FIDUCIARY ADVISORY SERVICES. Navigating The Web Of State Fiduciary Income Tax Issues

FIDUCIARY ADVISORY SERVICES Navigating The Web Of State Fiduciary Income Tax Issues

NAVIGATING THE WEB OF STATE FIDUCIARY INCOME TAX ISSUES I. Introduction. Charles D. Fox IV John B. O Grady A. In recent years, a number of developments have increased the need for fiduciaries to understand the laws of different states and how they affect the administration and taxation of trusts. One development has been the increased use of change of situs provisions to move trusts from the original jurisdiction to a new jurisdiction with more favorable laws such as a move from a state that does not have the Uniform Code to a state with the Uniform Code. Another development has been the increasing number of states that permit decanting. Currently, fifteen states permit decanting and decanting legislation has been proposed in three states. 1 s are being moved more and more frequently to jurisdictions that permit decanting so that the trusts can be decanted into new trusts with more favorable provisions than the current trusts. However, as will be discussed below, a change in the situs of a trust may result in a trust being subject to income taxation in two states rather than simply one. B. Fiduciaries must understand and adhere to the income tax rules that govern each trust. Challenges particularly arise when a trust is moved to a new jurisdiction. However, the misunderstanding of the state income tax rules in the original jurisdiction governing a trust by fiduciaries is not limited to isolated occurrences. C. The income taxation of trusts and estates from a federal income tax perspective is complex. In examining any trust from a federal income tax perspective, several determinations must be made. The first is whether the trust is a grantor trust or a non-grantor trust. If the trust is a grantor trust, for income purposes all items of income (both ordinary and capital gain) will be reported to the grantor or third party treated as the owner for income tax purposes and all deductions and credits will be available to the grantor. 2 If the trust is a non-grantor trust, a determination must first be made if the non-grantor trust is a simple trust or a complex trust. These determinations will affect the federal income taxation of the trust. D. Forty-three states and the District of Columbia also tax the income of nongrantor trusts and estates. The rules governing the income taxation of a trust or estate vary significantly from state to state. The income taxes owed by a trust or estate can vary from state to state because of the 1 Chart on State Decanting Statutes Passed or Proposed (as of June 7, 2012) prepared by M. Patricia Culler and located on the ACTEC Website. 2 See Internal Revenue Sections 671 to 678. 1

complexity. The attached chart, prepared by Richard W. Nenno, Wilmington Company, summarizes the state fiduciary income tax laws affecting non-grantor trusts. 3 In reviewing the chart, a reader can see the difference in which states approach the income taxation of trusts and estates. E. In dealing with the income taxation of a trust or estate, fiduciaries face two important responsibilities. One responsibility is to ensure that a trust or estate pays the state income tax that it owes. A second responsibility is to minimize the exposure of a trust or estate to state income tax. In order to meet these responsibilities, a fiduciary must have a clear understanding of the income tax laws of each state that might seek to tax the income of a trust or estate. II. The Different Ways in Which States Tax Income. A. Currently seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, do not tax the income of trusts. The other states and the District of Columbia do tax the income of trusts to a greater or lesser extent. B. If a trust is treated as a grantor trust for federal income tax purposes, all income (ordinary and capital gains) will be taxed to the grantor of the trust. Most states follow the federal grantor trust rules. If a trust is a grantor trust for federal income tax purposes, the trust will be treated as a grantor trust for state income tax purposes. Pennsylvania and Tennessee do not follow the federal grantor trust rules for irrevocable trusts and the District of Columbia and Louisiana tax grantors only in limited circumstances. C. Every state follows the rule that to the extent that income is distributed from an irrevocable non-grantor trust to a beneficiary, the beneficiary pays the tax and not the trust. Consequently, in examining the income taxation of a trust or estate from a state law perspective, one is primarily looking at the taxation of income accumulated in a trust as well as capital gains. D. In the remainder of this outline, the focus will be on the state income taxation of irrevocable non-grantor trusts. Non-grantor irrevocable trusts are generally taxed for state income tax purposes on one or more of the following bases: 1. The trust was created pursuant to the will of a testator who lived in the state at the time of his or her death. 3 Chart on Bases of State Income Taxation of Nongrantor s (as of August 1, 2012) prepared by Richard W. Nenno and located on the ACTEC Website. It is used with the permission of Richard W. Nenno. 2

2. The creator of an inter vivos trust lived in the state at the time the trust became irrevocable. 3. The trust is administered in the state. 4. One or more trustees live or do business in the state. 5. One or more beneficiaries live in the state. 4 E. The trust that meets one or more of the bases for taxation in a state is generally referred to as a. F. The bases for the state income taxation of non-grantor trusts vary from state to state: 1. created by will of resident. Connecticut, District of Columbia, Illinois, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, Ohio, Oklahoma, Pennsylvania, Vermont, Virginia, West Virginia, and Wisconsin tax a trust that is created by the will of a decedent who was a resident of the state at the time of his or her death. Other states, such as New Jersey and New York, require that such a trust have ees, assets, source income, or a resident beneficiary before they will tax such a trust. 5 2. Inter vivos trust created by resident. The District of Columbia, Illinois, Maine, Maryland, Minnesota, Nebraska, Oklahoma, Pennsylvania, Vermont, Virginia, West Virginia, and Wisconsin tax an inter vivos trust if it becomes irrevocable when the creator lived in the state. 6 3. administered in the state. Colorado, Georgia, Indiana, Kansas, Louisiana, Maryland, Minnesota, Mississippi, Montana, New Mexico, North Dakota, Oregon, South Carolina, Virginia, and Wisconsin tax the trust if a trust is administered in that state. Idaho and Iowa tax a trust if it is administered in the state if this basis is combined with other factors. Hawaii requires that a trust administered in Hawaii have at least one resident beneficiary for the trust to be taxed in Hawaii. Utah since 2003 has permitted a Utah corporate trustee to deduct all nonsource income of a trust administered in Utah. 7 4 Richard W. Nenno. Let My ees Go! Planning to Minimize or Avoid State Income Taxes on s. Proceedings of the 2012 Heckerling Institute on Estate Planning. p. 15-7. (Hereafter Nenno ). This paper is the best single source on the income taxation of trusts and estates from a state perspective. 5 Nenno, p. 15-8. 6 Nenno, p. 15-8. 7 Nenno, p. 15-9. 3

