Massachusetts Court Rules that Trust is Subject to Fiduciary Income Tax as a Resident

A recent case in Massachusetts illustrates the complexity surrounding the state taxation of trusts, which involve multiple parties and typically do not conduct any activity.

By Jeff Glickman, SALT partner

When examining whether a particular taxpayer is subject to a state’s tax, we generally look at the activities of the actual taxpayer. For example, for an individual, we look to the activities of the individual (e.g., where does he/she reside or earn income). For corporations, we look at the activities of the corporation itself (e.g., where are the corporation’s employees and property). With respect to the taxation of trusts, however, the issue is not as simple. The trust itself is just a fiduciary arrangement; it doesn’t really conduct any activity. Therefore, to determine the taxability of a trust, most states look to the activities of the three players involved in any trust arrangement: the creator (or grantor), the trustee and the beneficiary.

On July 11, 2016, the Massachusetts Supreme Judicial Court (the “Court”) issued an opinion in which it addressed the issue of whether certain living irrevocable trusts (the “Trusts”) that did not earn Massachusetts source income could be taxed as resident trusts when the trustee, Bank of America (“BofA”) was not domiciled in the state. [1] These Trusts were each created by an individual who was a Massachusetts resident at the time of creation. No identified beneficiary was a Massachusetts resident, although the income received by the Trusts was “accumulated for unborn or unascertained persons, or persons with uncertain interests.” The trustee, BofA, was domiciled at all times in North Carolina, but it did have offices in Massachusetts, and it did perform activities as trustee both within and outside Massachusetts.

Under Massachusetts law, a trust will be taxable as a resident (i.e., on all of its income regardless of source) if each of the following is an “inhabitant” of Massachusetts: (i) at least one grantor or creator of the trust, (ii) at least one or more of the beneficiaries and (iii) at least one trustee. [2] With regard to (ii), the statute also provides that income “accumulated for unborn or unascertained persons, or persons with uncertain interests shall be taxed as if accumulated for the benefit of a known inhabitant” of Massachusetts. Therefore, under these provisions, the Trusts clearly satisfied (i) and (ii). The sole issue was whether BofA is an “inhabitant” of Massachusetts.

The definition of “inhabitant” refers only to natural persons who are domiciled in the state or who maintain a permanent place of abode and spend more than 183 days in the state during the year. [3] Another statute provides, however, that if a corporation acts as a trustee, then they are subject to tax in the same manner and under the same conditions are individual inhabitants. [4] Therefore, the specific question for the Court was how to interpret the meaning of “inhabitant” when applied to a trustee that is a corporation. Ultimately, the Court concluded that a corporate trustee will qualify as an “inhabitant” if it: (i) maintains an established place of business in Massachusetts where it conducts business for more than 183 days during the tax year and (ii) conducts trust administration activities within Massachusetts that include, in particular, “material trust activities relating specifically to the trust or trusts whose tax liability is at issue.” Based on this standard, the Court held that BofA was an inhabitant with respect to the Trusts, and therefore, the Trusts are taxable as residents.

State standards for taxing trusts are not consistent, so it is important when establishing a trust to understand the state income tax consequences and whether there are states for establishing and maintaining the trusts that provide more favorable income tax treatment in order to preserve as much of the trust corpus as possible. Aprio’s SALT team can assist you with understanding how your trust will be taxed and whether there are alternatives for reducing the fiduciary income tax liability.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the August 2016 SALT Newsletter. To view the newsletter, click here.

[1] Bank of America, N.A., trustee v. Commissioner of Revenue, 474 Mass. 702 (July 11, 2016).

[2] Mass. Gen. Laws, ch. 62, § 10(a), (c). The taxation of trusts is similar to the taxation of individuals in that resident trusts are taxable on all of their income, regardless of source, and nonresident trusts are taxable only on income sourced to the taxing state. In this case, since the Trusts did not earn any Massachusetts-source income, they can only be taxed by Massachusetts if they are resident trusts.

[3] Mass. Gen. Laws, ch. 62, § 1(f).

[4] Mass. Gen. Laws, ch. 62, § 14.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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