“We tell clients with this concern to minimize chances that their state of residence would attempt to tax their trust by establishing the trust in a non-tax jurisdiction such as Delaware, South Dakota, New Hampshire or Nevada,” he added.
“Recently, we’ve seen more clients become aware of trust taxation when they’re moving from high-income-tax states, like Illinois, to a retirement location like Florida,” Wittenberg said. “They’re more aware that the change in residency is having a positive impact on their personal income tax situation, and they want to understand how their trusts are impacted.”
“Even trusts intentionally created in no- or low-tax states can become subject to tax in other states when factors of the trust change,” Novak said. “It’s important to advise clients of the potential exposure to additional state income taxes before the trust invests in fixed assets outside of its resident state, and when a trustee, beneficiary or the administration of the trust changes domicile.”
“Many times our clients focus on one specific issue without completely understanding all the other consequences” of trust taxation, Pon said. “It’s also important to work with an estate-planning attorney who not only understands trust law, but also the tax law.”