4. ee. Arizona, California, Georgia, Kentucky, Montana, New Mexico, North Dakota, Oregon and Virginia tax an irrevocable trust if one or more trustees reside in the state. 8 5. beneficiary. California, Georgia, North Carolina, North Dakota and Tennessee tax a trust if it has one or more resident beneficiaries. 9 G. There are many variations to the bases rules above depending upon the laws of a particular state. One must look at the law of each state in determining whether that state s income tax will apply to a particular trust. H. As can be seen above, some states apply more than one basis in determining whether a trust is subject to income taxation of that trust. For example, Virginia taxes the income of a non-grantor trust if (i) the trust is created by the will of a Virginia decedent; (ii) the trust is created by a Virginia resident; (iii) the trust is administered in Virginia; or (iv) there is at least one trustee who is a Virginia resident III. Examples of different states: A. The opportunity for reducing taxes can be important. State fiduciary income tax rates range from 3.07% in Pennsylvania to as high as 12.846% in New York City. B. New York. New York defines a as a trust created by a New York resident or grantor. New York does not tax a trust if a trust has no New York trustees, assets, or source income. C. Connecticut. Connecticut basically taxes irrevocable trusts that are created by a Connecticut testator or a person who is a resident of Connecticut at the time the trust became irrevocable. D. Delaware. Delaware generally does not impose any income tax upon s except in cases where one or more trust beneficiaries live in Delaware and then only upon the portion of the trust income attributable to the beneficiaries who reside in Delaware. E. Maryland. Maryland taxes an irrevocable trust created by a Maryland testator or grantor if the trust was created under the will of a decedent domiciled in Maryland on the date of decedent s death, the creator or grantor of the trust is a current resident of Maryland, or the trust is principally administered in Maryland. 8 9 Nenno, p. 15-9. Nenno, p. 15-9. 4

1. Virginia. Virginia, as noted above, has a broad definition of a subject to Virginia taxation. The definition is: A trust created by the will of a decedent who at his death was domiciled in the Commonwealth; a trust created by or consisting of property of a person domiciled in the Commonwealth; or a trust which is being administered in the Commonwealth. 10 2. The Virginia Administrative Code expands on this definition by adding that a trust is considered to be administered in Virginia if its assets are located in Virginia, its fiduciary is a resident of Virginia or it is under the supervision of a Virginia court. 11 F. Missouri. A trust will be subject to Missouri income tax if it was created by the will of a Missouri decedent or it is an inter vivos trust created by a Missouri resident. In addition, the trust must have a resident income beneficiary on the last day of the taxable year if the trust is to be subject to tax in Missouri. G. California. A trust is a California resident for income tax purposes if a trustee or non-contingent beneficiary is a resident of California, regardless of the residence of the settlor. With respect to corporate fiduciaries, the residence of the corporate fiduciary is the place in which the corporation conducts the major portion of the administration of the trust. 12 IV. Examples of Challenges Faced by Fiduciaries A. Given the complexity of and the differences between the rules governing the income taxation of trusts and estates by different states, an irrevocable non-grantor trust may be subject to income taxation in more than one state. Example: has non-contingent beneficiaries in California. ee is a resident of Virginia. The noncontingent California beneficiaries make the trust a resident for California income tax purposes. The presence of the trustee in Virginia would make the trust a resident for Virginia income tax purposes. Under the Virginia rules, the trust would be eligible for a credit for a portion of the tax paid to California. 13 The credit cannot exceed the portion of the tax owed by the trust in this example attributable to 10 Va Code Ann. 58.1-302. 11 23 VAC 10-115-10. 12 Cal Rev and Tax Code 17742. 13 Va Code Ann. 58.1-371. 5

