2013 TRUST NEXUS SURVEY:

//////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////////// BLOOMBERG BNA SPECIAL REPORT 2013 TRUST NEXUS SURVEY: ANALYSIS OF KEY FACTORS DRIVING STATE TAXATION OF TRUSTS

(Vol. 2013, No. 34) 5 Special Report 2013 Trust Nexus Survey States look to the same basic set of factors, such as the location of the trustee or trust administration, to determine if a trust is subject to their jurisdiction s income tax. But the states vary dramatically in the factors considered and the weight given to each factor, according to a recent survey conducted by Bloomberg BNA. For those administering trusts or filing tax returns, perhaps just as difficult as ascertaining these different state standards is the continual monitoring of new filing obligations and opportunities to legally avoid paying income tax to a jurisdiction, experts caution. Accomplishing this requires regular review and communication between the administrator, the trustee, and beneficiaries. Survey Identifies Activities Creating Sufficient Nexus to Tax Trust Income, Jurisdictional Standards Vary Among the States BY LAUREN COLANDREO AND STEVEN ROLL T he criteria states use for determining if a trust is subject to income tax within their jurisdiction vary widely and can include several factors, according to the results of a recent survey conducted by Bloomberg BNA. 1 The varying patchwork of state standards can result in unexpected state income tax liabilities for the unwary. Some factors that the states use to justify the imposition of income tax can extend beyond events that could have been contemplated when the trust was created. For example, a trust could become subject to tax in some jurisdictions as the sole result of having a beneficiary move there. There are five basic ways in which a trust can become subject to a state s income tax, said Richard W. Nenno, managing director and trust counsel in wealth 1 Thirty-two of the 44 jurisdictions that impose an individual income tax participated in the survey. When a jurisdiction did not participate in the survey or declined to answer a question, the responses were based on Bloomberg BNA s interpretation of the jurisdiction s tax laws. The jurisdictions that did not participate in the survey were Colorado, Delaware, Idaho, Kentucky, Mississippi, Montana, Nebraska, New Hampshire, New York, New York City, Oklahoma, and South Carolina. Lauren Colandreo is a state tax law editor with Bloomberg BNA. Steven Roll is an assistant managing editor with Bloomberg BNA. advisory for the Wilmington Trust Company. He said a state s income tax might apply if: s the trust was created under the will of a testator who lived in the s an inter vivos trust was created by a settlor who lived in the s the trust is administered in the s a trustee lives in the or s a beneficiary lives in the state. It is important for the trustee to be involved with the planning process, implementing the trust, and performing due diligence once the trust has been established, Nenno told Bloomberg BNA Aug. 19th. During each phase, the trustee should ensure that the attorney is considering where the trust might be subject to tax and whether it is possible to legally avoid tax in certain jurisdictions, Nenno said. With planning, you can save a lot of money, he said. If a trust had a $1 million capital gain in 2012, it could have been subject to over $100,000 in income taxes to New York. The federal deduction for state taxes paid can be wiped out for trusts subject to the alternative minimum tax, he explained. But New York s laws allow trusts to avoid the state s income tax if there is no trustee or assets located in the state and no New York source income, he said. No Tax States. One way to limit exposure to state income tax is to establish the trust in a state that does not impose such a levy. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming. Tennessee taxes only dividend and interest income. Trusts are no longer subject to New Hampshire s tax on dividend and interest income for periods ending on or after Dec. 31, 2013. However, the tax still applies to residents of the state who receive distributions. TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

6 (Vol. 2013, No. 34) SPECIAL REPORT But even trusts that adhere to this strategy could nevertheless become subject to tax in another state based upon factors such as the residence of a trustee, the location of the trust s assets, or use of a taxing state s governing law in the trust document. In the states that do impose tax, the rates can differ dramatically. Pennsylvania imposes the lowest rate at 3.07 percent, California the highest at 12.30 percent. Top 15 Lowest Maximum Tax Rates Rank State Tax Rate 15 Maryland and Virginia 5.75% 14 Ohio 5.421% 13 Oklahoma 5.25% 12 Alabama 5% 11 Illinois 5% 10 Mississippi 5% 9 Utah 5% 8 Kansas 4.90% 7 New Mexico 4.90% 6 Colorado 4.63% 5 Arizona 4.54% 4 Michigan 4.25% 3 North Dakota 3.22% 2 Indiana 3.40% 1 Pennsylvania 3.07% Top 15 Highest Maximum Tax Rates Rank State Tax Rate 15 Wisconsin 7.65% 14 North Carolina 7.75% 13 Maine 7.95% 12 Hawaii 8.25% 11 New York 8.82% 10 New York City 8.82% 9 District of Columbia 8.95% 8 New Jersey 8.97% 7 Iowa 8.98% 6 Vermont 9.40% 5 Minnesota 9.85% 4 Oregon 9.90% 3 Rhode Island 9.90% 2 Massachusetts 12% 1 California 12.30% Some attributes of a trust that could affect a state s imposition of tax are more controllable than others, Aen Walker Webster with Buchanan Ingersoll & Rooney LLP in Washington D.C. told Bloomberg BNA Aug. 16. Characteristics of a trust such as the trust s governing law, the state where it is administered, and the location of the trustee can be changed at any point after the trust s inception, some more easily than others, she said. But changing other characteristics of the trust could be more difficult, depending on the circumstances. This would include the location of a trust s fixed assets, source of trust income, or residence of a beneficiary. Factors that do not apply in all states but, when they apply, are not possible to change include: the state of residence of the trust settlor at the time of creation of the trust, or, for testamentary trust, the testator s domicile at death, she said. The number and variety of criteria