Webinar Transcript (10/30/2025): “State Income Taxation Of Trusts”
Host: Jonathan I. Shenkman, President & Chief Investment Officer of ParkBridge Wealth Management (Contact: jonathan@parkbridgewealth.com)
Presenter: Andrew S. Katzenberg, Esq. LL.M., Partner, ArentFox Schiff LLP (Contact: andrew.katzenberg@afslaw.com)
Jonathan Shenkman: Good morning, and welcome to the Park Bridge Wealth Management Full Webinar Series. This program is entitled, State Income Taxation of Trusts. As always, my name is Jonathan Shankman. I'm the President and Chief Investment Officer of Park Bridge Wealth Management.
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Jonathan Shenkman: In that role, I serve in a fiduciary capacity to help my clients achieve their financial objectives. The goal of my programs is to bring professionals together to help them better serve their clients.
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Jonathan Shenkman: And this is done by educating attendees on the latest topics in wealth planning, and by encouraging collaboration between a client's attorney, CPA, and financial advisor where appropriate.
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Jonathan Shenkman: My practice focuses on working with high net worth families, businesses, and not-for-profits. I manage individual investment portfolios, trust accounts, corporate retirement plans, and endowments to help my clients achieve their financial goals.
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Jonathan Shenkman: In addition to the 20 or so events I run every year, I also do a fair amount of writing on the topics of investing and financial planning. You can read my work in a variety of periodicals, including Barron's, CNBC, Forbes, Kiplinger, The Wall Street Journal, and Trust and Estates Magazine, to name just a few. You can see all my work on my website at parkbridgewealth.com forward slash articles, or by following me on social media at JonathanOnMoney.
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Jonathan Shenkman: Additionally, you can check out my weekly podcast, which is also called Jonathan on Money, and you can listen to that on Apple, Spotify, or wherever you get your podcasts.
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Jonathan Shenkman: Today, we're privileged to hear from Andrew Katzenberg, who's a partner, Aaron Fox Schiff, based in Washington, D.C, in New York City. Andy focuses on wealth transfer planning and preservation, multi-generational planning, estate and trust administration, nonprofit and tax stems organizations, and charitable giving.
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Jonathan Shenkman: Among his high net worth clients are hedge fund and private equity managers, business owners, art dealers, and athletes.
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Jonathan Shenkman: He also represents clients in forming and managing nonprofit and tax-exempt organizations, and acquiring and retaining their tax-exempt status.
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Jonathan Shenkman: Andy has authored numerous articles related to his field and is a nationally recognized lecturer. Andy also serves as an adjunct professor at the University of Baltimore Law School Graduate Master's Program. Today, Andy is going to be speaking on state income taxation of trusts, and with that introduction, I'll now turn the program over to Andy.
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Andrew Katzenberg: Thank you, Jonathan, and I appreciate you having me again. Thank you for all those who have started their day nice and early with me, and look forward to hoping to provide you some nugget of information that you didn't have before you got here. So, where do we always start?
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Andrew Katzenberg: when it comes to this income planning, it's really, you know, being a trust and estates attorney, it's the estate tax regime which has really driven us actually over to focusing on these income tax potential savings. As a trust and estates attorney, our first focus is, you know, the estate tax, and its increase is what's almost made it
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Andrew Katzenberg: less relevant in that area to push us over here. So, just, you know, as a basic primer that I feel is always important that everyone has to… the building blocks is that
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Andrew Katzenberg: The federal state tax exemption currently is $13.99 million, subject to inflation, subject to that it's going up to actually to $15 million adjusted for inflation come January 1, 2026.
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Andrew Katzenberg: Again, with that high benchmark of being $15 million, and a couple being $30 million, there's not a lot of estate tax planning
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Andrew Katzenberg: Needed for those who we'll call are the clearly not rich, the rich.
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Andrew Katzenberg: They're probably pretty rich, and it's only those mega wealthy above that $30 million, or the $50 million, and $100 million up, where the estate tax regime really is their more… maybe their primary focus, or at least coexisting with their income tax focus.
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Andrew Katzenberg: all those clients and individuals, essentially from $40 million and below, I'd probably argue, are more concerned when they come to your doorstep about
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Andrew Katzenberg: how can we save income taxes? How can we say something today? Not something…
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Andrew Katzenberg: in the future, either because I don't need it, or they think they don't need it, or because I'm less concerned about it because that's… I'm 50, or 40 years old, or 60 years old, and that's, you know, decades away before I have to… I care about it. I would love to know what you can do for me today to save money for me today that I can still use. That's often where you're seeing clients talking about it. As you know.