income derived from California sources. Moreover, the Virginia credit is only available for the California tax if California provides a similar credit to trusts subject to Virginia taxation. 14 Example: There is a Delaware because the trustee is a Delaware trustee. None of the beneficiaries of the trust are Delaware residents. There is a Virginia cotrustee. In this situation, the trust would be subject to tax in Virginia, but not in Delaware because Delaware only taxes the income of an irrevocable non-grantor trust to the extent that there are resident beneficiaries. B. Two large challenges facing corporate trustees are: 1. Paying state income tax when no state income tax is owed. Example: There is a Delaware. No beneficiary of the trust is a Delaware resident. Delaware does not tax non Delaware source ordinary income or capital gains that will benefit individuals who reside outside Delaware. ee, however, believing that Delaware income tax should be paid, pays the taxes for many years. 2. ee does not pay state income tax although state income tax is owed. Example: Individual establishes an irrevocable trust in Illinois for benefit of the descendants. Under Illinois law, the trust is always subject to Illinois income tax because it was established by a Illinois resident. ee is located in Texas and there are no beneficiaries in Illinois. Texas does not tax the income of trusts and estates. ee does not pay any income tax on the assumption that it is now a Texas trust and not subject to Illinois income tax. C. Changing the residency of a trust as a solution to state income taxation 1. Changing the residency for income tax purposes requires that the trustee and counsel analyze the rules regarding the residency of a trust in the current state and any state to which the trustee is 14 Va Code Ann 58.1-332. 6

considering moving the trust. Depending upon the laws of this current state of residency and the possible future states of residency, one must look at the terms of the trust instrument as well as the location of the trustee, the trust assets and the beneficiaries. An analysis should also be made of the potential state income tax savings that will arise from moving the trust. 2. It is also helpful to have in the document provisions that will provide flexibility in possibly changing the situs of the trust or the ability to add such provisions. V. Preserving Flexibility in Estate Planning Documents. Estate planners must pay attention to preserving flexibility in irrevocable documents in order to meet changes in laws or in the needs of the beneficiaries. This includes addressing changes in fiduciary income taxation. A. If estate planners can take any lesson from 2010, it is that one cannot predict when and how the transfer tax landscape may change. In light of this general unpredictability and the looming uncertainty of 2013 and beyond, maintaining flexibility in estate planning documents is imperative. Estate planners should use drafting techniques that allow maximum flexibility to react to future changes in the law and changes in family circumstances. Beneficiaries, executors, trustees, and advisors will always need to evaluate the tax and other effects of exercising the powers or options that provide this flexibility, but the following techniques may allow the most flexibility in order to carry out the intention of a grantor or decedent or maximize available tax benefits in an uncertain transfer tax landscape. B. Powers of Appointment 1. The inclusion of powers of appointment in irrevocable trust agreements allows beneficiaries to take a second look at a trust after its creation. A testamentary power of appointment permits a current beneficiary who holds the powers to make prospective changes that may affect future beneficiaries, effective upon the death of the current beneficiary. In contrast, an inter vivos power of appointment permits a current beneficiary to transfer property to other beneficiaries during the beneficiary s lifetime. An inter vivos power of appointment may initially appear less favorable because of possible adverse tax consequences, but inter vivos powers allow a beneficiary to provide an immediate benefit for the permissible appointees if appropriate to do so. The holder of an inter vivos power of appointment does not need to wait until his or her death to implement the flexibility provided by the grantor. 7

2. Estate planners must also be mindful of the tax treatment of general and limited powers of appointment. The holder of a general power of appointment is treated as owning the appointive property for estate tax purposes. If the holder dies holding a general power of appointment, the appointive property will be included in the holder s estate. Likewise, the exercise of a general power of appointment during the holder s life may trigger gift tax liability for the holder. In contrast, the holder of a limited power of appointment (that is, one that is not exercisable in favor of the holder, the holder s estate, the holder s creditors, or creditors of the holder s estate) is not treated as owning the appointive property for estate tax purposes. However, adverse GST tax consequences may still apply. C. Testamentary Powers of Appointment. 1. A testamentary power of appointment allows an estate plan to react to changes in the law or in family circumstances without locking in any such changes until the death or incapacity of the holder of the power. Such powers of appointment may allow (1) the distribution of trust principal to a trust designed to better address new tax laws, (2) the retention of more property for future generations if permitted by changes to the GST tax, and (3) the distribution of property outright to beneficiaries if neither tax nor non-tax reasons justify the continued existence of a trust. 2. In drafting testamentary powers of appointment, individuals and their advisors should consider the permissible appointees of the power of appointment (for example, whether permissible appointees should be limited to the spouse or descendants) and whether the donee of a limited power of appointment may appoint trust assets outright or in further trust. The ability to appoint trust assets in further trust requires consideration of restrictions on the duration of the new trust, the distribution of trust assets at trust termination, the ability of the donee to create separate trusts, or other aspects of the future disposition of the trust assets. D. Powers of Appointment. The exercise of an inter vivos general power of appointment will be treated as a gift by the holder, equal to the value of the trust interest transferred by the holder. Further, an inter vivos power of appointment may cause otherwise excludable trust property to be taxed in the holder s estate. The adverse tax consequences of inter vivos powers of appointment may be lessened through the use of the holder s annual exclusion amount. The 35% gift tax rate, at least through 2012, also may lessen the tax sting. In some cases, the resulting gift by the holder (that is, the value of the trust interest surrendered by the holder) may be zero or have a nominal value. For example, if a trustee has 8

