United States

Consider an approach to fight a state’s assertion of nexus

Changing the situs of a trust may be beneficial


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Fighting a state's assertion of nexus involves making a case to the state that, even though a trust may fall under a technical definition of a "resident trust," insufficient connections exist between the trust and the state to subject the trust to taxation on its out-of-state income under the Constitution. Depending on the laws of the resident state, a second option may be to change the situs of the trust to a more taxpayer-friendly jurisdiction.

Moving the situs of a trust may not allow the trust to escape state taxation. Many states' laws determine nexus based on the location of the trustees, trust assets or residences of trust beneficiaries. Different rules may apply for determining where the trustee is domiciled, and it is not simple to engineer a mass exodus of beneficiaries and trust property away from certain taxing jurisdictions. There are a number of recent cases that do create new options to minimize and even avoid state tax liability on undistributed trust income, and they offer insight into drafting strategies that provide maximum flexibility in the future to move the trust's situs.

In his article, Case Law Options for Trusts Looking to Minimize State Income Taxes, first published in the The Tax Adviser, Jonathan Schwartz concludes that a handful of 2013 cases involving the taxation and administration of trusts should grab the attention of those looking to reduce the state income tax liabilities of their testamentary and inter vivos trusts.


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