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Andrew Katzenberg: The federal gift tax and state tax, they are coupled, so whether you use it during life or death, that, you know, that $14 million is connected.
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Andrew Katzenberg: Right now, it's $19,000 per DONI for the annual exclusion. Adjusted for inflation, it is not increasing in 2026. It will still be $19,000.
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Andrew Katzenberg: Always the generation skipping transfer tax is looming out there when jumping over more than one generation, so we all want to be cognizant of that with our planning. And again, this income tax planning will all… though it's going to be income tax planning, you can do it at the same time as you're doing estate tax planning, because it's all trust planning.
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Andrew Katzenberg: So, they're gonna have a trust that's going to avoid the estate tax as well as the income tax. That's usually going to be the play. So, both the… you get, you know, two bites of the apple, with one bullet kind of thing.
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Andrew Katzenberg: Again, then you also have the state tax regime, again, because I'm… I assume I'm talking to a very heavy New York, Connecticut, and maybe New Jersey crowd, in this audience today. 12 states plus DC have,
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Andrew Katzenberg: a state… estate tax. New York obviously has, is at 7.16.
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Andrew Katzenberg: The cliff begins at 105%, that's at 7. roughly 5 million, then you're totally taxed, so that's kind of that line, that 7 million line, so even though we're talking about the 15 million.
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Andrew Katzenberg: that's, for us in New York, really arguably not irrelevant, but not as important, because 7 is that first line of defense that you're going to tell clients you need to be below 7, and the rest you gotta get out earlier, or below, we'll call it, 14 between a couple.
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Andrew Katzenberg: Connecticut mirrors the federal, so they're right now roughly at 14, going to 15.
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Andrew Katzenberg: And then they also have a gift tax, only state and country with that, so be aware of that. If you have property in Connecticut, you are… could be dwindling that down. Often clients sometimes might move around, or before they move, might make gifts to avoid, using up their Connecticut estate slash gift exemption. New Jersey, you got rid of it for a gas tax, to those individuals, but you still have an inheritance tax.
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Andrew Katzenberg: likely it's never coming back, is probably how I look at it. I'll never say never, but…
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Andrew Katzenberg: Pretty close that they're not going to bring it back at this point, because it's been,
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Andrew Katzenberg: Close to a decade, or getting close to, that they… they got rid of it.
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Andrew Katzenberg: Again, you got Illinois, Minnesota, Massachusetts, DC, Maryland, Hawaii, Maine, Oregon, Rhode Island, Vermont, Washington, the other states. And as you can see, Massachusetts has a low bar, kind of like what New York used to be, which was, 1 million back in around the 2000s.
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Andrew Katzenberg: Now it's at… they're only at 2 million, so just be aware of these other states have much lower thresholds, which again.
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Andrew Katzenberg: gets us to state income taxation, that that's great, I… I'm… maybe I'm someone that has $10 million or $20 million, and I think I'm totally immune from the estate tax, so that's not why I'm here today. You've done that vanilla basic planning for the client.
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Andrew Katzenberg: They have, you know, their power of attorney and their living wills, and they're saying, well, what else can you do? What other, you know, bag of tricks do you have for me?
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Andrew Katzenberg: And the answer is, well, what… maybe we can save something when you do a sale, you know, on your investments. Obviously, states like New York and California being two of the highest income tax states
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Andrew Katzenberg: Out there. New York, if you live in the city, over the state level, it's about 10.9% is the top bracket, and then you have the city level in New York City, and again, a high swath of people that we're dealing with do live in Manhattan.
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Andrew Katzenberg: It's 3.876, so when you combine them, you're close to almost 15% at that point of a tax rate. Again, one of the highest in the country. California is, I think, the other. I think they might still be ahead of us, but we're trying to be number one, apparently, in this category.
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Andrew Katzenberg: So, you have that issue of, I'm being hit with a 15% tax, can I somehow get rid of that?
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Andrew Katzenberg: And who are the states allowed to tax? They're allowed to tax residents and non-residents alike. It doesn't matter. It depends on where the source of the income is. If it's coming out of New York, they can tax it. If you are located here, they can also tax it, whether it's sourced here or not.