that apply in different states highlight the need for those who administer and provide tax reporting for trusts, including trust companies and other financial institutions, to perform and document annual reviews to determine that each trust is filing tax returns in all states that have jurisdiction to tax the trust s income, Webster explained. With so many factors that can change year by year, and mindful that state law also can change, she said state fiduciary income tax compliance is a moving target. Trustees, and those who prepare trust tax returns, should document their due diligence to control liability for failure to file fiduciary income tax returns in all states that may apply, she added. The question of whether a trust is subject to income tax in a state is not always easy to ascertain from a quick review of that state s tax code and/or fiduciary income tax return, Webster said. Those unfamiliar with the structure and operation of the tax laws in a given state may not be able to discern whether a trust should file a tax return in that or how to coordinate tax reporting among several states that may have jurisdiction to tax the trust, she said. Mobile Trustees, Beneficiaries. One problem for those administering trusts is that trustees and beneficiaries have become highly mobile, Christine Albright a partner with Holland & Knight in Chicago told Bloomberg BNA Aug. 19. Is the fiduciary of the trust asking if a trustee or beneficiary has moved during the year? In an ideal world, this conversation would be taking place before a trustee or beneficiary has moved, she said. The states power to impose tax is dependent on the concept of nexus, which generally means the threshold of contact that must exist between a taxpayer and a state before the state has jurisdiction to tax the taxpayer. The Due Process Clause of the U.S. Constitution requires that there be some minimum connection between a state and the person, property, or transaction it seeks to tax. Similarly, the Commerce Clause, which governs the taxation of interstate commerce, requires that there be a substantial nexus between the taxed activity and the taxing state. The U.S. Supreme Court in Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977) established a four prong test for determining if a state tax passes muster under the Commerce Clause. Those four prongs are: (1) the taxpayer must have a substantial nexus to the taxing jurisdiction; (2) the tax must be fairly apportioned; (3) the tax being imposed upon the taxpayer must be fairly related to the benefits being conferred by the taxing jurisdiction; and (4) the tax may not discriminate against interstate commerce. To avoid violating the Commerce Clause, all four prongs must be satisfied and the failure to meet any one of these requirements renders the tax unconstitutional. 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 7 Substantial Nexus. The first prong of the Complete Auto Transit test substantial nexus is one of the most highly disputed areas of state tax law. In Quill Corporation v. North Dakota, 504 U.S. 298 (1992) the U.S. Supreme Court established a bright-line standard for determining substantial nexus. The standard was physical presence in the taxing state. Quill involved use taxes. As a result, it is an open question of whether the physical presence rule applies to income taxes. Another key factor in determining whether a trust is taxable within a state is how that jurisdiction defines a resident trust. Resident trusts are subject to tax on all income, while nonresident trusts are subject tax on income that derives from within the jurisdiction. The definition of a resident trust varies widely among the states. In Illinois, for example, this determination is based on whether the trust meets the state s statutory definition of a resident. It explained in its response to the Bloomberg BNA survey that this determination is based on the residency of the trustor. Other states, such as Georgia, seem to emphasize the presence of a fiduciary within their borders when making this determination. In addition, the states generally consider several factors to determine if a state meets the definition of a resident trust. For instance, regulations in Idaho provide that a trust is a resident trust if it meets three out of five specified conditions. Recent State Trust Nexus Ruling. A recent state court ruling on the constitutional limitations on a state s power to tax a trust was McNeil v. Commonwealth, 67 A.3d 185 (Pa. Commw. Ct. 2013). The Commonwealth Court of Pennsylvania found that the imposition of Pennsylvania s personal income tax on two inter vivos trusts that were located in, administered in, and governed by the laws of Delaware violated the Commerce Clause. In applying the substantial nexus prong under Complete Auto Transit, the court found that the trusts contacts with Pennsylvania included only the residency of the trusts discretionary beneficiaries and the residency of the settlor when the trusts were established in 1959. The court ruled that these contacts did not create the requisite presence in Pennsylvania to establish a substantial nexus with the state. The court explained that its focus was on whether the Trusts presence in Pennsylvania is sufficient, and not on the fact that there are discretionary beneficiaries who are Pennsylvania residents and who may, at some time in the future, benefit from the existence of the Trusts. The court cited a Pennsylvania regulation defining residency for purposes of a trust, which specifically stated that [t]he residence of... the beneficiaries of the trust shall be immaterial. The settlor s residency in Pennsylvania when he created the trusts in 1959 also did not create the physical presence necessary to establish a substantial nexus, the court ruled. This was because he chose to have the Trusts governed by Delaware law, established the administration of the Trusts in Delaware, and did not reserve in himself any continuing control or power of appointment over the Trusts property, the court explained. The court noted that the U.S. Supreme Court, in Quill, rejected a slightest presence standard to establish a substantial nexus when it refused to find that substantial nexus could result from the