discretion to make distributions to a surviving spouse for health and support needs that are not adequately provided for out of the surviving spouse s other assets and income, and the surviving spouse has significant independent assets, the value of the trust interest surrendered by the surviving spouse will have little value because of the unlikelihood that the surviving spouse could receive trust distributions. E. Discretionary Distributions. The dispositive provisions of a trust provide guidance to the trustee on how and when trust assets may be distributed to trust beneficiaries. Permitting a trustee to make discretionary distributions to beneficiaries is a simple way to grant a trustee the flexibility to adapt to changing circumstances. Some individuals may not feel comfortable granting a trustee what may seem like unfettered discretion. Such concerns may be alleviated by carefully selecting the initial trustee, naming a successor trustee, and directing when and under what conditions a trustee may be removed. F. Protectors. protectors, special trustees, independent trustees, and persons with similar titles and roles can serve as the custodians of the paramount purposes of an irrevocable trust. Such persons can be granted, among other important powers, the authority within certain limits to fine-tune an individual s estate plan. For example, a trust protector can be granted the power to make administrative changes to a trust, such as changes to the procedures for the removal and appointment of trustees or changes to trustee investment provisions. A grantor may also allow a trust protector to make substantive changes to trust terms to address changes in family circumstances, financial conditions, trust or tax laws, or other legal environments that may affect the trust. Some grantors may also choose to give a trust protector the authority to make changes affecting the beneficiaries of the trust, such as adding or removing beneficiaries, directing discretionary distributions, or altering a beneficiary s interest in the trust. The authority of a trust protector can also be limited to specific transfer tax conditions, such as permitting a trust protector to act if the estate tax is permanently repealed or if it no longer applies to the grantor s estate. G. Decanting. A number of states 15 have enacted decanting statutes that allow a trustee, without court approval, to appoint trust assets in favor of another trust with new or modified terms that may better address changes in the tax law. Where available, decanting statutes can be useful tools for dealing with changes in beneficiary circumstances, consolidating trust assets for administrative purposes, modifying trustee provisions (such as 15 Alaska, Arizona, Delaware, Florida, Indiana, Kentucky, Missouri, Nevada, New Hampshire, New York, North Carolina, Ohio, South Dakota, Tennessee, and Virginia have enacted decanting statutes. 9

removal powers, appointment of successor trustees, and trustee compensation) or investment provisions, changing the situs or governing law of the trust, and correcting drafting errors. The state statutes vary in form with respect to the similarity required between the beneficiaries and their interests in the old and new trust, whether an interested trustee may decant a trust, and the notice and procedural requirements to decant. 1. Uniform Code. The Uniform Code (the UTC ), which has been adopted so far in 23 jurisdictions, 16 provides numerous statutory tools for dealing with common trust problems. These statutory provisions provide flexibility to grantors, trustees, and beneficiaries in dealing with irrevocable documents, both by allowing private agreements concerning trusts and by codifying the broad powers of the courts over trusts. Each state s version of the UTC has state specific variations that must be carefully reviewed. The discussion below is based on the UTC as approved by the National Conference of Commissioners on Uniform State Laws. 2. The UTC allows interested persons, usually the trustee and the beneficiaries, to enter into a private agreement called a nonjudicial settlement agreement that resolves almost any matter involving a trust, so long as the agreement does not violate a material purpose of the trust and could be approved by a court. Court approval of the agreement is not required, but is allowed. One of the most important and useful features of this provision is the ability to bind minor, incapacitated, and unborn persons to a nonjudicial settlement agreement by virtual representation. Under virtual representation, minor, unborn, or incapacitated persons may in many circumstances be bound to the agreement without the appointment of a guardian ad litem provided there is a qualified representative available, such as a parent or a person with a substantially identical interest in the trust, who does not have a conflict of interest. Nonjudicial settlement agreements can be one of the most useful and efficient ways of addressing and resolving a very wide range of trust issues. VI. Possible constitutional challenges. This section looks at three recent cases in which the constitutionality of certain state income tax regimes has been questioned A. Quill Corporation v. North Dakota, 504 U.S. 298 (1992). In Quill, the United States Supreme Court reviewed the constitutionality of North 16 The following states have adopted the UTC: Alabama, Arizona, Arkansas, the District of Columbia, Florida, Kansas, Maine, Missouri, Michigan, Nebraska, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Utah, Vermont, Virginia, and Wyoming. The UTC is pending in New Jersey. 10

Dakota s use tax on an out-of-state mail order business that had no outlets or sales representatives in the state but sold items to North Dakota residents under both the Due Process Clause and the Commerce Clause. The U.S. Supreme Court concluded that the use tax would not violate the Due Process Clause even though the business was not physically present in the state and had no outlets or sales representatives in North Dakota. The court noted that the Due Process Clause requires some definite link or minimum connection or contacts between a state and the person, property or transaction it seeks to tax and that the income attributed to the state for tax purposes must be rationally related to values connected with the tax in the state. Here, the court noted that mail order business had directed activities at North Dakota residents and that the magnitude of the contacts was more than sufficient for Due Process Clause purposes. The court reached a different conclusion regarding the Commerce Clause which prohibits certain state actions that interfere with interstate commerce. The Commerce Clause, according to the court, requires a substantial nexus which is different from the minimum contacts tests of the Due Process Clause. B. District of Columbia v. Chase Manhattan Bank, 689 A.2d. 539 (D.C. App. 1997). A resident of the District of Columbia died in 1934. Pursuant to a trust that he created, annuities were to be paid after his death to certain relatives and friends for a set number of years. After that period ended, the remaining trust property was to be distributed to the descendants of the decedent s nieces. The sole trustee was Chase Manhattan Bank in New York which held all the trust assets. None of the beneficiaries of the trust resided within the District of Columbia. The District of Columbia taxed the income of a testamentary trust if a decedent created the trust under his or her will and died while a resident of the District of Columbia. The trust paid the income tax to the District of Columbia from 1987 to 1991. Chase argued that the District of Columbia s taxation of the trust income violated the Due Process Clause. The court noted that the critical question, then, is whether the relationship between the District and the testamentary trust of one of its residents is sufficiently close to justify the District s classification of the trust itself as a resident for purposes of taxation. The court looked at the fact that courts of the District of Columbia had continuing supervisory jurisdiction over the trust since its inception and thereby provided a forum in which questions about the administration of the trust could be resolved. This jurisdiction over the trust provided a sufficient nexus between the District of Columbia and the trust to overcome any Due Process Clause concerns. 11

