trust is administered in Indiana.

For further information, please contact Amber Larsen at 312-980-2964, Mike Calahan at 312-980-2996, or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.