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Andrew Katzenberg: So, those are the two groups that are concerned with this and trying to potentially avoid it. So this is where the planning opportunity arises.
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Andrew Katzenberg: is
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Andrew Katzenberg: does New York, or Connecticut, or any state that it may be, Illinois, Massachusetts, do they have the right
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Andrew Katzenberg: To tax your income.
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Andrew Katzenberg: And the place this falls is really under, the 14th Amendment, and between the, actually, the Due Process Clause, and the 14th Amendment combined, that, you know, the states have these rights that you need, a degree of nexus.
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Andrew Katzenberg: to the state in order for them to apply their laws to you and tax you. You know, benefit and burden, essentially, is how you can look at it.
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Andrew Katzenberg: And, you know, the most recent case that came out, from the Supreme Court now, these all start off, by the way, at state-level cases, and then there's a handful of Supreme Court cases on top, which then apply to all the states. Some of the states do not have
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Andrew Katzenberg: clear, cases on which way things go. You never want to be a case, try to avoid being the name on a case, but at some point, if you have a client that's big enough, and good facts.
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Andrew Katzenberg: it might be worth it. New York is one example, though I will get to that in a minute, but the most recent
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Andrew Katzenberg: federal case from the Supreme Court was in 2019 in Kastner. I'm sure many of you, again, probably have heard of this, because rarely is there that often something that's so relevant to our field that comes up in the High Court, so I know I was, paying close attention to this when it started trickling down.
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Andrew Katzenberg: And they brought up this issue, when it comes to, the taxation of a trust in North Carolina.
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Andrew Katzenberg: And the question North Carolina was asking was, can, or position was, they wanted to tax based on the residency of the beneficiary.
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Andrew Katzenberg: So the facts of that case were that the North Carolina Supreme Court found that it was unconstitutional, and their taxing authority pushed it up to the federal level. It was a New York grantor, New York law, New York trustees.
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Andrew Katzenberg: The assets were held in Massachusetts. The only connection to, the state of North Carolina
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Andrew Katzenberg: were the beneficiaries, a daughter and a granddaughter of the grantor. That was it. That was their one connection to it. And like I said.
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Andrew Katzenberg: the ruling in Kastner was that it's all about this nexus, minimum connections between the state and the trust that allows taxation.
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Andrew Katzenberg: And again, if you are getting benefits from the state, then the state is allowed, essentially, to tax you, and the question is, are you getting any benefits? Prior cases which have been decided, in this area to help, you know, solidify kind of the do's and don'ts, we'll call it, of how to, you know, setting up these types of trusts.
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Andrew Katzenberg: Resident Exempt, trusts, is that
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Andrew Katzenberg: you have, the location of the trustee. That has been determined, settled by the Supreme Court. It doesn't mean that if you have a trustee in this state, you are then taxable, period. It just means the state is allowed to put a law down on their books that says.
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Andrew Katzenberg: If we are taxing a trust based on the location of the trustee, that is constitutionally allowed. You can't challenge it. So if they have it.
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Andrew Katzenberg: It's there.
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Andrew Katzenberg: Example, New York.
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Andrew Katzenberg: doesn't have a rule like that. So, you could have a trust with a New York person on it, for example.
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Andrew Katzenberg: and they… you could have a… it's out of… I don't want to use California, bad example, but out of Texas, with everything and nothing else connected to New York, and New York would not tax it, because New York doesn't have a law in the books saying that location of the trustee is a trigger for taxation in New York. They could, but they choose not to.
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Andrew Katzenberg: Also, siteus administration, the status of the administration, is another one that's been decided. If they choose to be the reason of the state of why we're taxing you, that would be constitutionally permissible. And then income given to the beneficiary is taxable.
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Andrew Katzenberg: In that income… that beneficiary's actual state.
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Andrew Katzenberg: Where they're located. So all those have already been decided, and Castor was figuring out, what about just the beneficiary? And when I say just the beneficiary.
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Andrew Katzenberg: this case is specific to its facts. So again, if you have one, derivation difference.
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Andrew Katzenberg: you can't say Kastner blesses me. It can make me feel more comfortable, but it's not necessarily, means you're bulletproof. So again.
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Andrew Katzenberg: Court ultimately concluded the rationale was, that they focused on ownership and control, and that this beneficiary, who is a contingent beneficiary, because it was totally discretionary of the trustee, they had to own and enjoy the property. They don't as a non-contingent beneficiary.