C. Chase Manhattan Bank v. Gavin, 733 A. 2d. 782 (Conn. 1999). Chase Manhattan Bank was the trustee of four testamentary trusts and one inter vivos trust. With respect to two of the testamentary trusts, none of the beneficiaries were Connecticut residents. For the two other testamentary trusts, Connecticut residents had interest as current beneficiaries and remainder beneficiaries. With respect to the inter vivos trust, both the current beneficiaries and the remainder beneficiaries were Connecticut residents. Each of the testamentary trusts and the inter vivos trusts met the requirements under Connecticut law for a that was subject to Connecticut income taxation. For the tax year at issue, all assets of the testamentary trusts and inter vivos trust were held outside Connecticut and all aspects of the administration of the trust were conducted outside Connecticut. Chase paid income taxes imposed on the testamentary trusts and inter vivos trust in 1993. It then sought a refund of the taxes arguing that the Connecticut taxation scheme violated the Due Process Clause and the Commerce Clause. The court relied on Quill to examine whether there was a sufficient connection between the state and the subject it sought to tax. With respect to the four testamentary trusts, the court noted that Connecticut provided the law that allowed for the creation of the wills and testamentary trusts and their administration and a forum for the litigation of the disputes concerning those instruments. This was a sufficient nexus to overcome Due Process Clause concerns. As a result, the state was justified in taxing the undistributed income of a testamentary trust even though the administration was not conducted in Connecticut and all assets were held outside Connecticut. With respect to the inter vivos trust, the court stated that the Connecticut domiciliary enjoyed all the protections and benefits afforded to domiciliaries and this was sufficient to tax the income of the inter vivos trust. The court distinguished Safe Deposit and Company v. Virginia, 280 U.S. 83 (1929) in which the court decided that the State of Virginia was prohibited under the Constitution from taxing an inter vivos trust with Virginia beneficiaries and a Maryland trustee that held assets in Maryland. It asserted that the main basis of the court s decision in Safe Deposit and Company was that allowing Virginia to tax would give rise to double taxation and this approach had been abandoned in later cases. \41159448.1 12

Bases of State Income Taxation of Nongrantor s Created by Created by ee Alabama Ala. Code 40-18-1, 40-18- 2, 5.00% on 40-18-5, 40-18-25; Ala. Admin. Code r. 810-3-25-.10 810-3-25- $3,000.12, 810-3-25-.14; instructions to 2011 Ala. Form 41 at 2, 3. 1 1 www.revenue.alabama.go v Alaska No income tax imposed on trusts. Arizona Ariz. Rev. Stat. 43-304(4), (5), 43-1001(2), (11), 43-101 1(5)(a), 43-1091, 43-1301(2), (3), (5), 43-1311, 43-1331, 43-1332; instructions to 2011 Ariz. Form 141AZ at 1, 2, 12. 4.54% on $150,000 www.azdor.gov Arkansas Ark. Code Ann. 26-51-201 26-51-203, 26-51-406; Ark. Inc. Tax. Reg. 4.26-51 -1 02, 9.26-51-102; instructions to 2011 Ark. AR1002 at 1; 2011 Tax Tables at 6. 7.00% on $49,999 2 2 www.dfa.arkansas.gov

Bases of State Income Taxation of Nongrantor s Created by Created by ee California Cal. Rev. & Tax. Code 10.30% on 17006, 17014, 17015, 17041 (a), $1 (b), (e), (h), (i), 17043(a), million 17301, 17731, 17742 1 7745, 17951, 18505, 19136; Cal. Code Regs. tit. 18, 17743 17744; instructions to 2011 Cal. Form 541 at 2, 3, 5, 10, 14. www.ftb.ca.gov Colorado Colo. Rev. Stat. 39-22-103(10), 39-22- 104(1.7), 39-22-401, 39-22- 403, 39-22-404, 39-22-601(4); instructions to 2011 Colo. Form 105 at 3, 4; 2011 Colo. Form 105 at 1. 4.63% www.taxcolorado.com Connecticut Conn. Gen. Stat. 12-700(a)(8)(E), (a)(9),(d), 1 2-700a, 12-701 (a)(4)(c), (D), (5), (8), (9), (19), (20), 12-71 3, 12-714, 12-719(a), 12-722(n); Conn. Agencies Regs. 12-701 (a)(4)-1, 12-701 (a)(9)-1, 12-713(a)-1, 12-713(a)-4, 12-714(a)-1, 12-701 (a)(1 1)-1; instructions to 2011 Form CT- 1041 at 4 6, 9; 2011 Form CT- 1041 at 1. 6.70% 3 www.ct.gov/drs 14

