Presented at the ACTEC 2021 Virtual Annual Meeting, this article discusses the importance of planning for state income taxation of trusts.

  • Practitioners must factor the state income tax treatment of the trusts they create for their clients into their estate planning recommendations.
  • They must take steps to assure that the income of these trusts is not taxed by any state, or by no more than one state in any event.
  • Trustees of trusts that do not already reflect this planning must consider whether there is any way to reduce the incidence of state income taxation on the trusts’ income.

This paper will examine briefly the general pattern of state income taxation of trusts and then will consider the significant constitutional limitations on such taxation, which states sometimes ignore in their reach for more revenue. Next, it will focus on the taxation schemes of states. Then, it will discuss how the practical estate planner should establish the situs of a trust in order to minimize state income taxes on trusts and what options may exist for the trustee of an existing trust to reduce or eliminate state income tax liabilities. Finally, the paper will consider some related issues.

Please see important disclosures at the end of the article.

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