Smartly setting up trusts requires knowledge of state tax laws, not just federal rules. “Each state has its own little unique twists and turns,” says Heather Flanagan, a senior wealth planner at PNC Wealth Management. “It’s kind of a hodgepodge right now. It would be nice to have some uniform law.”
Everyone knows that nothing is that simple when it comes to taxes. 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. But that is just not always the case.
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 by an experienced estate planning attorney who can help you navigate tax issues.
Remember also to revisit your trust with your attorney from time to time as state tax laws do change.
When it comes to any government and taxes, you need to stay involved to minimize the tax burdens on your trust.
It’s important to have your estate documents reviewed by a professional with your best interest in mind. Contact us today to set up an appointment to review your current plan.
Reference: Barron's (May 16, 2015) "Can Another State Tax Your Trust?"