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Andrew Katzenberg: or as a contingent beneficiary. They have no right to possess, the income. The money may go somewhere else.
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Andrew Katzenberg: These people may never get it, and it may end up with somebody in the state of Maryland, and then why did North Carolina get to tax that money when ultimately no one in North Carolina ever received it or received any benefit from it?
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Andrew Katzenberg: So again, that's why they focused on things like the settler's ability can revoke it, trustee can control it, those are the things that the court ultimately relied on, and came to that conclusion that, again.
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Andrew Katzenberg: North Carolina could not tax, based on that reason.
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Andrew Katzenberg: And so, the real answer is not about what this did decide, but what it didn't decide that still are open factors. A state with a beneficiary with other factors. So again, unless you meet up all the factors of this case.
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Andrew Katzenberg: it arguably does not apply, or you can't say with certainty, I'm okay. It just means, you know, if I have the law in North Carolina and a beneficiary.
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Andrew Katzenberg: this case doesn't bless me. I might have a problem. Might. I'd probably feel comfortable with that, and I'd probably change the law, but I wouldn't, you know, be telling my clients they're okay.
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Andrew Katzenberg: Residency of the settler, that's a big one. That's the real one that's out there, that, you know, whether a settler… the state says a settler can do that, you know, makes a trust in your state, you are stuck in our state, which is kind of the example of Connecticut's position.
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Andrew Katzenberg: Right, and right now, that hasn't been changed. You are stuck in the taxation of Connecticut if you have a Connecticut resident settler. That has not been decided by the Supreme Court. Could be taken up, but who knows? And relying only on non-contingent,
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Andrew Katzenberg: beneficiaries. So, those are another spot if it's, you know, again, this was a contingent beneficiary because of discretionary. If there isn't.
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Andrew Katzenberg: Who knows? Maybe, maybe not.
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Andrew Katzenberg: So again, where does that leave us with these cases as you kind of tie them all together? What you can do with this planning is known as, you know, an income-exempt trust, or a resident exempt trust.
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Andrew Katzenberg: a trust that is a resident of, technically, a state that has a tax… that wants to tax it, but you are excluded from that state-level tax. And that's what you're looking for. Essentially, you'd be, you know, not taxed.
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Andrew Katzenberg: from the state level, in any state, wherever the trustee may be, wherever the settler may be, there's only tax you're getting hit with is the federal tax, so you're not going to avoid that unless you moved to, you know, and moved yourself to Puerto Rico, but otherwise, you're still going to get what that 23.8% most likely tax is going to be hit with you, but you're not going to pay
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Andrew Katzenberg: the 5, or the 10, or the 15% state-level tax, as you go to these higher tax states, becomes increasingly more relevant. So…
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Andrew Katzenberg: when you look at the states with no income taxation, you have stuff like New York, which has a specific statute for exemptions. So they've codified, what some states have done
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Andrew Katzenberg: through, you know, legit… not legislation, through, case law. And New York, again, we're always on the cutting edge, I guess. And so we have a state statute specifically that, you know, you follow, you're in, and you're fine, though there is some questionable constitutionality pieces to that, that one day you, one of you on this call, might be the one to challenge.
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Andrew Katzenberg: Other states, based on various factors, location of the grantor, trustee, beneficiary, as I discussed.
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Andrew Katzenberg: Some of these are clearly constitutional, and we know that. Some of these are a little unclear, because they haven't been fully litigated. Other relevant cases in other states
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Andrew Katzenberg: if you fall in these places to kind of look for further guidance, you have, Minnesota Fielding in 2018, you have Bank of America, Massachusetts, where there was actually a loss, you have Pennsylvania, with McNeil and, Weiss.
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Andrew Katzenberg: You have Lynn in Illinois. Again, all of these go through various factors, and if you can try to, in these states where there are cases, mirror their facts, where you can rely on this case.
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Andrew Katzenberg: Then you can probably avoid state income taxation. Doesn't mean if you can't mirror that, that you can't also do it. You may have a fact, you know, something that is very similar but one fact off. Doesn't mean you can't take that position, doesn't mean you can't advise the client that, hey, you can do this, but there's a risk because we don't have a case dead on point, but you are very close to it.
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Andrew Katzenberg: And it should work, and it's probably a risk worth honestly taking, because again.
