USA Trends and Developments Contributed by: Rebecca O’Toole, Julie Sirlin Pleshivoy and William Keenen, Greenberg Traurig, LLP
be located and more on the residency and activities of the individuals involved in its administration and beneficial enjoyment. California illustrates the point. California generally considers both fiduciary residence and beneficiary residence when determining the state income taxation of a non-grantor trust. Consequently, a California trus - tee may create California income-tax exposure even if no beneficiaries reside in California, while California beneficiaries may independently create California tax exposure even if all trustees reside elsewhere. New York follows a different approach. Although New York classifies many trusts created by New York domicili - aries as resident trusts, a trust may qualify for a resi - dent trust exemption if statutory requirements relat - ing to trustee residence, trust assets and the source of trust income are satisfied. Accordingly, the same trust may be taxed very differently depending on the state involved and the residence of its fiduciaries and beneficiaries. The lesson for planners is straightforward: trust tax - ation depends on a trust’s actual connections to a jurisdiction, not merely on the situs designation con - tained in the governing instrument. Trustee residence, beneficiary residence, fiduciary appointments, admin - istrative functions and the location of trust decision- making may all affect the trust’s state tax profiles. As a result, planners must not only structure trusts thought - fully at inception, but also monitor changes in fiduciary Mobility planning extends beyond domicile and trust situs. For many clients, the location of assets and the structures through which those assets are owned can be just as important. As states continue to take differ - ent approaches to taxing income, gains, pass-through entities and intangible assets, planners must evaluate not only where a client resides, but also where income- producing assets are held and how they are structured. Different assets present different planning opportu - nities and challenges. Marketable securities, closely held business interests, partnership interests, carried interests, and deferred compensation arrangements may each be subject to different sourcing rules and and beneficiary residency over time. Asset location and entity structuring
state tax regimes. Therefore, planners often evalu - ate assets according to their income characteristics, expected appreciation and anticipated liquidity pro - file. Assets expected to generate significant income or gain may be held through trusts or entities established in favourable jurisdictions, while less tax-sensitive assets may remain associated with the client’s primary state of residence. Entity structuring is often an equally important part of the analysis. States vary significantly in how they source income from pass-through entities, multi-state businesses and intangible property. Therefore, domi - cile planning is frequently co-ordinated with owner - ship restructuring and entity design to align anticipat - ed income and gain with the client’s broader state-tax objectives. Particularly in the context of partnership interests, carried interests, deferred compensation arrangements and closely held businesses, these considerations can materially affect the ultimate tax result. Conclusion The differences among state tax regimes have become too significant for affluent individuals and families to ignore. As states pursue new ways to increase rev - enue from concentrated wealth, taxpayers and their advisers increasingly consider where they live, where trusts are administered, who serves as fiduciary and how assets are structured. At the same time, wealth has become increasingly mobile. Individuals can relocate, trusts can change situs, fiduciary functions can move and assets can often be repositioned across jurisdictions. In turn, state tax policy now influences far more than annual tax liability; it affects fundamental planning decisions involving wealth preservation, trust administration and family governance. The result is an ongoing cycle. States adopt new tax - es and expand existing regimes. Taxpayers respond through domicile planning, trust planning, and chang - es in asset ownership and administration. States then adapt their policies and enforcement efforts in response. Understanding that cycle has become an essential part of modern estate planning and will likely remain so as state tax regimes continue to diverge.
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