New York Tax Exempt Trusts

June 13, 2019

In a previous post on New York State trust taxation, we learned that this area of taxation quickly gets complicated. There’s lots of ins and outs to trust taxation, in part because of there’s a lot of specialized terminology. We briefly discussed that there are three broad categories of trusts in New York, resident, nonresident and exempt. Whether a given trust falls into one of these categories is extremely critical. In this post, we’ll delve a bit deeper and explore the contours of New York tax exempt trusts.

A Bit of a Mystery

Trusts are a bit of a mystery to the general population. As a result, there are a lot of misconceptions surrounding them. People often think of “trusts” and picture wealthy people with money set aside for the future. This taint of elitism may have some basis in reality. Nonetheless, the truth is that trusts can be highly useful financial vehicles. Trusts can serve any number of purposes and can offer plenty of benefits. And this applies not just to spoiled, over-privileged youths, but to all people.

In this post, we will build on our previous installment on New York trusts. To do so, we’ll examine the requirements New York tax exempt trusts in greater detail. As we previously advised, these requirements can be a bit nuanced. This is exactly why you need to find a qualified tax attorney whenever you’re performing an exempt status analysis. Our goal here is to explore the contours of these requirements a bit more. That way, you’ll have a better idea of how they work in reality.

Categories of NY Trusts: Resident, Nonresident and Exempt 

Very briefly, let’s just reiterate the basics on the 3 categories of trusts in New York. A resident trust is one which is subject to New York State tax on all of its income. This means that if the trust generates income from another state, this income will still be subject to tax. A nonresident trust is only subject to state tax on its New York source income. In general, this means income generated within the State of New York. Finally, an exempt trust is not subject to state tax in New York. Predictably, exempt status is the desired status for NY trusts, but this status is not easy to qualify for. 

Requirement #1: Trustees Must Be Located Out of New York State 

To qualify for exempt status, the trustees of a given trust must be located (or “domiciled”) outside of the State of New York. This requirement may appear straightforward, but in reality it can be tricky. In TSB-A-04(7)I, the Department of Taxation and Finance indicated that it will consider those who have power or influence over the trustee as “trustees” for purposes of this requirement. So, if a trust is formed out of state, with an out of state trustee, but with an advisor or other person who directs or controls the behavior of the trustee in NY State, then the first requirement may not be met. This is precisely the kind of expert counsel you need from a tax attorney who’s guiding you on this matter. 

Requirement #2: Trust Property Must Be Located Out of New York State 

This requirement is the most straightforward of the 3 requirements. To qualify for exempt status, the trust cannot have any tangible or intangible property located in the State of New York. For real property and tangible personal property, this requirement is very simple: the property is located wherever it is physically located. So if a trust owns a house in Maine, that house is considered out of state property. For intangible property, the property is considered to be located wherever the trustee is domiciled. So if the trust owns stock, and the trustee is located in Delaware, then the stocks are also situate in Delaware.

Requirement #3: Trust Cannot Have New York Source Income 

This is probably the most difficult requirement to meet. And the reason for this is because New York tax exempt trusts cannot generate any income which is traceable to a New York source, no matter how tenuous the trace may be. For instance, if a trust owns an investment fund, and the investment fund invests only a tiny amount of a money in a publicly traded corporation which shows just $50 of New York source income, this could jeopardize the requirement. This is the sort of thing which could be considered New York source income for exempt status purposes, even though it’s quite far removed from the trust itself. Technically, the trust owns the stock, but the corporation has NY source income. To meet this requirement, the trust cannot have any income derived from a NY source. 

Believe it or not, there are even more angles to exempt status requirements than we discuss here. In the future we may come back and discuss this topic in even greater depth. As an example, it may be possible to qualify New York tax exempt trusts mid year, say, if a change of trustee occurs, in order to receive partial exempt status in a given tax year. 

Our NYC Tax Attorneys Know New York Tax Exempt Trusts

At Mackay, Caswell & Callahan, P.C., we pride ourselves on our research prowess, consideration for clients and eagerness to see results. We go the extra mile for our clients because we believe so fervently in seeking results for them. If you have a tax related issue – such as tax debt resolution, a 1031 exchange, entity formation, etc., please don’t hesitate to reach out. We’ve helped hundreds of people make the best strategic decision in their case. Get in touch with one of our top New York City tax attorneys for more information today.

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