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Andrew Katzenberg: good facts make good case law, so if you have a good, you know, set of good facts, even if you… the state feels you were wrong, it is unlikely that they're going to want to challenge you and lose and kind of open the floodgates up, so to speak.
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Andrew Katzenberg: Additionally, not to say this is not a game, but the reality is, if you don't believe you have to file in a state and you don't file in a state, well.
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Andrew Katzenberg: it's very hard for someone to challenge you if they don't even know you're there, especially if you think your position is right. So, practicality kind of rules on that if you can come to a reasonable conclusion in that, and your comfortability with you and your client.
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Andrew Katzenberg: So, give you an example.
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Andrew Katzenberg: For New York, we have our own statute, and this is what's known as a… for New York, it's known as a resident exempt trust, because it's a, a resident income tax trust.
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Andrew Katzenberg: of the state of New York. That is clear. The reason is because New York's position is we… you are subject to taxation in New York if the grantor is a New York person.
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Andrew Katzenberg: That's one of the triggers. Or, you know, you are sucked in, whether they created this at death or during life, that makes it a New York resident trust. Full stop, you are subject to taxation unless you meet the statutory exemption.
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Andrew Katzenberg: So, for New York to meet the… to meet that requirement, you have no New York trustees.
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Andrew Katzenberg: The trust is administered outside the state of New York.
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Andrew Katzenberg: and no New York source income. That last one, no New York source income, means currently, and there's, a tax opinion letter, New York opinion letter, that states, $1 of New York source income spoils the well.
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Andrew Katzenberg: So you… all it takes is literally $1 from some partnership that you weren't even aware of, that the trust owns, that provides you that you have a little bit of, you know, a couple dollars of New York source income.
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Andrew Katzenberg: And the other $5 million of income, or whatever it may be, it's all now New York source. And you are not resident exempt, and the whole thing is subject to 15%.
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Andrew Katzenberg: We'll get to the solution on that in a minute. But again, be aware of that. That is something people question, whether constitutionally, if that's actually permissible by having that $1 to such a, you know, 1% of 100%
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Andrew Katzenberg: is New York's source, and I'm now allowed to tax the other 99% that has no connection to the state of New York. Just because the grantor originally was there, maybe I don't have anyone else connected to New York.
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Andrew Katzenberg: questionable, but no one is yet to take up that mantle. The best use of, really, resident exempt trust is on the sale of a business with large capital gain exposure. The reason
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Andrew Katzenberg: Obviously, is you have a business, you're going to sell it for $100 million, and you're saying, oh, telling the client, if, you know, if you had, again, doing estate planning, you had transferred a large portion, half the business, maybe the entire thing.
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Andrew Katzenberg: to, you know, a Dynasty trust, or, you know, a family trust, however you want to call it, is in there. So, from a state tax perspective, now you have this $100 million windfall that is outside your taxable estate, you know, dodging the 40 org for New York with our exemption, or our…
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Andrew Katzenberg: It's gonna be a 50%, or our tax, a 50% tax total. In New York, we've avoided that, great, but you know what would be wonderful? If I could save $15 million.
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Andrew Katzenberg: on the sale event, so by not paying your state income tax. So again, that's usually where you see it, where you want to park this business on a resident-exempt trust. Usually, we're looking to our neighbor, to the east, or maybe, I guess it's the south, Delaware.
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Andrew Katzenberg: You know, it was a common place where you get, you know, a Delaware trustee, a Delaware trust, Delaware law.
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Andrew Katzenberg: and you don't have any New York trustee, no New York source, again, depending on what company you're selling, it better be a company that doesn't have source income that would spoil this. And again, the administration's gonna be happening in Delaware now. You are a resident-exempt trust, so when this trust that owns this business sells for $100 million, you will not pay
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Andrew Katzenberg: New York State tax. Now, you have to be aware of the state that you're setting it up in. They don't have a tax that they can tax you on. So there are some states that have no tax. Florida has no state-level income tax. That's why people like it there.
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Andrew Katzenberg: Wyoming and Dakotas, I believe, have no state income tax. Delaware, misnomer, does have a state-level income tax, however, they don't tax
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Andrew Katzenberg: you… if you don't have a beneficiary in the state. So, if you have a New York settler with New York beneficiaries and setting up in Delaware, that's why you don't have to pay. Similar rule in the state of Maryland, you have a trust in Maryland, but with no Maryland beneficiaries.
