By Steven J. Oshins, Esq., AEP (Distinguished)

Different states have different rules as to what creates a “resident trust” that is subject to taxation in that state. States may tax a trust based on the residency of the settlor or testator, based on whether there is a resident trustee or beneficiary or whether there is administration in that state, or for a combination of these factors and/or other similar factors.

So it isn’t as easy as simply situsing a trust in a state with no state income tax. You have to look at the state taxing statutes that may apply.

The Non-Grantor Trust State Income Tax Chart

The Non-Grantor Trust State Income Tax Chart simplifies this analysis by summarizing each state’s taxing rules and providing a hyperlink to the applicable taxing statutes.  The Chart was created not only to be a resource to practitioners and clients, but also to create opportunities for them.

One focus of this Chart is to determine whether a trust can be moved to another state in order to save state income tax.  Another focus is to determine who to avoid using as trustees, in which states to avoid trust administration, as well as other variables that may unnecessarily cause a state income tax.

No trust should ever be created without the advisor knowing the residency of the settlor, the proposed trustees and the beneficiaries.  This information is invaluable in the planning process since it can have a substantial influence on certain decision points.

Thus, each advisor should have a handy resource to use to quickly access the different state rules in order to be able to properly plan for their clients.

Summary of the Columns

The Non-Grantor Trust State Income Tax Chart is a two-page summary of the non-grantor trust state income tax rules in all states and Washington, D.C.  The states are listed in alphabetical order.

• Column 1 lists the name of the state.

• Column 2 lists the statute or other taxing authority showing what it takes to be treated as a resident trust. For those who access the online version, the statute or taxing authority is linked so that the end-user can easily access that authority in order to read the rules carefully. This feature will help those who were unsure how to spot the opportunity to very easily go directly to the source.

• Column 3 lists the highest tax rate for 2024 in that jurisdiction.

• Column 4 answers the question, “Under What Condition does the State Tax a Non-Grantor Trust?” It answers it in a very short summary fashion so the reader can quickly understand the gist of the statute or other taxing authority. There is a warning towards the bottom of each of the two pages not to rely on the short summary and to always read the statute.

Planning Opportunities

There are various planning options available, including the following:

1. Incomplete Gift Non-Grantor Trust (“ING Trust”) – This is an irrevocable trust in which transfers to the trust are incomplete for gift tax purposes, but complete for income tax purposes.  These trusts are generally set up in Nevada or Delaware, however they can generally be set up in any state that has a Domestic Asset Protection Trust statute and no state fiduciary income tax.
2. Non-Grantor Gift Trust for Descendants – This is an irrevocable trust in which transfers to the trust are complete for gift tax and income tax purposes.  These trusts should be set up in a state that has no state fiduciary income tax.
3. Non-Grantor Gift Trust for Spouse and Descendants – This is an irrevocable trust in which transfers to the trust are complete for gift tax and income tax purposes.  It is sometimes referred to as a SLANT.  In order to make it a non-grantor trust, it must require an adverse party to approve a distribution to a beneficiary.  These trusts should be set up in a state that has no state fiduciary income tax.
4. Non-Grantor Gift Trust for Settlor, Settlor’s Spouse and Descendants – This is an irrevocable trust in which transfers to the trust are complete for gift tax and income tax purposes.  In order to make it a non-grantor trust, it must require an adverse party to approve a distribution to a beneficiary.  Since this trust must qualify as a Domestic Asset Protection Trust, it should be set up in a state that has a Domestic Asset Protection Trust statute.  The state also should not have a state fiduciary income tax.

RELATED EDUCATION

If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:

• The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
• Estate Planning Techniques in a Time of Low Interest Rates
• The Installment Sale to an Intentionally Defective Grantor Trust
• The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
• Steve’s FREE State Rankings Charts

ABOUT THE AUTHOR

Steven Oshins AEP (Distinguished) ) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth. He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020, 2022 and 2024. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com.  His law firm’s website is www.oshins.com