Fiduciary Trust International

It appears that both the New York State Senate and Assembly have dropped Governor Paterson’s proposal to broaden the New York state income tax on resident trusts.

The Current Law Provides Exemptions

Under current law, a resident trust pays no New York state income tax if it has no New York domiciled trustees, none of the assets are located in New York, and the trust has no New York state source income. This is so regardless of whether the trust was created by agreement or under a will. Because intangible personal property, such as a stock, bond or bank account, is deemed to be located where the trustee is domiciled, a trust that was established by a New York resident but that has a non-New York trustee pays no New York State income tax if it does not own New York real estate or tangible personal property located in New York.

The Governor’s Proposal

The Executive Budget Bill (A09710), introduced on January 19, 2010, provides that:

• Testamentary trusts established under the will of a New York domiciliary decedent will always be subject to New York state income tax;
• Trusts created under an agreement that become irrevocable when the creator is (or was) a New York resident will always be subject to New York state income tax if they have New York source income or identifiable beneficiaries who are New York residents (on a pro rata basis).

The Arguments For and Against

The stated purpose of the bill is to prevent tax avoidance by resident trusts through the use of non-New York trustees by adopting the approach used in other states such as California, Connecticut, Delaware, Maryland and Rhode Island, which tax the income from resident lifetime trusts according to the percentage of beneficiaries who are state residents. The bill assumes that $25 million in revenue will be raised as a result of this proposal.

Opponents have argued that the more likely result would be to drive wealthy residents out of the state and that the impact would fall most heavily on middle-class families who do not have the financial means to relocate. They have also argued that the provision likely would be subject to Constitutional challenge and that it would not raise the projected revenue assumed in the Executive Budget Bill.

Conclusion: The Governor’s Proposal is Not Off the Table—Yet

The Assembly and the Senate unveiled their 2010-2011 budget proposals before the recent Easter/Passover holidays and the provisions relating to New York resident trusts were nowhere to be found. With the legislature reconvening later this week, it will be interesting to see whether Governor Paterson backs off this proposal.

If you have any questions, please feel free to reach out to your Fiduciary Trust contact.

The above information is as of April 8, 2010 and should not be construed as specific legal or tax advice. You should consult your personal legal or tax advisor(s) regarding your specific circumstances in determining whether this information is relevant to any investment, tax or estate planning decisions that you make. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication 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 (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.