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New York Trust Taxation

New York State income taxation of trusts can be a tricky subject. There are many pieces of information to take in. A trust is taxed at the federal level. But trusts are also subject to tax in the State of New York. Tax planning for trusts in New York requires a highly sophisticated analysis. There are many variables to consider. Proper tax planning can result in huge tax savings. But this usually requires a great deal of research and expertise. In the past, we’ve just briefly dipped into the realm of trust taxation. As with other areas of tax law, trust taxation is difficult in part because it has its own lingo and its own concepts to master. Familiarizing oneself with these terms and concepts takes time and effort. But this is where MCC comes in.

In this post, we explore the basics of how trust taxation in New York State. As we will see, trusts receive less favorable treatment than other persons at the state level in New York. Proper tax planning can always improve the tax treatment of a given trust, but on the whole, resident married individuals and other persons are better off from a tax standpoint. First, we will go over the basic distinction between grantor and non-grantor trusts. This will give readers an understanding of which trusts are subject to income tax. Then, we will discuss the three separate categories of trusts in New York State. And then finally we will discuss the specifics of the tax treatment of trusts in New York.

Grantor vs. Non-Grantor Trusts

It’s possible to set up many different types of trusts. There can be nearly as many types of trusts as there are purposes for them to serve. However, there are 2 main types of trusts. Whether a trust falls into one of these two types is a very important determination. A “grantor” trust is a pass through entity. This means that its income automatically passes through to the beneficiary and is reported on the individual’s tax return. A Grantor trust is one in which the beneficiary and the fiduciary (also known as the “trustee”) are one and the same person.

Non-grantor trusts are distinct legal entities. Their tax treatment is separate from the beneficiary’s. Non-grantor trusts are subject to specific tax rates at the state level in New York, unless they’re exempt from taxation. These types of trusts have a creator (or “trustor”), a fiduciary or trustee, and a beneficiary. The trustee manages the trust and follows out the instructions of the trustor. Non-grantor trusts can either be established during a person’s life, or set up after a person’s death, through his or her Will.

For the purposes of New York State trust taxation, the critical issue is whether a given trust is either grantor (or “pass through”) or non-grantor. 

The Categories of New York Trusts 

If a given trust is taxed separately from its other associated persons, the next important task is to determine which of the following three categories it falls into: resident, nonresident or exempt. If a trust is a resident trust, then it is subject to tax in New York State on all of its income. However, if it is a nonresident trust, only its New York source income is subject to state tax.

If a resident trust receives “exempt” status, then it will be exempt from taxation on all of its income. Exempt status applies only if the trust fulfills three distinct requirements. The first requirement is that all of the trustees (and persons who have influence on the trustees) be located outside of New York State. The second requirement is that all of the trust property must be located outside of New York. And finally, the third requirement is that the trust cannot have any New York source income. Fulfilling these three requirements can be tricky. We will go over the nuances of these three requirements in a future post. But for now, know that a trust which meets these requirements can receive exempt status which means that it won’t be subject to state tax.  

Tax Treatment of Trusts in New York State 

If a given trust is subject to New York State tax on its income, then it will be subject to the tax rates which also apply to resident individuals and resident married persons filing separately. You can view these rates here. Under these rates, a trust pays 4% on income at or below $8,000. Beyond that threshold, it pays at rates which vary from a low of 4.5% up to 8.82%. In reality, though, trusts receive less favorable treatment than do individuals and married persons filing separately. This is because trusts cannot take the state’s standard deduction. However, trusts can itemize deductions (under Section 619 of the State’s tax code). Married individuals filing jointly and resident heads of households enjoy better rates than trusts across the board. This rate schedule reinforces why it’s important to find a competent attorney to assist with tax planning for New York trusts. 

Contact Us if You Need Assistance 

Again, this is a broad overview of New York State income taxation of trusts. We will focus on all of the many subtleties in future posts. At Mackay, Caswell & Callahan, P.C., we’re proud to deliver material of this sort because we know it benefits our current and future clients. The more educated you are, the better you’ll be able to carve out a solid financial position for yourself. Our attorneys are here to address whatever tax issue you may have. If you have an issue related to tax debt resolution, a Sec. 1031 exchange, trust tax rates, or other issue, don’t hesitate to reach out. Call one of our top New York City tax attorneys today and we will respond immediately. 

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