presence of a few floppy diskettes that the out-of-state company sent its clients. Relying on the settlor s residence in Pennsylvania approximately 48 years ago to establish the trusts physical presence in Pennsylvania would be the equivalent of applying the slightest presence standard rejected by the U.S. Supreme Court in Quill. In addition, the court found that other prongs of Complete Auto Transit were not satisfied. Taxing the trusts income, all of which was derived from sources outside Pennsylvania, was not fairly apportioned because it was inherently arbitrary and had no rational relationship to the trusts business activity in the the court concluded. Taxing the trusts entire income, the court found, was not fairly related to the benefits that the state provided to the trusts. Bloomberg BNA Survey. Bloomberg BNA s survey aimed to identify the activities that could subject a trust to tax in each state. The survey breaks down the trust activities into seven broad governing law of the trust, s having a beneficiary that is a or The majority of jurisdictions subject trusts to tax based on meeting three or four of the above categories. TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

8 (Vol. 2013, No. 34) SPECIAL REPORT Of the jurisdictions with an individual income tax, Massachusetts, New York, New York City, North Carolina, and Pennsylvania are least likely to tax trusts, identifying nexus creating activities in only two categories. Illinois, North Dakota, and West Virginia, on the other hand, responded that they will impose income tax on a trust based on any of the seven categories. Trusts receiving in-state-source income are most likely to subject to tax in that with 43 jurisdictions responding that state-source income would create sufficient nexus. Other factors that most states said would trigger taxation were: state (34 states), s having a trustor who is a resident of the state (32 states), and state (25 states). The activities that were least likely to trigger taxation in most states were: s having a resident beneficiary (11 states), and s using a state s governing law as the governing law of the trust (12 states). But even some of these lesser used factors could pose significant problems for unsuspecting practitioners. California was among the 11 states that said it would tax a trust based on the presence of a beneficiary within their jurisdiction. This means that if you have a Florida trust with Florida assets and a beneficiary with a vested interest in the trust who lives in California, California will impose tax on the trust even if the beneficiary receives no income, Alan S. Gassman, a partner with Gassman Law Associates in Clearwater, Florida. It s easy to forget that you can be taxed by just having a beneficiary in a state. I m sure that there are thousands of non-california trusts out there with California beneficiaries, he added. Nexus From a Beneficiary in the State. Illinois also said that nexus would result from the presence of a beneficiary within its borders. But the states s law suggests otherwise. Illinois subjects trusts to income tax depending on whether the trust is a resident of Illinois under 15 ILCS 5/1501(a)(20); 35 ILCS 5/201, and Ill. Admin. Code tit. 86, 100.3020. A trust s residency is based on the domicile of the trustor. The residency of the beneficiary is not taken into consideration under Illinois law when determining whether the trust is a resident. 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 9 Trustor s Residency Is Driving Factor for Nexus. Residency of the trustor is frequently used as the basis for state income tax. In many cases, however, states responded that nexus is created when the trustor is domiciled in the rather than simply a resident. For state tax purposes, domicile is generally a person s fixed and permanent home and the place to which the person intends to return to when he or she is away. Domicile is determined based on the facts and circumstances of each case. An individual s intent is a primary consideration when determining whether he or she changed his domicile. Under most states laws, an individual may have only one domicile. But he or she may have more than one residence, and may be considered a resident of more than one state. For income tax purposes, residency is often statutorily defined and is determined based on either domicile or a minimum amount of time spent in the state. The survey asked states to identify whether specific activities relating to the trustor s residency would create nexus for testamentary trusts. Specifically, we asked each state if taxation would result of one or more of the following activities: s the trust was created by the will of a testator or by a decedent who resided/lived in your state as of the testator s date of death, s the trust was created by the will of a testator or by a decedent who was present in your state for 183 days or more in the year of the testator s death, s the trust was created by the will of a testator or by a decedent who was present in your state for less than 183 days in the year of the testator s death, s the trust was created by the will of a testator or by a decedent who was registered to vote in your state in the year of the testator s death, or s the testator/decedent had a valid driver s license issued by your state as of the date of the testator s date of death. The survey posed similar questions with respect to activities creating nexus for inter vivos trusts. Sixty-two percent of the jurisdictions said that one or more activities relating to a resident trustor would cause the trust to be taxed. Of the 32 states making up this 62 percent, the trustor s residency subjects both testamentary and inter vivos trusts to taxation in almost all jurisdictions. However, the trustor s residency does not create nexus for a testamentary trust in Kansas or for an inter vivos trust in Maryland. TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

