Individuals who have created multiple trusts in their estate plan that are subject to high state income taxes may recognize significant tax savings by moving those trusts to a state with lower (or no) income taxes. Changing the residence of a trust, or “situs,” should not be undertaken without consulting your advisors, including your trust and estate attorney.
What’s the tax impact?
Only irrevocable nongrantor trusts are subject to federal and state tax at the trust level. The taxes generally apply to undistributed ordinary income or capital gains, often at higher rates than personal income taxes. Income distributed to beneficiaries is deductible by the trust and taxable to beneficiaries.
Therefore, relocating such a trust may offer a tax advantage if it accumulates (rather than distributes) substantial amounts of ordinary income or capital gains and can be moved to a state with low or no taxes on accumulated trust income.
Can situs be changed?
The ability to change a trust’s situs depends on factors such as whether the trust document authorizes a change in situs and the laws of the current and destination states.
In determining a trust’s state of “residence” for tax purposes, states generally consider one or more of the following factors:
- the trust creator’s state of residence or domicile;
- the state in which the trust is administered; and
- the state or states in which the trust’s beneficiaries reside.
How do you move it?
Moving a trust may involve appointing a replacement trustee in the new state and moving the trust’s assets and records to that state. In some cases, it may be necessary to amend the trust document or to transfer the trust assets to a new trust in the destination state.
For tax purposes, a final return should be filed in the current jurisdiction. The return should explain the reasons that the trust is no longer taxable in that state.
Before you take action, contact me at SDitman@berdonllp.com or your Berdon advisor. We can help explain the tax and nontax consequences of changing the situs of your trusts.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.