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Andrew Katzenberg: you are not subject to Maryland income taxes because, again.
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Andrew Katzenberg: they see… they don't see how the money is ever going to funnel down into the state, if it's just going to end up… if it's going through and passing to somebody in, you know, Maine, how the benefit is ever going to land in the state, and they view that as, you know, exempt.
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Andrew Katzenberg: Now, this application, like I said, is not limited to New York. New York, when it comes to their statute specifically, you want to be aware
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Andrew Katzenberg: that there is a clawback. So, similar to, like, a foreign trust scenario where you offshore it if you bring it back on, there's a throwback tax. New York has a similar mechanic. If you put the money over there, and it, at some later date comes back in.
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Andrew Katzenberg: to the state of New York, it is subject to that throwback tax, which essentially would try to
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Andrew Katzenberg: calculate what the tax would have been, plus interest on it, and comes up with a number that you owe, which actually is draconian, and actually worse than what you probably would have owed, and is a nightmare for everyone involved, it's someplace you don't want to be. That being said, you're saying, wait, but my client's in New York, his kids are in New York, like.
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Andrew Katzenberg: it might happen. It might, but it also might be that this trust sits over there in Delaware, and when the kid becomes 20 and goes to college in Pennsylvania, or he moves to DC,
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Andrew Katzenberg: He might not, when the time comes to send money out to him, he might not be in the state of New York. Or, obviously, you have a trustee who has a brain on his head, and lawyers advising them, and CPAs and financial advisors to tell them, before we pull any money out of this trust, maybe you consider moving.
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Andrew Katzenberg: Maybe you just go across, you know, the river to New Jersey and live in Jersey City for a year. We'll rent you a very nice
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Andrew Katzenberg: condo, and you can overlook the water and take a little ferry across. It's worth it, because we can save a million dollars when we make a distribution to you, if we need to make a distribution to you. So, again, that's just the administration mechanics of being aware of that fact. Again, you also
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Andrew Katzenberg: should know that this throwback tax only applies to interest and dividends, not capital gains. So, if you do this example, you sell the business, you save the $15 million, and then you say, well, my son, your daughter, is never gonna leave New York, and that's where they… whatever, and so… and they're gonna need some of this money to come out. Well, when you make a distribution of $100,000,
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Andrew Katzenberg: But…
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Andrew Katzenberg: it will suck up the accrued income and dividends, but it's not going to grab this big, you know, $15 million savings, isn't sitting there that's going to have to be onboarded at any point. It's erased.
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Andrew Katzenberg: Other states that have some of these throwback taxes, it's everything. It doesn't, you know, I believe California's that way. It doesn't exclude it, but New York's explicitly excludes
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Andrew Katzenberg: the capital gains. So, again, something to beware, kind of a windfall, where you could literally go, you know, I call it offshoring it, but go to another state, do this deal, and then you could bring it immediately back in the state of New York if you're concerned that, look, we're never going to leave, I don't want to deal with this, so we bring it right back into the New York, but a year later, but the capital gains have been essentially cleaned out, and, you're fine.
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Andrew Katzenberg: Again, downside to this, usually requires a corporate trustee, which adds cost, but again, you gotta weigh that… that… that kind of…
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Andrew Katzenberg: balancing act there, with it. I mean, if you're saving $15 million, I'm really not concerned about paying, you know, $10,000, $15,000 to a JP Morgan or a Morgan Stanley or whoever, to administer the trust in Delaware or some, you know, the South Dakota Trust Company to administer in South Dakota.
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Andrew Katzenberg: As we talked about, the recapture of income, but excluding capital gains, so that's the downside to be really aware of that fact.
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Andrew Katzenberg: Again, looking at some other cases, that I think are relevant here, because they're more recent, and they kind of give us a better sense of things, like fielding in Minnesota, which, just kind of show you kind of the difference of the facts, whether set there alone was enough to pass this
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Andrew Katzenberg: a minimum connection test, looks at all factors, and the trustee was most important. That was Minnesota's belief. Again, no state is the same.
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Andrew Katzenberg: So the facts, and for fielding, you have an intervis trust versus a testamentary trust. That's a big difference, okay? I… you know, there's… if you have a testamentary trust, it's probably a lot stickier and a lot more problematic versus intervivors.