10 (Vol. 2013, No. 34) SPECIAL REPORT We also asked states to clarify whether the trustor s residency creates nexus for inter vivos trusts at various points of time, including when the trust was created, funded, or became irrevocable. According to the survey results, the trustor s residency is most likely to create nexus when the inter vivos trust is an irrevocable trust that was created as a revocable trust and the trustor was a resident when the trust later became irrevocable. Approximately half of the states for which nexus is created by a resident trustor responded that nexus is created when the trustor was a resident when the trust was created, when the person who funded the trust was a resident when the trust was created, or was created by a current resident. Trusts funded by a resident were least likely to be subject to tax, with only 11 jurisdictions responding yes. 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 11 The survey also questioned whether certain activities, such as registering to vote, maintaining a stateissued driver s license, and spending time in the created nexus for the trust. States often indicated that although registering to vote or maintaining a stateissued driver s license do not on their own create nexus, these activities were factors taken into consideration and, by requiring a current in-state address, could create the domicile necessary to subject the trust to taxation. States also said nexus is generally not dependent on the length of time the trustor spent in- most notably because a person s domicile is not determined merely by the amount of time he or she spends within the state. Use Caution When Appointing a Trustee. When appointing a trustee, trustors in over half of the jurisdictions must carefully consider the tax consequences of doing so. Twenty-three jurisdictions responded that a trustee s residency will create sufficient nexus for the trust to be taxed. Additionally, 25 jurisdictions responded that one or more of a trustee s in-state activities while administering the trust will create nexus. Of those states basing nexus on the trustee s residency, over 85 percent responded that the trust has sufficient nexus when the trustee lives in- maintains a permanent place of abode in the or has an office for conducting trust business in-state. When determining whether the location where the trustee administers the trusts will create nexus, we asked the states to identify whether certain activities will, by themselves, do so. Over 80 percent of the states taxing trusts based on the location where the trust is administered will do so when any of the following activities take place: s trust is administered in-state at any time during the year; s trust is principally administered in-state; s trust accounting, bookkeeping, sales and purchases take place in-state; s trust fiduciary s usual place of business is in the state; s majority of the discretionary decisions regarding the investment of trust assets are made in-state; s majority of the discretionary decisions regarding the distributions of trust income and principle are made in-state; or s trust assets are managed, or the investment decisions are made, by an in-state corporate trustee that is a member of an affiliated group with members located throughout the country. In 13 jurisdictions, simply maintaining the trust s official documents, books, and records is sufficient to create nexus. TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

12 (Vol. 2013, No. 34) SPECIAL REPORT Conclusion. There is only so much planning you can do, because you may not know where the trustee or trustor will be in the future, Laura Peebles a director at Deloitte Tax LLP in Washington D.C. told Bloomberg BNA Aug. 16. How do you predict what the rules will be 10 years from now? Who would have thought 10 years ago that cloud computing would be such a big issue? Flexibility is the key, Peebles said. You must be prepared to deal with the known unknowns, such as where trustee may be located in the future, as well as the unknown unknowns, such as new technological developments affecting nexus. There are often situations, Peebles explained, where trusts have nexus based on different factors in multiple states. At times, this has resulted in the states trying to tax the same income twice, she said. You have to deal with this one state at a time. The solution varies among jurisdictions and their criteria, she said. For example, Peebles added, you may move the trust to a different jurisdiction, ask the trustee to consider moving, or ask the trustee to resign, depending on the factor creating nexus. What is clear is that ensuring that a trust is filing all necessary state income tax returns or avoiding tax in jurisdictions in which it is legally required to do so requires a regular review of the state jurisdictional implications of the location of trust s assets and key players such as the trustees and beneficiaries. Communication between the trust fiduciary, the tax return preparer, trustees, and beneficiaries can help avoid paying an unnecessary tax or receiving an unexpected tax assessment. Overview of State Income Taxation of Trusts Alabama Alabama subjects trusts to income the same rate as for single individual taxpayers, is 5.1 percent. [Ala. Code 40-18- 5.] A fiduciary must file a fiduciary income tax return for the following: s all resident trusts with net income over $1,500 for the year; s all nonresident trusts with any net income derived from sources in Alabama; and s any trust, whether resident or nonresident, claiming a qualifying net operating loss for the year. [Ala. Code 40-18-29(a); Alabama Form 41, Fiduciary Income Tax Return and Alaska Alaska does not impose an Alaska does not impose an Alaska does not impose an Arizona Arkansas Arizona subjects trusts to income Arkansas subjects trusts to single individual taxpayers, is 4.54 percent. [Ariz. Rev. Stat. Ann. 43-1011(5)(a); 43 1311(B).] tax rate for trusts, subject to an inflation adjustment, is 7 percent. [Ark. Code Ann. 26-51-201(a).] The fiduciary of a trust must file a return for the trust if either of the following apply: s the trust has any Arizona taxable income for the tax year; or s the trust s gross income for the tax year is $5,000 or more, regardless of the amount of the Arizona taxable income. [Arizona Form 141AZ, Fiduciary Income Tax Return and Fiduciaries should file fiduciary income tax returns when any of the trust s income is currently distributable, income tax is payable by the beneficiaries or the grantor, the