Bases of State Income Taxation of Nongrantor s Created by Created by ee Delaware 30 Del. C. 11 02(a)(1 2), 6.95% on (13), 1105, 1169, 1170, 1601(5), (8), (9), 1605(b), 1631, 1632, $60,000 1635, 1636, 1639; 2011 Del. Form 400-I at 1, 2; 2011 Del. Form 400 at 2. 4 4 4 www.revenue.delaware.gov District of Columbia D.C. Code 47-1803.01, 47-1803.02(a), 47-1805.02(2)(D), 47-1806.01, 47-1806.03(a)(7), 47-1809.01, 47-1809.02, 47-1809.03, 47-1809.04, 47-1809.05(1 ) (2), 47-1809.08, 47-1809.09; instructions to 2011 D.C. Form D-41 at 3, 4; 2011 D.C. Form D-41 at 2. 8.50% on $40,000 otr.cfo.dc.gov Florida No income tax imposed on trusts; Florida intangible personal property tax repealed for 2007 and later years. Georgia O.C.G.A. 6.00% on 48-7-20(a), (b)(1), (d), 48-7-22(a), (b), 48-7-27(a), 48-7- $7,000 114(e); Ga. Comp. R. & Regs. r. 560-7-3-.07(1 ) (5); instructions to 2011 Ga. Form 501 at 2. www.etax.dor.ga.gov 15

Hawaii Haw. Rev. Stat. 8.25% on inc. 235-1, 235-2.3, 235-4, 235- over $40,000 4.5, 235-51(d); Haw. Admin. Rules 18-235-1.17; instructions to 2011 Haw. Form N-40 at 1, 2-3, 11. Bases of State Income Taxation of Nongrantor s Created by Created by ee 4 4 www.hawaii.gov/tax Idaho Idaho Code 63-3011B, 63-3011C, 63-3024(a); Idaho Admin. Code Regs. 35.01.01.035, 35.01.01.075(e), 35.01.01.261; instructions to 2011 Idaho Form 66 at 1, 2, 10. 7.80% on inc. over $26,760 5 5 5 5 www.tax.idaho.gov 16

Illinois 35 Ill. Comp. Stat. 5/201 (a), (b)(5), (c), (d), 202, 203(c), 301(a), (c), 803(a), 1501 (a)(14), (a)(20)(c) (D); Ill. Admin. Code tit. 86, 100.2050, 100.3000, 100.3010, 1 00.3020(a); instructions to 2011 IL-1041 at 1, 2, 4 5; 2011 IL-1041 at 2, 3; 2011 Schedule N R. Bases of State Income Taxation of Nongrantor s Created by Created by ee 6.50% www.tax.illinois.gov Indiana Ind. Code 6-3-1-3.5(a), (e), 6-3-1-12(d), 6-3-1-1 3, 6-3-1-1 4, 6-3-2-1(a), 6-3-4-4.1; Ind. Admin. Code tit. 45, r. 3.1-1-1, r. 3.1-1-10, r. 3.1-1- 12, r. 3.1-1-21(d), r. 3.1-1-25, r. 3.1-1- 91; instructions to 2011 Ind. Form IT-41 at 1, 2, 3, 4, 6. 3.40% www.in.gov/dor 17

Bases of State Income Taxation of Nongrantor s Iowa Iowa Code 422.4 422.7, 422.9; Iowa Admin. Code r. 701-89.3(422); instructions to 2011 Iowa Form IA 1041 at 1; 2011 Iowa Form IA 1041 at 2. 8.98% on $64,755 Created by Created by ee 5 5 5 www.state.ia.us/tax Kansas Kan. Stat. Ann. 6.45% on 79-32,109(d), 79-32,110(a)(2), (d), 79-32,134; $30,000 instructions to 2011 Kan. Form K-41 at 2; 2011 Kan. Form K-41 at 4. www.ksrevenue.org Kentucky Ky. Rev. Stat. Ann. 141.010(9) (11), 141.020, 141.030(1); 103 Ky. Admin. Regs. 19:010; instructions to 2011 Ky. Form 741 at 1, 2. 6.00% on $75,000 revenue.ky.gov Louisiana La. Rev. Stat. Ann. 47:181 47:182, 47:187, 47:300.1 47:300.3, 47:300.6, 47:300.10(3); instructions to 2011 La. Form IT-541 at 5. 6.00% on $50,000 6 www.revenue.louisiana.gov 18

Bases of State Income Taxation of Nongrantor s Maine Me. Rev. Stat. Ann. tit. 36, 5102(1 -C)(A), (4)(B) (C), 5111, 5121, 5160, 5403; instructions to 2011 Form 1041ME at 1, 2. 8.50% on $19,950 Created by Created by ee www.maine.gov/revenue Maryland Md. Code Ann., Tax Gen. 10-101(d), (e), (g), (i), (j), (k), (n), 10-102, 10-103(a)(3), 10-105(a)(1), (d), 10-5.50% (plus county tax between 1.25% and 106(a)(1)(iii), 10-106.1, 10-201, 3.20%) on 10-212, 10-601, 10-604, 10-901, 10-902; instructions to 2011 Md. $500,000 Form 504 at 1, 3, 4. www.marylandtaxes.com Massachusetts Mass. Gen. Laws ch. 62, 4, 5A, 10; Mass. Gen. Laws ch. 62B, 13; Mass. Gen. Laws ch. 62C, 6; Mass Regs. Code tit. 830, 62.10.1(1), (2); instructions to 2011 Mass. Form 2 at 3, 4 6, 8, 9, 11, 41, 47; 2011 Mass. Form 2 at 2. 5.30% (12.00% for short-term gains and gains on sales of collectibles) 4, 7 www.mass.gov/dor 19

