Fiduciary Trust International

Dear Colleagues,

Here is a summary of a recent change that impacts clients with New York resident trusts.

New Tax Filing Required for New York Resident Trusts
Although Governor Paterson's effort to tax certain New York resident trusts which historically have been exempt from New York State income taxation has failed, such trusts are now required to file New York State fiduciary income tax returns even if no tax is due.

Background
As a general matter, New York State imposes an income tax upon the income of any New York resident trust. A trust is a New York “resident” trust if it was established under (a) the Will of an individual who was domiciled in New York at the time of his or her death, (b) a lifetime agreement by an individual who was a New York domiciliary at the time the trust was created and that, was either irrevocable at that time or, if revocable when created, has not become irrevocable or (c) under a revocable trust agreement that became irrevocable at the time the grantor was domiciled in New York.

The Three-prong Test
As with many rules, there is an exception. Under current law, a New York resident trust does not pay New York State income tax if (i) none of the trustees are domiciled in New York, (ii) none of the trust assets are located in New York and (iii) the trust does not have New York source income.

Earlier this year, Gov. Paterson introduced a proposal that would subject all testamentary trusts established by New York domiciliaries and certain irrevocable lifetime trusts established by New York domiciliaries and which have non-contingent New York resident beneficiaries to New York State income tax, regardless of the residence of the trustees, the situs of trust property or source of income. (Executive Budget Bill, A09710).

Thankfully, this proposal was dropped in the Assembly and Senate budget negotiations. As a result, the New York State income tax exemption for New York resident trusts that meet the three-prong test above still stands.

Not Taxed but Not Forgotten
Traditionally, New York State resident trusts that were exempt under the three-prong test from paying New York State income tax were also relieved from filing a New York State Fiduciary Income Tax Return. (See NYS Department of Taxation and Finance TSB-M-96(1)I). This is no longer the case.

Pursuant to TSB-M-10(5)I, issued by the New York State Department of Taxation and Finance on July 23, 2010, every New York resident trust that meets the general filing requirements must file Form IT-205, Fiduciary Income Tax Return, regardless of whether the trust is exempt from the payment of New York State income tax under the exception for certain New York resident trusts described above.

In addition, New York resident trusts that are exempt from the payment of New York State income tax under the three-prong test must attach new Form IT-205-C, New York State Resident Trust Nontaxable Certification, to the completed fiduciary income tax return.

A New York State resident trust meets the general filing requirements if the trust:

• Is required to file a federal income tax return for the taxable year;
• Had any New York State taxable income during the taxable year; 
• Had certain tax preference items for minimum tax purposes in excess of the specific deduction; or 
• Is subject to a separate tax on lump-sum distributions.
  

Although the new requirement is backed by the authority of the NYS Department of Taxation and Finance, it lacks the punch of penalties in the event of non-compliance.

Effective Date
The new filing requirement applies for tax years beginning on or after January 1, 2010.

For more information, please reach out to your Fiduciary Trust contact.

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