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Andrew Katzenberg: It was created… again, these are all partially, I'll call them bad facts. The fact that they won is what is good, but this is just for Minnesota. Interbivas Trust is a good fact. Minnesota, trust created by a resident of New York, bad fact.
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Andrew Katzenberg: Governed by Minnesota law, bad fact. One of the beneficiaries was a resident of Minnesota, bad fact.
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Andrew Katzenberg: Minnesota S-Corp was an asset, technically a bad fact.
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Andrew Katzenberg: But that being said, the places where it was helpful is Trustee was in Colorado, then Texas.
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Andrew Katzenberg: it was, administered outside Minnesota. Again, those are two things the Supreme Court has ruled are clearly constitutionally allowed to be taxed on, and there's no Minnesota, source income. So those are probably the three more important pieces, and ultimately, the court found that, the state couldn't tax the trust because of that. So again, you had connections to the state, not just one, but multiple, and it still was outside the state's
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Andrew Katzenberg: the state felt, Supreme Court felt it was outside its realm of taxation. Then you get to Illinois. There's another good one, again, states, again, with a state tax is why they're always kind of coupled together, and these are probably the more aggressive states, I'll call it.
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Andrew Katzenberg: Basically, Lynn, and to be clear, in Illinois, for example, they haven't changed what it says on the books for their laws, even though this case happened, you know, a decade ago. The law still says that if you,
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Andrew Katzenberg: if the grantor creates a trust in… who's an Illinois resident, we can tax that trust. That's what the law says. If you just go pull it up and you just don't know about this case that's sitting… that's clearly sitting there and is totally alive and well, from the highest court in Illinois.
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Andrew Katzenberg: you might think you have to pay tax. They probably will take your money, too.
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Andrew Katzenberg: But that alone is not sufficient. It has failed due process. It is not enough of a nexus, for the trust to be taxed in Illinois. It was distinguished from a case in Connecticut. Gavin, this is the one where Connecticut, where, because there was non-contingent beneficiaries in that example, in Gavin versus here, there was just contingent beneficiaries. Again, good facts here.
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Andrew Katzenberg: Inner body was trust, not testamentary.
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Andrew Katzenberg: Again, trust created by Illinois resident, we said, that's the main one. Trustee, two inside Illinois, one outside. Trust governed by Texas law. Trust Protector in Connecticut. No Illinois beneficiaries.
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Andrew Katzenberg: Again, that… I think that some states are focusing a little more on that as kind of a big trigger. Administration was in Texas. So again, you have trustees in Illinois. Again, Illinois may take me a position that this is not the main factor. This is not the most relevant factor to them.
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Andrew Katzenberg: First being the resident, but again, the residency of the settler has been knocked out by, case law. So, some other examples. California is one of the states that you all should be aware of, that they tax based on two principles.
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Andrew Katzenberg: the trustee, and the beneficiary. Either of those. So if you have a non-contingent, if you have a
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Andrew Katzenberg: a non-contingent beneficiary, or any trustee, one of five, one of three, you will be taxed in the state of California. So always something to be aware of when setting up somebody who's maybe a settler out of California, and where you're setting the trust up.
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Andrew Katzenberg: And what the beneficiaries have a right to, and who those trustees may be, because you can avoid, again, one of the highest states in the country, which would be considered a resident exempt trust.
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Andrew Katzenberg: Now, you know, one of the things you might fall into that I… we have about a minute or two left.
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Andrew Katzenberg: I want to point out is, what if I get stuck in one of these situations where the facts just don't line up the way I want them to line up, and I have a trust that looks like it's going to be taxed, whether maybe there's source income, or whether there's maybe, you know, a fact in the document that says it's governed by New York law, or Maryland law, whatever the state you're trying to get out of as law, it just has these connection points.
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Andrew Katzenberg: That are unclear whether they're enough or not, and it puts you in a bad kind of spot.
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Andrew Katzenberg: Well, that's the beauty of decanting, and most states now allow decanting. I think it's as high as maybe 30 states have that on the books, 36 or so. There's also maybe common law decanting, whether you believe that's a thing or not, that you can essentially bifurcate the trust, split it in two, and take all the bad attributes and put them in one bucket, and take all the good attributes and put them in another bucket.
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Andrew Katzenberg: So that… that is the solution point that I've often done with clients to separate trusts that one that can't work, and ones that can work. So if you have some New York source income, you have five assets, and one happens to be some kind of New York source income, especially a rental property, that's an easy example, you have rental property in the state of New York, that's going to be New York source.