Bases of State Income Taxation of Nongrantor s Created by Created by ee Michigan Mich. Comp. Laws 206.14(3), 206.16, 206.18(1)(c), 206.36(1), 206.51(1)(g), (6), 206.110, 206.301; instructions to 2011 MI-1041 at 2 3, 15; 2011 MI-1041 at 1. 4.35% 8 www.michigan.gov/taxes Minnesota Minn. Stat. 289A Subd. 2(a), 289A.25 Subd. 1, 290.01 Subd. 7b, Subd. 19, Subd. 29, 290.014 Subd. 1, Subd. 3, 290.03(3), 290.06 Subd. 2c, Subd. 2d, 290.17, 290.191, 290.20, 290.22; instructions to 2011 Minn. Form M2 at 1, 2, 13. 7.85% on $75,000 9 9 10 www.taxes.state.mn.us Mississippi Miss. Code Ann. 27-7- 5(1), 27-7-27; instructions to 2011 Miss. Form 81-110 at 1; 2011 Miss. Form 81-110 at 1. 5.00% on $10,000 www.dor.ms.gov Missouri RSMo 143.011, 143.061, 143.091, 143.111, 143.121, 143.311, 143.331(2) (3), 143.341, 143.371, 143.381, 143.391, 143.501; instructions to 2011 Form MO-1041 at 1, 7. 6.00% on $9,000 11 11 www.dor.mo.gov/tax 20

Bases of State Income Taxation of Nongrantor s Created by Created by ee Montana Mont. Code Ann. 15-30- 2101(32) (33), 15-30-2103, 15-30-2110, 15-30-2151, 15-30- 2153; instructions to 2011 Mont. Form FID-3 at 3, 14, 16, 17; 2011 Mont. Form FI D-3 at 2. 6.90% on $16,000 revenue.mt.gov Nebraska Neb. Rev. Stat. 77-2714.01(6), 77-2715, 77-271 5.02, 77-2716, 77-2717; Neb. Admin. Code tit. 316, Ch. 23, REG-23-001, REG-23-004; instructions to 2011 Neb. Form 1041N at 6, 7, 8. 6.84% on $15,150 www.revenue.ne.gov Nevada No income tax imposed on trusts. New Hampshire N.H. Rev. Stat. Ann. 77:1, 77:3, 77:4, 77:4-c, 77:10 77:12, 77:18; N.H. Code Admin. R. Ann. 902.07, 905.02; instructions to 2011 N.H. Form DP-10 at 1, 3, 5, 8. 5.00% (interest and dividends only) 4 www.nh.gov/revenue 21

Bases of State Income Taxation of Nongrantor s Created by Created by ee New Jersey NJSA 54A:1-2(d), (o)(2) 8.97% on (3)(p), 54A:2-1(b)(5), 54A :2-1.1, 54A:5-1, 54A :5-3, $500,000 54A:5-7, 54A:5-8, 54A:8-3.1, 54A :8-4(m); instructions to 2011 Form NJ-1041 at 1 2, 4, 7, 23. 12 12 www.state.nj.us/treasury/ taxation/ New Mexico N.M. Stat. Ann. 7-2-2 7-2- 3, 7-2-7(C); instructions to 2011 N.M. Form F1D-1 at 1, 3. 4.90% on $16,000 www.tax.newmexico.gov New York State N.Y. Tax Law 8.97% on 601(c) (1-a), 605(b)(3) (4) 611 612, 618, 631, 633, 651, $500,000 685(c)(6); N.Y. Comp. Codes R. & Regs. tit. 20, 105.23, 118.1; instructions to 2011 N.Y. Form IT-205 at 1, 2, 5, 6, 7, 10, 23. 12 12 www.nystax.gov New York City N.Y. Tax Law 1301 1306; Admin. Code City of N.Y. 11-1704.1, 11-1705, 11-1711, 11-1712, 11-1718, 11-1719, 11-1721; instructions to 2011 N.Y. Form IT-205 at 23. 3.876% on $500,000 12 12 www.nystax.gov 22

Bases of State Income Taxation of Nongrantor s Created by Created by ee North Carolina N.C. Gen. Stat. 105-134.1(10), 105-1 34.2(a)(3), 105-1 34.5, 105-1 60.2, 105-160.5; N.C. Admin. Code tit. 17, r. 6B.3716, 6B.3718; instructions to 2011 N.C. Form D-407 at 1; 2011 N.C. Form D- 407 at 2. 7.75% on $60,000 www.dor.state.nc.us North Dakota N.D. Cent. Code 57-38- 01(12), 57-38-07, 57-38- 30.3(1 )(e); 57-38-31; N.D. Admin. Code 81-03-02.1-04; instructions to 2011 N.D. Form 38 at 2; 2011 N.D. Form 38 at 2. 3.99% on $11,350 www.nd.gov/tax Ohio Ohio Rev. Code Ann. 5747.01 (A), (I)(3), (S), 5747.02(A)(6), (D), 5747.09; instructions to 2011 Ohio Form IT 1041 at 3 5, 11 12. 5.925% on $204,200 4 www.tax.ohio.gov 23

