Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Saturday, November 11, 2017

Bloomberg BNA Special 2017 Multistate Tax Report Trust Nexus Survey

{85b15df4-1e00-4265-b7ad-f968bf9e3813}_tax_rpt_2017_trust_nexus_survey_101017 (1)Bloomberg BNA recently released its 2017 Multistate Tax Report relating to trusts. An introduction to the survey is provided below:

Each year, Bloomberg BNA’s Trust Nexus Survey aims to identify the activities that may subject a trust to tax as a resident trust in each state.

In light of the increasing number of cases surrounding this determination, Bloomberg BNA also sought to high- light the constitutional limitations placed on each states’ ability to tax trusts as residents of their state. We asked state tax administrators if their state applies Quill when determining whether a trust is subject to taxation as a resident trust and if they have binding judicial precedent addressing these limitations.

Up one from last year, only five states (California, Hawaii, Kentucky, Oregon, and Vermont) responded that they apply Quill when making trust residency determinations. Similarly, only five states, including California, Illinois, and New Jersey, said that they have binding judicial precedent on this topic. ‘‘It’s interesting to see how that state of the   law jives with the constitutionality of sticking with Quill, given that Quill  was a U.S. Supreme Court case,’’ Denicolo   said.

Given the increase in litigation surrounding a trust’s residency in recent years, this year we also asked the states whether they are appealing or acquiescing in any reported federal or state case addressing taxation of trusts. A mere three states responded ‘‘yes,’’ highlighting the fact that while litigation in this area is on the rise, it has not yet be- come a nationwide trend. Notably, two of these three states, Minnesota and North Carolina, indicated that they do not have binding judicial precedent addressing the constitutional limitations related to taxation of trusts; however, their responses to this question may change in the near future.

As the complexity surrounding the taxation of trusts continues to grow, nonresident trusts are also faced with challenges in determining their tax liability in multiple states. To address this growing trend, the survey asks ques- tions regarding how nonresident and part-year resident trusts are taxed and the availability of credits for taxes paid to other states.

Unsurprisingly, a majority of states indicated that nonresident trusts are subject to tax in their state. Of these 30 states, 26 states indicated that nonresidents are taxed on their state-source income only. Most states (23) also permit trusts to be taxed as part-year residents: 16 states treat part-year resident trusts as residents only for a portion of the year, 4 states treat them as nonresidents for the entire year, and 3 states treat them as residents for the entire year.

For the first time, we addressed what portion of a part-year resident trust is taxed. Eleven states said a part-year resident trust is only taxed on the actual income it receives or accrues while it is a resident. In four states (Louisiana, Oregon, Tennessee, and West Virginia), the trust is taxed on a pro-rata share of its annual income, based on the percentage of time it was a resident trust in the state.

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