Accavallo & Company, LLC

You moved out of New York, but you left your Trust behind: Tax and Administrative Implications of New York Resident and Non-Resident Trusts

Trusts in General

Trusts are utilized by individuals to efficiently transfer their assets to their loved ones, while minimizing estate tax implications. Establishing a properly drafted trust can shield the trust’s property from being included in the settlor’s gross estate for estate tax purposes, ensuring the assets are distributed as per the settlor’s wishes and protecting them from the beneficiaries’ potential creditors.

However, when contemplating a move away from New York, a crucial aspect often overlooked is the state income tax treatment of the trust and its beneficiaries. This oversight can significantly impact the economic success of the estate plan. In this article, we delve into the federal and New York state income tax treatment of trusts and beneficiaries, shedding light on potential implications for individuals moving away from the state.

Income Tax Considerations

Federal Tax

When a settlor establishes a trust, the assets transferred to the trust are held by the trustee according to the trust agreement’s terms, reflecting the settlor’s directions for income and asset disposition to the family members. To be effective for estate and gift tax purposes, the trust must be irrevocable, and the property transfer must be complete.

For income tax purposes, trusts can be classified into two types: non-grantor trusts and grantor trusts.

Non-Grantor Trust: These trusts are separate taxpayers and are subject to federal income tax at compressed rate brackets, generally paying more in taxes compared to individual taxpayers. However, they can distribute income to beneficiaries, shifting the tax liability to them.

Grantor Trust: Under grantor trust rules, the settlor is considered the owner of the trust property and its income. The settlor is liable for the trust’s income tax, allowing the trust to grow without being reduced by tax payments.

 

New York Taxation of Trusts

New York applies specific rules regarding income taxation of trusts, differentiating between resident and non-resident trusts. A resident trust consists of property transferred by a New York domiciled individual or property transferred under a New York resident’s will. In contrast, a non-resident trust includes property not meeting these criteria.

Non-Resident and NY Source Income: A non-resident trust is subject to New York income tax only on its New York source income, such as income from New York properties and certain business activities in the state.

Resident Trust: A resident trust is subject to New York income tax on its federal taxable income for the tax year, similar to individual taxpayers.

 

 

New York Exempt Trusts

For former New Yorkers who wish to leave the state but retain their trusts in New York, there is an exemption from New York income tax for resident trusts that meet specific conditions:

No New York Domiciled Trustee: The trustee must not be domiciled in New York

No New York Assets: The trust should not hold any assets located in New York

No New York Source Income or Gain: The trust must not generate any income or gain from New York sources

Meeting these conditions allows the trust to be exempt from New York income tax, benefiting the trust and its beneficiaries

 

Administrative Considerations

Common Reasons to Move a Trust

One of the most common reasons for creating a trust is to take advantage of more favorable tax consequences related to trusts. As such, one of the most common reasons to want to move a trust is to take advantage of more favorable tax-related trust laws in another state, open up the trust to prospective investment potential, extending the lifetime of the trust and possibly reducing the administration fees of the trust.

If you are moving from one state to another, keep in mind that your trust will not automatically move with you, and you may want to consider if the laws in the state you are moving to are more beneficial for your trust. These laws can impact administration, protection of assets and beneficiary rights and rules.

Determining If Your Trust Can Be Moved

Generally, most revocable trusts can be easily moved by simply changing the location of the trust. If for some reason the state in which your revocable trust is located or other factors related to your revocable trust prohibit you from moving it to a new location, you have the option to revoke the trust and then establish a new one in the location of your choice. Irrevocable trusts can be a bit trickier in that whether they can be moved depends on the language used in the creation of the trust. With an irrevocable trust, even if you change the location of the trust, it will likely still be governed by the laws of the state in which it was created unless the trust contains language regarding changing locations that complies with state law and states otherwise.

 

 

Some trusts are drafted with silent language on the location of the trust. In such cases, several different factors are used to determine the location of the trust that can include:

  •      The location in which the trust is administered
  •      The trustee’s state of residence
  •      The state of residence of the person that drafted the trust
  •      The location of the trust’s beneficiaries and any real property contained within the trust
  •      Applicable state law as it relates to any of the above factors

 

Sometimes, moving a trust can be as simple as replacing the trustee with a new trustee residing in the state where you would like to move the trust to. Determining whether your trust can be moved ultimately depends on applicable state law and the language of the trust in question.

Potential Dangers of Moving Your Trust

It is important to be knowledgeable of the applicable laws of the state in which your trust was created as well as the applicable laws in the state you are considering moving your trust to. The difference in laws could have a large impact on your trust. For instance, you may be moving your trust from a state that allows perpetual trusts to one that does not, which can limit the duration of the trust.

Moving the trust could also count as a modification of the trust, which may trigger certain taxes that would otherwise remain dormant. If your trust contains real estate or other assets in one state that taxes those assets and the state you are considering moving your trust to taxes trust assets located in other states, you could subject yourself to double the tax liability for some assets within the trust.

 

Understanding the tax implications of leaving New York while maintaining trust situs in the state is vital for effective estate planning. It’s essential to consider both federal and state income tax consequences to make informed decisions regarding trusts and asset management. Seeking advice from experienced tax professionals can provide valuable foresight to ensure a tax-efficient and economically successful estate plan. Please contact us at Accavallo & Company, LLC to assist with any questions you may have at (203)925-9600 or [email protected]

 

 

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Sherri Fisher is a Tax Manager at Accavallo & Company, LLC.  Sherri has longstanding expertise in Trust and Estate Taxation, Eldercare, and Estate planning. Sherri appreciates the relationships she has built with estate planning attorneys and advisors, to provide a team approach to assisting her clients. Sherri also has seasoned experience in business and individual taxation and is partial to assisting start-ups in developing overall accounting and operating plans.

Prior to joining Accavallo & Company, LLC, Sherri was a manager in a large firm, servicing high net worth trust clients, business, and personal clients. She was also a Partner in a large bookkeeping firm, which specialized in cloud accounting systems for regional and national companies. Sherri led a team in assisting clients to organize their accounting systems.  She is a graduate of Florida Atlantic University with a B.S. degree in Accounting.    

Sherri’s experience includes working with companies and organizations in a variety of industries including:

  • Investment Trusts

  • DAPT and Family Investment Partnerships

  • Estate and Probate Administration

  • E-Commerce

  • Manufacturing

  • Construction

  • Real Estate Investment

  • Marketing and Service-based industries

In addition to her professional accomplishments, Sherri is an Intuit Advanced Pro Advisor, Intuit Future Firm Advisory Board member, member of the Valley WIN Network, and proudly served as past Connecticut Public School liaison for the Yale Tommy Fund for Childhood Cancer. Sherri enjoys time with her family, Cleveland sports, thrifting and gardening.