Bases of State Income Taxation of Nongrantor s Oklahoma Okla. Stat. tit. 68, 2353(6), (10), (12), 2355(B), (F); Okla. Admin. Code 710:50-23- 1(c); instructions to 2011 Okla. Form 513 at 2, 4, 14. 5.50% on $81,000 Created by Created by ee www.tax.ok.gov Oregon Or. Rev. Stat. 316.022(6), 31 11.00% on 6.037(1), 31 6.267, 316.282(1)(d), (2); Or. $250,000 Admin. R. 150-316.282(3); instructions to 2011 Or. Form 41 at 1, 2; 2011 Or. Form 41 at 2. www.oregon.gov/dor Pennsylvania 72 P.S. 7301(j), (k), (n), (s), 7302, 7303, 7305, 7325, 7326, 7330, 7331; 61 Pa. Code 101.1, 101.8, 105.1, 105.2, 105.3, 105.4, 115.2, 115.9, 117.5; instructions to 2011 Form PA-41 at 1, 3, 4, 5, 7, 8; 2011 Form PA-41 at 1. 3.07% www.revenue.state.pa.us Rhode Island R.I. Gen. Laws 44-30-1 (a), (e), 44-30-2(a)(1), (b), 44-30- 2.6, 44-30-5(c); R.I. Code R. PIT. 90-13; instructions to 2011 Form RI-1041 at 1-1, 1-2; 2011 RI-1041 Tax Schedules at 1. 5.99% on $7,022 4 4 www.tax.ri.gov 24

Bases of State Income Taxation of Nongrantor s South Carolina S.C. Code Ann. 12-6- 30(5), 12-6-510(A), 12-6-520, 12-6-570, 12-6-610, 12-6-620, 12-6-1720, 12-6-3910, 12-6- 4910, 12-6-4930; instructions to 2011 Form SC1041 at 1, 2, 3 7.00% on $13,700 Created by Created by ee www.sctax.org South Dakota No income tax imposed on trusts. Tennessee Tenn. Code Ann. 67-2- 102, 67-2-107, 67-2-110, 67-2-111; instructions to 2011 Tenn. Form INC. 250 at 1, 3, 4 6.00% (interest and dividends only) www.tn.gov/revenue Texas No income tax imposed on trusts. Utah Utah Code Ann. 59-10- 103(1 )(a)(i i), (r), (w)(iv), 59-10-1 04(2)(b), 59-10-201, 59-10-201.1, 59-10-202(2)(b), 59-10-204, 59-10-205, 59-10- 207, 59-10-209.1, 59-10-210, 59-10-504, 75-7-103(1)(i); instructions to 2011 UT Form TC-41 at 1, 2, 4. 5.00% 13 13, 14 www.tax.utah.gov 25

Bases of State Income Taxation of Nongrantor s Created by Created by ee Vermont 32 V.S.A. 5811(11)(B), 5822(a), (a)(5), (b)(2); instructions to 2011 Vt. Form FI-161 at 1, 2. 8.95% on $11,350 www.state.vt.us/tax Virginia Va. Code Ann. 58.1-302, 58.1-320, 58.1-322(A), 58.1-360 58.1-362, 58.1-381, 58.1-490(M), 58.1-491; 23 Va. Admin. Code 10-115-10, 10-115-40, 10-115-50, 10-115-60, 10-115-110, 10-115- 140, 10-115-145, 10-115-150; instructions to 2011 Va. Form 770 at 1, 2, 6. 5.75% on $17,000 www.tax.virginia.gov. Washington No income tax imposed on trusts. West Virginia W. Va. Code 11-21-3, 11-21-4e(a), 11-21-7(c), 11-21- 11 11-21-12, 11-21-18; W. Va. Code St. R. 110-21- 7(7.3); instructions to 2011 W. Va. Form IT-141 at 2, 7, 10. 6.50% on $60,000 www.wvtax.gov 26

Bases of State Income Taxation of Nongrantor s Created by Created by ee Wisconsin Wis. Stat. 71.02(1), 71.04(1), (4), 71.06(1p), (2e)(b), 71.09(2), 71.122, 71.125(1), 71.14(2), (3), (3m), 71.16, 71.17(4); instructions to 2011 Wis. Form 2 at 1 2, 7, 19. 7.75% on inc. over $224,210 15 16 www.revenue.wi.gov Wyoming No income tax imposed on trusts. 1 Provided that trust has resident fiduciary or current beneficiary. 2 Provided that trust has ee. 3 Provided that trust has resident noncontingent beneficiary. 4 Provided that trust has resident beneficiary. 5 Provided that other requirements are met. 6 Unless trust designates governing law other than Louisiana. 7 Provided that trust has Massachusetts trustee. 8 Unless trustees, beneficiaries, and administration are outside Michigan. 9 Post-1995 trusts only. 10 Pre-1996 trusts only. 11 Provided that trust has resident income beneficiary on last day of year. 12 Unless trustees and trust assets are outside state and no source income; trustee should file informational return. 13 Post-2003 irrevocable resident nongrantor trust having Utah corporate trustee may deduct all nonsource income but must file Utah return if must file federal return. 14 Inter vivos trusts only. 15 s created or first administered in Wisconsin after October 28, 1999, only 16 Irrevocable inter vivos trusts administered in Wisconsin before October 29, 1999, only 27