trust s net income is at least $3,000, or any beneficiary of the trust is a nonresident. [Ark. Regs. 1.26-51-803; Arkansas Form AR1002, Fiduciary Return and 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 13 California California subjects trusts to s having a beneficiary that is a single individuals and is subject to an inflation adjustment, is 12.3 percent. [Cal. Rev. & Tax. Code 17041).] There is an additional tax at the rate of 1 percent on taxable income in excess of $1 million. [Cal. Rev. & Tax. Code 17043.] Fiduciaries must file fiduciary income tax returns when a trust s gross income is more than $10,000, the trust has an alternative minimum tax liability, or a trust has net income in excess of $100. [Cal. Rev. & Tax. Code 17742(a); 18505; Cal. Code Regs. tit. 18, 18505 1; California Form 541, Fiduciary Income Tax Return and Colorado Connecticut Delaware Colorado subjects trusts to Connecticut subjects trusts to Delaware subjects trusts to The flat income tax rate for trusts, which is the same as the rate for single individuals, is 4.63 percent of federal taxable income. [Colo. Rev. Stat. 39-22-104(1.7); 627.] The flat income tax rate for trusts is 6.7 percent. [Conn. Gen. Stat. 12-700(a)(8)(E).] the same as the rate individual taxpayers, is 6.75 percent. [Del. Code Ann. tit. 30, 1102(a)(13).] The fiduciary of every resident trust, or every nonresident trust with Colorado source income, must file a Colorado income tax return if it is required to file a federal income tax return or if it has a Colorado tax liability. [Colo. Rev. Stat. 39-22-601(3).] Fiduciaries of resident trusts should file fiduciary income tax returns when they are required to file a federal income tax return or have any Connecticut taxable income for the taxable year. Fiduciaries of nonresident trusts should file returns when they either have income derived from Connecticut sources or incur a net operating loss, net passive activity loss, or net capital loss for Connecticut income tax purposes but not for federal income tax purposes for the taxable year. [Conn. Agencies Regs. 12-740- 1(a)(2); 5(a).] The fiduciary of a trust must file a fiduciary income tax return when the fiduciary was required to file a federal income tax return. [Del. Code Ann. tit. 30, 1162; 1163; Delaware Form 400, Fiduciary Income Tax Return and TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

14 (Vol. 2013, No. 34) SPECIAL REPORT District of Columbia The District of Columbia subjects trusts to income tax based on the following s having a beneficiary that is a tax rate for trusts is 8.95 percent. [D.C. Code Ann. 47-1806.03.] A fiduciary of a trust must file a return if any either of the following applies: s the gross income for the estate is $1,675 or more for the taxable year; or s the gross income for the trust is $100 or more for the taxable year. [D.C. Code Ann. 47-1805.02(2); District of Columbia Form D-41, Fiduciary Income Tax Return and Florida Florida does not impose an Florida does not impose an Florida does not impose an Georgia Hawaii Idaho Georgia subjects trusts to income Hawaii subjects trusts to income s having a beneficiary that is a Idaho subjects trusts to income single taxpayers, is 6 percent. [Ga. Code Ann. 48-7-20.] tax rate for trusts is 8.25 percent. [Haw. Rev. Stat. 235 51(d).] single individuals, is 7.4 percent. [Idaho Code 63-3024(a); See also Idaho State Tax Comn., Income Tax Rate Schedule (2013).] The fiduciary of a trust must file a fiduciary income tax return if the fiduciary: s receives income from business done in Georgia, s manages funds or property located in Georgia, or s manages funds or property for a Georgia beneficiary. [Ga. Code Ann. 48 7 22(a)(1); Georgia Form 501, Fiduciary Income Tax Return and Fiduciaries of trusts that are required to distribute all income currently should file returns when the trust s taxable income is at least $200; fiduciaries of other trusts should file returns when the trust s taxable income is at least $80. [Haw. Regs. 18 235 94(b).] Fiduciaries of resident trusts must file returns when required to file a federal return and federal gross income is at least $100. Fiduciaries of nonresident trusts must file returns when required to file a federal return and federal gross income attributable to Idaho sources is at least $100. [Idaho Code 63-3030; Idaho Form 66, Fiduciary Income Tax Return and 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 15 Illinois Illinois subjects trusts to income s having a beneficiary that is a The flat income tax rate for trusts is 5 percent. There is also an additional personal property replacement tax rate of 1.5 percent. [35 ILCS 5/201(b)(5.1); 35 ILCS 5/201(d).] The fiduciary of a trust must file a fiduciary income tax return if the trust: s has net income, regardless of any deduction for distributions to beneficiaries; s is an Illinois resident and files, or is required to file, a federal income tax return, regardless of the amount of net income or loss; or s is a nonresident of Illinois, but received income from Illinois sources. [35 ILCS 5/502.] Indiana Iowa Kansas Indiana subjects trusts to income Iowa subjects trusts to income tax based on the following Kansas subjects trusts to income The flat income tax rate for trusts s 3.4 percent. [Ind. Code Ann. 6-3-2-1(a).] resident single individual taxpayers, is 8.98 percent. [Iowa Code Ann. 422.5(1); Iowa Admin. Code r. 701-89.8(422)(10)(a); Iowa Dept. of Rev., Iowa 2013 Tax Rate Schedule. ] single individual taxpayers, is 4.9 percent. [Kan. Stat. Ann. 79-32,110(a)(2); (d).] Fiduciaries of Indiana resident and nonresident trusts must file a fiduciary income tax return when the gross income of the trust is at least $600. [Ind. Code Ann. 6 3 4 1; 4 2(c); Indiana Tax Information Income Tax Bulletin 1; Indiana Form IT-41, Fiduciary Income Tax Return and The fiduciary of a trust should file a fiduciary return for each accounting period in which there is taxable income of $600 or more, and at the final accounting period before the estate is closed, regardless of income. Non-resident fiduciaries must include a copy of the federal income tax return. [Iowa Code Ann. 422.6; 422.14; Iowa Admin. Code r. 701-89.4(422)(6); Iowa Form IA 1041, Fiduciary Return and Fiduciaries of resident trusts should file fiduciary income tax returns when the trust has any taxable income or there is withholding tax due for nonresident beneficiaries. Fiduciaries of nonresident trusts in Kansas should file fiduciary income tax returns when the trust has any taxable gain or income from Kansas sources. [Kan. Stat. Ann. 79-3220(c); Kansas Form K-41, Fiduciary Income Tax Return and TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

