Death & Taxes: Bloomberg BNA’s 2014 Trust Nexus Survey Reveals Significant Issues for Unsuspecting Practitioners, Particularly Double Taxation

Double taxation of trust income is a very real problem. The issue arises because trusts are subject to state income taxes on their entire income when they are classified as resident trusts under a taxing state’s law. Each state has its own definition of “resident trust,” which leads to the possibility of a trust to be a resident trust, and therefore taxable on its entire income, in multiple states.

Resident trusts must also have nexus with a taxing state. Although factors establishing trust nexus vary from state-to-state, they often include where the trust is administered, where the trustor is domiciled or a resident, where the trustee is domiciled or a resident, where the beneficiary is domiciled or a resident and where the trust assets are located.

Bloomberg BNA’s Trust Nexus Survey contains questions regarding activities based on factors states use to determine resident trust status. The states’ responses are useful for practitioners in need of comprehensive coverage of trust nexus issues across the U.S.

“Practitioners need to keep track of many different pieces, some of which they cannot control, in order to make sure that they fulfill all of a trust’s filing requirements,” said Lauren Colandreo, a Bloomberg BNA State Tax Law Editor who helped develop the questionnaire and analyzed this year’s results. The 2014 Trust Nexus Survey questionnaire included new questions specific to irrevocable and revocable inter vivos trusts because they are often treated differently under state income tax laws.

The 2014 Trust Nexus Survey was sent to 44 jurisdictions (including the District of Columbia and New York City) that impose an individual income tax. Responses from 31 of the 44 jurisdictions were collected and compiled into a Special Report, which highlights trends among the states and offers expert commentary regarding how practitioners can best resolve nexus issues.

In addition to the Trust Nexus Survey, Bloomberg BNA offers a Trust Nexus Evaluator Tool, which allows users to generate either customized reports or charts that summarize whether a trust will be taxed as a resident trust in a particular state. Because trust nexus laws are often nuanced, the Trust Nexus Evaluator Tool offers substantial guidance.

“There will be a shift from the use of the trustor’s domicile or residency as the sole factor used to determine whether a trust is subject to tax as a resident trust as more taxpayers challenge the constitutionality of [resident trust definition] statutes,” Colandreo predicted.  She added, “Pennsylvania did not participate in this year’s survey because it is in the process of reviewing its definition of a resident trust,” in response to McNeil v. Commonwealth, which requires Pennsylvania to rely on factors beyond the trustor’s residence at the time of establishing the trust when determining the trust’s residence. Bloomberg BNA’s Trust Nexus Survey will prove increasingly useful as state laws change over time.

If states work together, the future may bring a unique and uniform approach to trust income taxation. In the meantime, Bloomberg BNA’s Trust Nexus Survey will serve as a way to sort through the varying state laws.

By: Sarah Mugmon

For a free copy of the Bloomberg BNA 2014 Trust Nexus Survey, sign up here.

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page: What other issues should be addressed in next year’s Trust Nexus Survey?