Trust Situs

What Changed

Some states are contemplating new taxes which would cause trusts in those states to be taxed. Depending on where they’re based, there could potentially be a greater burden on the trustees and the beneficiaries regarding the reporting and taxation of trust income. Thus, understanding what’s happening in the state where your trust situs is based is important.

Additionally, there may be an option to make distributions from a trust and utilize the Section 199A deduction which provides a 20% deduction. This can be complicated, but trustees might want to ask whether the beneficiaries need additional income to fully utilize the deduction or if too much would result in a phase-out. The trustee must pay attention to whether there would be uneven distributions which are proper and what the eventual effect on future distributions would be.

Because of the $10,000 limit on state tax deductions, there has been discussion on certain types of trusts, such as personal-use residential property or other types of property in trusts. Due to this limitation on the deduction of state taxes, trustees may need to watch distributions, particularly when distributable net income will face a greater tax burden due to the lack of the deduction. Consider if the tax benefits outweigh other issues, such as asset protection and unequal distributions.

Planning Opportunities

  • Explore if trust situs should be changed to a more trust-favorable state if the current resident state is contemplating an increase in income or commerce tax.
  • Review state taxation of nongrantor trusts that accumulate income, which affects corpus and income for future beneficiaries. Determine if a distribution should occur and for what reason.
  • Consult state rules against perpetuity to see if it’s possible to exempt estate, gift, and generation-skipping transfer tax for a substantial period of time.
  • Look to the statutory rights to change trust through the decanting provision according to what the state provisions allow. Are there more flexible provisions that can be added to an existing trust?
  • Consider the effects of gifts because of the potential claw-back provisions.
  • Consider if a charitable trust still allows access to income as well as if a charitable remainder trust can be formed to provide annuity income to additional beneficiaries while still reducing tax liabilities.

More Resources


Article
The IRS issued proposed regulations clarifying a potentially significant tax break—aggregating your trades or businesses for a pass-through, or Section 199A, deduction.

Article
On August 8, 2018, the Treasury and the IRS issued new proposed regulations for the Qualified Business Income deduction under Section 199A.

Article
A new qualified business income deduction provides tax relief to owners of certain domestic trades or businesses operating as pass-through entities.

Article
Taxpayers who own and operate businesses through pass-through entities could benefit from a new qualified business income deduction.

Article
Individuals will need to consider the effects of President Trump’s tax reform in their 2017 income taxes.