16 (Vol. 2013, No. 34) SPECIAL REPORT Kentucky Kentucky subjects trusts to single individual taxpayers, is 6 percent. [Ky. Rev. Stat. Ann. 141.020.] Fiduciaries must file returns for resident and nonresident trusts when those trusts have certain levels of gross income. [Ky. Rev. Stat. Ann. 141.190(1); Kentucky Form 741, Fiduciary Income Tax Return and Louisiana Maine Maryland Louisiana subjects trusts to Maine subjects trusts to income Maryland subjects trusts to tax rate for trusts is 6 percent. [La. Rev. Stat. Ann. 300.1.] single individual taxpayers, is 7.95 percent. [Me. Rev. Stat. Ann. tit. 36, 5111; 5160. See also Me. Rev. Svcs., State of Maine - Individual Income Tax Rates (2013).] single individual taxpayers, is 5.75 percent. The county income tax rate in Maryland is a flat rate for all taxpayers that varies by county but must fall between one percent and 3.2 percent. [Md. Code Ann., Tax-Gen. 10-105(a)(1); 106.] Fiduciaries of resident trusts and of nonresident trusts with Louisiana source income should file fiduciary income tax returns when the trust has at least $2,500 of net income, at least $6,000 of gross income, or a nonresident beneficiary. [La. Rev. Stat. Ann. 162(A); Louisiana Form IT-541, Fiduciary Income Tax Return (For trusts) and Fiduciaries of resident and nonresident trusts should file a fiduciary income tax return if the trust had any Maine taxable income; gross income of $10,000 or more, regardless of the amount of Maine taxable income; retirement plan distributions; or a Maine income tax liability. [Me. Rev. Stat. Ann. tit. 36, 5220; 5222(3); Maine Form 1041ME, Income Tax Return for Resident and Nonresident Trusts and Fiduciaries should file fiduciary income tax returns when they are required to file a federal fiduciary income tax return and have Maryland taxable income or, if the trust does not have any Maryland taxable income, when the trust is a member of a passthrough entity and nonresident pass-through entity tax was paid on its behalf. [Md. Code Ann., Tax- Gen. 10 813; Maryland Administrative Release No. 16; Maryland Form 504, Fiduciary Income Tax Return and 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 17 Massachusetts Massachusetts subjects trusts to and The income tax rate for trusts, which is same as the rate for individual taxpayers, is: s 12 percent for Part A taxable income from capital gains; and s 5.25 percent for Part A taxable income from interest and dividends, Part B income, and Part C income. [Mass. Gen. L. ch. 62, 4; Mass. Regs. Code tit. 830, 62.4.1(5)(c)(3).] The fiduciary of a trust that is subject to Massachusetts jurisdiction and has taxable income in excess of $100 for a taxable year must file a return. [Mass. Gen. L. ch. 62C, 6(b).] Michigan Minnesota Mississippi Michigan subjects trusts to Minnesota subjects trusts to Mississippi subjects trusts to The flat income tax rate for trusts, which is the same as the rate for single individual taxpayers, is 4.25 percent. [Mich. Comp. Laws 206.51] The highest marginal tax rate for trusts, which is the same rate as married individuals filing separately, is 9.85 percent. [Minn. Stat. 290.06(2c), as amended by 2013 Minn. H.B. 677, effective for taxable years beginning after Dec. 31, 2012.] single individual taxpayers, is 5 percent. [Miss. Code Ann. 27-7-5.] The fiduciary of a trust must generally file a fiduciary income tax return if the trust was required to file a U.S. Income Tax Return for trusts (Form 1041) or had income taxable in Michigan that was not taxable on its federal Form 1041. [Mich. Comp. Laws 206.51(6); 206.91(1); 206.201(1); Michigan Form MI-1041, Fiduciary Income Tax Return and Fiduciaries of trusts in Minnesota should file Minnesota fiduciary income tax returns when the trust has either a nonresident alien beneficiary or at least $600 of Minnesota source income. [Minn. Stat. 289A.08(2); 290.014(3); 290.30; Minnesota Form M2, Income Tax Return for Trusts and Instructions; Minn. Dept. of Rev., Filing Requirements for Trusts. ] The fiduciary of a resident trust must file a fiduciary income tax return for any resident trust; fiduciaries of nonresident trusts should only file Mississippi fiduciary income tax returns when they have taxable income from Mississippi sources. [Miss. Code Ann. 27-7-35(1); Miss. Regs. 35.III.10.01.101; Mississippi Form 81 110, Fiduciary Income Tax Return (for trusts) and TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

18 (Vol. 2013, No. 34) SPECIAL REPORT Missouri Missouri subjects trusts to income s having a beneficiary that is a and single individual taxpayers, is 6 percent. [Mo. Rev. Stat. 143.011; 143.021; 143.061.] Resident trusts must file returns when they were required to file a federal return for the same period. Nonresident trusts with any Missouri source taxable income or Missouri gross income totalling more than $600 must file a Missouri income tax return. [Mo. Rev. Stat. 143.481; Missouri Form MO-1041, Fiduciary Income Tax Return and Montana Nebraska Nevada New Hampshire Montana subjects trusts to Nebraska subjects trusts to Nevada does not impose an New Hampshire does not impose a dividends and interest tax on trusts for taxable periods ending on or after Dec. 31, 2013. Resident grantors and beneficiaries are subject to the interest and dividends tax at 5 percent. [N.H. Rev. Stat. Ann. 77:3 (as revised by S.B. 286:3 9, 162nd Sess., 2nd year (N.H. 2012)); New Hampshire Form DP-10-ES, Estimated Interest and Dividends Tax Return and Instructions (2013).] single individual taxpayers and is subject to an inflation adjustment, is 6.9 percent. [Mont. Code Ann. 15-30- 2103; 2153; Mont. Dept. of Rev., Web Publication - Montana Individual Income Tax (2012).] tax rate for trusts is 6.84 percent. [Neb. Rev. Stat. 77-2701.01; 715.02; Neb. Dept. of Rev., 2012 Nebraska Legislative