With President Trump’s recent immigration reforms impacting the domiciliary status of many New York residents, estate trust administrators are faced with changes to the taxable status of those asset transfers. New York Consolidated Laws, Estates, Powers and Trusts Law (EPTL) applies specific rules to asset transfer procedure when there is a change in domiciliary of a trust holder. The federal Internal Revenue Service (IRS) provides fiduciary income taxation rules for U.S. residents with foreign income (I.R.C. §§ 1, 61), estates, and generation skipping asset transfers (I.R.C. §§ 2001, 2031-2046, 2601). Non-U.S. residents are subject to U.S. income tax from income sourced solely in the country, and are subject to taxation of estate, gift and generation skipping transfer of U.S. situs assets.
New York Rules to Domiciliary
In New York, trust asset transfer falls under three (3) categories of domiciliary: 1) resident, 2) nonresident, and 3) exempt resident.
Rules of taxation for New York estate assets apply to transfers of property by will, irrevocable trust, or revocable trust while a transferor is residing in the state. Revocable trust transfers are eligible to become irrevocable while the transferor is still a New York domiciliary; or has given up the right to revocation, or at time of the decedent’s death.
Property transferred to a revocable trust will become irrevocable after the transferor is no longer a New York domiciliary. Taxation rules apply to property transferred to New York beneficiaries under the will of a Massachusetts domiciliary; or where the estate of a Florida domiciliary has a New York trustee.
Exempt Resident Trust
Assets transferred to an estate under will of a New York domiciliary, where the trustee is a Florida domiciliary, are exempt where all assets are intangibles, and the sole trust income is from a non-New York source. In sum, if there is no New York assets or source income, and a trust’s intangible assets are sitused outside the state, a trust will be exempt from taxation. Exempt resident trusts must file a Form IT-205-C with a return to certify tax-exempt status.
How is tax determined when there is a change of domiciliary?
New York law provides for proportional assignment of fiduciary income taxation. For example, in a probate matter where there has been a change in domiciliary, the resident portion and nonresident portion would be determined by the court applying a fractional contribution formula to separate asset transfer value from the entire value of the trust immediately after contribution. Consult with the New York State Department of Taxation and Finance for guidelines to trust income taxation.
Contact an Estate Law Attorney
Taxation is a key aspect of estate planning. New York rules to domiciliary affect tax application depending on trust formation. If planning an estate in New York, a licensed attorney experienced in matters of estate tax can advise a client of the rules to resident, nonresident, or exempt trust taxation. Ettinger Law Firm is a licensed New York attorney at law practice providing clients with estate planning and probate litigation services. Contact Ettinger Law Firm for consultation in an estate law taxation matter.
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