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Andrew Katzenberg: You can decant,
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Andrew Katzenberg: you can leave the current trust as is, because it's already going to be reporting in New York, so let's not make two have to report and then explain why you're not, because that's more likely to get audited.
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Andrew Katzenberg: the current trust, which clearly is taxable, can decant all of its other assets to a new trust with, you know, the right wording and the right, you know, things inside it, but with no New York source. Now that one's from day one going forward, those assets won't be taxed. New York, you'll keep the one asset and the one trust that's being reported with New York Source.
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Andrew Katzenberg: it's, you know, pays its, you know, share, but now you're insulating the rest. So that's the real, you know, usual solution. Or, like, in some of these examples, they were doing decanting and moving the trust because it was governed by the state's law, and they want to now move it to a state, or administer it, or a new trustee. Again.
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Andrew Katzenberg: starting it anew versus taking the current trust as is, and saying, okay, I was taxable, but now I'm not.
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Andrew Katzenberg: Not that you can't do that, but it's cleaner to say, well, let's just send what… let's change what needs to be changed and start a whole new, wholly owned trust that has none of the bad facts, that's never had to report, and let's keep it there, and we'll keep reporting as is, because again.
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Andrew Katzenberg: Less likely to kind of pop up on the radar of whatever taxing authority when you go from turning on to off the trigger, because they're going to see you turn the lights off, and they're going to be looking for, just like if you change residency, when you leave, they're going to be looking for a tax return from you.
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Andrew Katzenberg: And they're gonna wonder why it didn't come, and then they're gonna start sniffing around. Same thing, if you have a trust, and you go from a trust that's taxable and then stop, they're gonna ask why, and then you're gonna say, well, everything was decanted. Then they're gonna ask, let me see this other trust, and maybe they'll bring it up as this is a problem. So it's better
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Andrew Katzenberg: to leave the current trust in place and just move what's the bad pieces of it somewhere else, or move it away from the trust that is the bad piece somewhere else. So again, that new entity is kind of totally anew and fresh and clean, starting from zero. So that's best practice on how to do these things. I think I am at time, so I hopefully, you know, you all took away something pretty good from this.
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Andrew Katzenberg: To you in your practice, I'm always available, for questions, you know, offline. You have my contact information.
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Andrew Katzenberg: In the slide, I think,
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Andrew Katzenberg: Jonathan's provided it to you as well. Please feel free to reach out to me if you have a question. I'm always happy, to be in here to listen. And for that, I'll turn it over to Jonathan.
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Jonathan Shenkman: Great, thanks so much, Andy, and if anyone has any specific questions.
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Jonathan Shenkman: new business opportunities, or any other issues I'd like to discuss, please feel free to reach out directly to Andy or myself where appropriate, and I'll also be sure to include his contact information in the follow-up email to this program. As I mentioned at the onset, the goal of these programs, stay up-to-date on timely wealth management-related topics and to collaborate where appropriate. And I think we can all agree that the clients who are best prepared are the ones who are served by a team of knowledgeable advisors.
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Jonathan Shenkman: Three more quick items before I let you go today. First, my webinar series continues on Thursday, November 13th, on business and real estate succession planning, featuring Avi Kestenbaum of Meltzer Lippey, based in Long Island, New York. And I'll be sure to send out the invitation to this program in the coming days. In the meantime.
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Jonathan Shenkman: If you have a friend or colleague who'd like, who'd find these webinars of interest, they can subscribe to my webinar distribution list by emailing me with the word webinar in the subject line. My email is jonathan at parkbridgewealth.com.
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Jonathan Shenkman: Second, you can follow all my work on X and Instagram at Jonathan on Money, and by connecting with me on LinkedIn, you can also listen to my weekly podcast called Jonathan Money, which is available on Apple, Spotify, or wherever you get your podcasts, and you can watch my practical planning videos, which I post several times a week, by following me on YouTube at Jonathan on Money as well. And third, please take 30 seconds to fill out my survey at the end of this program. It helps me improve my webinars.
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Jonathan Shenkman: and provide timely and interesting content to attendees, and I thank you in advance for that.
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Jonathan Shenkman: And with that, this concludes today's session. Please stay safe and healthy, and have a wonderful day, everybody.