Changes. ] Nevada does not impose an New Hampshire does not impose a dividends and interest tax on trusts for taxable periods ending on or after Dec. 31, 2013. Resident grantors and beneficiaries are subject to the interest and dividends tax at 5 percent. [N.H. Rev. Stat. Ann. 77:3 (as revised by S.B. 286:3 9, 162nd Sess., 2nd year (N.H. 2012)); New Hampshire Form DP-10-ES, Estimated Interest and Dividends Tax Return and Instructions (2013).] The fiduciary of a trust is required to file a fiduciary income tax return for trusts if the trust has total income is $2,240 or more during the taxable year. [Mont. Code Ann. 15 30 2603; Montana Form FID-3, Income Tax Return for Trusts and The fiduciary of the trust must file the fiduciary income tax return for any trust that is required to file a federal income tax return. [Neb. Rev. Stat. 77-2717(2); Nebraska Form 1041N, Fiduciary Income Tax Return and Nevada does not impose an New Hampshire does not impose a dividends and interest tax on trusts for taxable periods ending on or after Dec. 31, 2013. Resident grantors and beneficiaries are subject to the interest and dividends tax at 5 percent. [N.H. Rev. Stat. Ann. 77:3 (as revised by S.B. 286:3 9, 162nd Sess., 2nd year (N.H. 2012)); New Hampshire Form DP-10-ES, Estimated Interest and Dividends Tax Return and Instructions (2013).] 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 19 New Jersey New Jersey subjects trusts to and single individual taxpayers and unmarried individuals not filing as head of household or surviving spouse, is 8.97 percent. [N.J. Rev. Stat. 54A:2-1(b).] The fiduciary of every resident trust must file a return if gross income is more than $10,000. The fiduciary of every nonresident trust with New Jersey source income must file a return if gross income received from all sources during the taxable year is more than $10,000. [N.J. Rev. Stat. 54A:8-3.1(a)(1)(c); New Jersey Bulletin GIT-12 (Sept. 2011).] New Mexico New York New York City New Mexico subjects trusts to New York subjects trusts to and New York City subjects trusts to and single indvidual taxpayers, is 4.9 percent. [N.M. Stat. Ann. 7-2-2(I); 7.] single individuals, is 8.82 percent. [N.Y. Tax Law 601. See New York TSB-M-12(3)I (Feb. 13, 2012).] single individuals in both New York City and New York is 8.82 percent. [N.Y. Tax Law 1303; 601. See New York TSB-M-12(3)I (Feb. 13, 2012).] A fiduciary required to file a federal tax return must also file a New Mexico fiduciary income tax return if: s the trust is a resident of New Mexico; or s the trust has income from transaction of business in, into or from New Mexico, or property in New Mexico, or compensation in New Mexico. [New Mexico Form FID-1, Fiduciary Income Tax Return and Fiduciaries of resident trusts must file income tax returns when the trust: s has to file a federal return; s has any New York taxable income; s has tax preference items for minimum income tax purposes in excess of the specific deduction; or s was subject to a lump-sum distribution tax. [N.Y. Tax Law 601; 618; 651(e); New York Form IT-205, Fiduciary Income Tax Return and A trust s trustee must file the fiduciary income tax return. [N.Y. Tax Law 1306(e); N.Y.C. Admin. Code 11 1751(e)] TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

20 (Vol. 2013, No. 34) SPECIAL REPORT North Carolina North Carolina subjects trusts to s having a beneficiary that is a and North Dakota Ohio Oklahoma North Dakota subjects trusts to s having a beneficiary that is a Ohio subjects trusts to income tax based on the following Oklahoma subjects trusts to single individual taxpayers that are neither surviving spouses nor heads of household, is 7.75 percent. [N.C. Gen. Stat. 105-160.2; 134.2.] tax rate for trusts is 3.22 percent. [N.D. Cent. Code 57-38-30.3(1); N.D. State Tax Comr., North Dakota Taxation, An Overview of Major State and Local Taxes in North Dakota.] single individual taxpayers and subject to an inflation adjustment, is 5.421 percent. [Ohio Rev. Code Ann. 5747.02(A)(6); Ohio Dept. of Taxn., Income Tax Booklet for Residents, Nonresidents and Part-Year Residents; Ohio Dept. of Taxn., Form IT 1040ES, Income Tax Estimated Payment Vouchers and single individual taxpayers, is 5.25 percent. [Okla. Stat. Ann. tit. 68, 68-2355.] The trustee must file an income tax return if the trust must file a federal return and either: s the trust has North Carolina source income; or s the trust has at least one North Carolina beneficiary. [N.C. Gen. Stat. 105-160.5; N.C. Admin. Code tit. 17, r. 06B.3716; North Carolina Form D-407, trusts Income Tax Return and Fiduciaries of trusts are responsible for filing an income tax return if the fiduciary was required to file a federal fiduciary income tax return, regardless of whether the income is taxable to the trust or to the beneficiaries. [N.D. Cent. Code 57-38-07; 31. See N.D. Admin. Code 81 03-02.1-04(1); North Dakota Form 38, Fiduciary Income Tax Return and Generally, each trust that files a federal income tax return also must file the Ohio fiduciary income tax return. [Ohio Information Release Trust 2003-01 (April 14, 2003); Ohio Form IT 1041, Fiduciary Income Tax Return and Fiduciaries of resident trusts should file a fiduciary income tax return, regardless of whether they have taxable income for the year. Fiduciaries of nonresident trusts should file returns when they have Oklahoma taxable income. [Okla. Stat. Ann. tit. 68, 68-2368(F); Okla. Admin. Code 710:50-23-1(a)(2); Oklahoma Form 513, Resident Fiduciary Return of Income and Instructions; Oklahoma Form 513NR, Nonresident Fiduciary Return of Income and 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 21 Oregon Oregon subjects trusts to income and state. [2013 BBNA Trust Nexus Survey.] single individual taxpayers and is subject to an inflation adjustment, is 9.9 percent. [Or. Rev. Stat. 316.037; Or. Dept. of Rev., Oregon Instructions for Estimated Income Tax and Form 40-ESV Payment Voucher (2013).] A fiduciary income tax return must be filed by the fiduciary of: s every resident trust that is required to file a federal income tax return, and s every nonresident trust that for the taxable year has from sources within Oregon any taxable income, or gross income of $600 or more regardless of the amount of taxable income. [Or. Rev. Stat. 316.362(1).] Pennsylvania Rhode Island South Carolina South Dakota Pennsylvania subjects trusts to and Rhode Island subjects trusts to s having a beneficiary that is a resident of the South Carolina subjects trusts to South Dakota does not impose an The flat income tax rate for trusts in 2013 is 3.07 percent. [72 Pa. Stat. 7302.] tax rate for trusts is 9.9 percent. [R.I. Gen. Laws 44-30-2.6(c)(3)(A)(II); Rhode Island Form RI-1041ES, Fiduciary Estimated Payment Coupon and single individual taxpayers and is subject to an inflation adjustment, is 7 percent. [S.C. Code Ann. 12-6-510; 515; S.C. Dept. of Rev., South Carolina Declaration of Estimated Tax for Individuals (2013).] South Dakota does not impose an individual income tax. The fiduciary of a trust must file the fiduciary income tax return. [72 Pa. Stat. 3402 202; 61 Pa. Code 117.5(a); Pa. Dept. of Rev., Pa. Personal Income Tax Guide, ch. 14, Estates, Trusts and Decedents ; Pennsylvania Form PA-41, Fiduciary Income Tax Return and Fiduciaries of resident trusts are required to file a fiduciary return if the trust is required to file a federal income tax return for the taxable year or had any Rhode Island taxable income for the taxable year. Fiduciaries of nonresident trusts must file a fiduciary return and complete Schedule II if the trust had income or gain derived from Rhode Island sources. [R.I. Gen. Laws 44-30-1(a); 16(a); 35; 51; Rhode Island Form RI-1041, Fiduciary Income Tax Return and The fiduciary of a trust must file the fiduciary income tax return for a resident trust if the trust: s is required to file a federal income tax return for the taxable year; s has any South Carolina taxable income for the taxable year; or s any beneficiary of the trust is a nonresident. [S.C. Code Ann. 12 6 30(4); 4930; South Carolina Form SC1041, Fiduciary Income Tax Return and South Dakota does not impose an individual income tax. TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13

22 (Vol. 2013, No. 34) SPECIAL REPORT Tennessee Tennessee subjects trusts to s having a beneficiary that is a The flat income tax rate for trusts is 6 percent. [Tenn. Code Ann. 67-2-102.] A fiduciary who received $1,250 or more in taxable income and dividend income for the benefit of Tennessee residents is required to file a Tennessee Individual Income Tax Return. Trustees receiving taxable income on behalf of nonresident beneficiaries are not required to file a return unless the nonresident received taxable interest or dividend income as a resident during the tax year. [Tenn. Code Ann. 67-2- 102; 104; Tenn. Comp. R. & Regs. 1320-3-2-.05;.08; Tennessee Form INC 250, Individual Income Tax Return and Texas Texas does not impose a individual income tax. Texas does not impose an Texas does not impose a Utah Vermont Utah subjects trusts to income tax based on the following Vermont subjects trusts to income The flat income tax rate for trusts is 5 percent. [Utah Code Ann. 59-10-104.] tax rate for trusts, subject to an inflation adjustment, is 8.95 percent. [Vermont Form FI-161, Fidcuiary Return of Income and Instructions. But see Vt. Stat. Ann. tit. 32, 5822(a) (stating highest marginal tax rate of 9.4 percent.)] A fiduciary of a resident trust must file a fiduciary income tax return if the trust was required to file a federal fiduciary income tax return for the taxable year. A fiduciary of a nonresident trust must file a return if any income of the trust was derived from Utah sources and a federal fiduciary income tax return was required to be filed for the taxable year. [Utah Code Ann. 59 10 504; Utah Admin. Code R865 9I-20(A); Utah Form TC-41, Fiduciary Income Tax Return and Every trustee must file a fiduciary return if the trust was required to file a federal fiduciary income tax return and either earned or received more than $100 of Vermont income or received $1,000 or more in gross income from the sources listed under the Vermont portion of the income adjustment calculation. [Vt. Stat. Ann. tit. 32, 5861(a); Vermont Form FI 161, Fiduciary Return of Income and 8-23-13 Copyright 2013 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TM-WSTR ISSN 1534-1550

SPECIAL REPORT (Vol. 2013, No. 34) 23 Virginia Virginia subjects trusts to income resident single individual taxpayers, is 5.75 percent. [Va. Code Ann. 58.1-320; 321; 360.] The fiduciary of a resident trust must file a fiduciary income tax return if it is required to file a federal fiduciary tax return or if the trust had any Virginia taxable income for the taxable year. The fiduciary of a nonresident trust must file a return if the trust had income or gain derived from Virginia sources and was required to file a federal fiduciary income tax return. [Va. Code Ann. 58.1-381; Va. Regs. 10-115-110; Virginia Form 770, Fiduciary Income Tax Return and Washington Washington does not impose an Washington does not impose an Washington does not impose an West Virginia Wisconsin Wyoming West Virginia subjects trusts to s having a beneficiary that is a Wisconsin subjects trusts to Wyoming does not impose an all individual taxpayers other than married individuals filing separate returns, is 6.5 percent. [W. Va. Code 11 21 4e(a); W. Va. Code R. tit. 110, 110 21 4.1.] single individual taxpayers and is subject to an inflation adjustment, is 7.65 percent. [Wis. Stat. 71.125(1); 71.06.] Wyoming does not impose an Fiduciaries of resident trusts should file fiduciary income tax returns when they are required to file a federal income tax return or have any West Virginia taxable income. Fiduciaries of nonresident trusts should file West Virginia income tax returns when they have West Virginia source income exceeding the amount of their West Virginia personal exemption. [W. Va. Code 11 21 51; W. Va. Code R. tit. 110 110 21 51.1(2); 51.5; West Virginia Form IT-141, Fiduciary Income Tax Return (For Resident and Non-Resident Trusts) and The fiduciary of a resident trust must file a fiduciary income tax return if the trust had any taxable income or gross income of $600 or more, regardless of taxable income. [Wis. Stat. 71.13(1); Wisconsin Form 2, Fiduciary Income Tax for Estates or Trusts and Wyoming does not impose an TAX MANAGEMENT WEEKLY STATE TAX REPORT ISSN 1534-1550 BNA TAX 8-23-13