Is a trust exempt from New York income tax if its sole trustee lives outside New York and the trust owns no New York property?

Plain-English summary

In January 2005, a New York domiciliary created a trust funded with cash that was used to purchase equities. The trust agreement named two trustees: one a domiciliary of New York City ("S"), and one a non-domiciliary of New York State ("R"). Under the trust agreement, S was entitled to receive the trust's income until her death.

S died on August 1, 2008, and R became the sole trustee, remaining a non-domiciliary of New York throughout. On S's death, the trust's corpus was to be divided into two new trusts for the benefit of her two children - Family Trust 1 and Family Trust 2 - both of which were actually funded in December 2008, even though they were formed as of S's date of death. R served as sole trustee of both new trusts. The 2008 fiduciary income tax returns allocated income among S (January 1 to August 1, 2008) and each of the two new trusts (August 1 to December 31, 2008).

The petitioner asked whether Family Trust 1 and Family Trust 2 qualify as "nontaxable resident trusts" under Tax Law § 605(b)(3)(D). That provision exempts a resident trust from New York income tax if: (1) all trustees are domiciled outside New York; (2) the entire corpus, including any real and tangible property, is located outside New York; and (3) all income and gains are derived from sources outside New York, determined as though the trust were a nonresident trust. A related rule treats intangible property as located in New York whenever any trustee is domiciled here.

The Department found it unnecessary to decide whether the two trusts were even "resident trusts" in the first place, because the question was moot either way: their sole trustee, R, was a non-domiciliary of New York; the trusts owned no real or tangible property in New York; and, because the sole trustee was a non-domiciliary, income from the trusts' intangible assets (the equities purchased with the trust's cash) was not New York source income. Citing its earlier ruling in the Charles B. Moss Trust matter (TSB-A-94(7)I), the Department concluded that both trusts' income was not subject to New York income tax, so long as the § 605(b)(3)(D)(i) conditions continued to be satisfied.

What this means for you

Settlors and trustees structuring family trusts

If a trust's sole (or all) trustees are domiciled outside New York, and the trust holds no New York real or tangible property, the trust's income from intangible assets generally will not be New York source income - even if the trust would otherwise be classified as a New York resident trust because its creator was domiciled here. Whether the trust technically counts as a "resident trust" can become moot once these three conditions are met.

Accountants and tax professionals preparing fiduciary returns

When a New York-created trust splits into successor trusts (for example, on the death of an income beneficiary), check the domicile of each successor trust's trustee(s) and the location of trust assets separately for each successor trust. A successor trust with a non-domiciliary trustee and no in-state property can qualify for the § 605(b)(3)(D) exception independent of how the original trust was treated.

Advisory-opinion limits

This opinion is limited to the facts presented and binds the Department only as to this petitioner. It expressly left open whether Family Trust 1 and Family Trust 2 are technically "resident trusts" under § 605(b)(3), because the nontaxable-trust exception applied regardless of the answer.

Common questions

Q: What are the three conditions for a resident trust to be treated as nontaxable in New York?
A: Under Tax Law § 605(b)(3)(D)(i), all trustees must be domiciled outside New York, the entire corpus (including real and tangible property) must be located outside New York, and all income and gains must be derived from sources outside New York, determined as if the trust were a nonresident trust.

Q: Does it matter where the trust's intangible assets, like stocks, are "located"?
A: Yes in one respect: Tax Law § 605(b)(3)(D)(ii) deems intangible property to be located in New York if any trustee is domiciled in New York. Here, because the sole trustee was a non-domiciliary, that deeming rule did not pull the trusts' equity holdings into New York.

Q: Did the Department decide whether Family Trust 1 and Family Trust 2 were New York resident trusts?
A: No. The Department said it was "not clear from the facts" whether they were resident trusts, but called the question moot because both trusts qualified as nontaxable even if they were resident trusts.

Q: What prior ruling did the Department rely on?
A: The Charles B. Moss Trust advisory opinion (TSB-A-94(7)I, April 8, 1994), for the principle that a non-domiciliary sole trustee means trust income from intangible assets is not New York source income.

Q: Does this ruling apply to other trusts with similar facts?
A: No. An advisory opinion is limited to the facts presented and binds the Department only with respect to the petitioner who requested it, provided all relevant facts were fully and accurately disclosed.

Citations and references

• Tax Law § 605(b)(3) - defines what constitutes a New York resident trust
• Tax Law § 605(b)(3)(D)(i) - the three conditions (trustee domicile, corpus location, income source) for a resident trust to be nontaxable
• Tax Law § 605(b)(3)(D)(ii) - intangible property is deemed located in New York if any trustee is domiciled in New York
• Charles B. Moss Trust, Adv Op Comm T&F, April 8, 1994, TSB-A-94(7)I - non-domiciliary sole trustee means intangible-asset income is not New York source income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2010.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a10_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-10(5)I
Income Tax
June 8, 2010

Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I100211A

On February 11, 2010 the Department of Taxation and Finance received a Petition for Advisory
Opinion from name and address redacted. Petitioner asks whether the trusts qualify as nontaxable resident
trusts for purposes of Tax Law section 605(b)(3)(D). Because the trusts hold no real or tangible property in
New York and their trustee is not domiciled in New York, the trusts are nontaxable trusts for purposes of Tax
Law section 605(b)(3)(D).
Facts
In January 2005, name redacted, then a domiciliary of New York, created a trust. The trust was
funded with cash, which was used to purchase equities. The trust agreement provided for two trustees: name
redacted (S), a domiciliary of New York City, and name redacted (R), a non-domiciliary of New York State.
R became the sole trustee upon the death of S on August 1, 2008. R remained a non-domiciliary of
New York State after becoming sole trustee. The trust agreement provided that S was to receive trust income
up until her death. After her death, the corpus of the trust was to be divided into two separate trusts, one for
each of her children:
Name redacted Family Trust f/b/o name redacted (Family Trust 1);
Name redacted Family Trust f/b/o name redacted (Family Trust 2).
Both trusts were funded in December 2008, even though they were formed on S’s death. R is the
sole trustee of these two trusts.
The final 2008 federal and New York State fiduciary income tax returns of the name redacted Family
trust reflected income for the full calendar year but allocated the income on the K-1’s as follows:
S - income from January 1, 2008 to August 1, 2008;
Family Trust 1– income from August 1, 2008 to December 31, 2008;

and

Family Trust 2 - income from August 1, 2008 to December 31, 2008.
Analysis
Tax Law section 605(b)(3) defines a resident trust as follows:
•

a trust, or a portion of a trust, consisting of property transferred by will of a decedent who at his
death was domiciled in this state, or

•

a trust, or portion of a trust, consisting of the property of:

TSB-A-10(5)I
Income Tax
June 8, 2010

-2-

a person domiciled in this state at the time such property was transferred to the trust, if
such trust or portion of a trust was then irrevocable, or if it was then revocable and has
not subsequently become irrevocable; or
a person domiciled in this state at the time such trust, or portion of a trust, became
irrevocable, if it was revocable when such property was transferred to the trust but has
subsequently become irrevocable.
Tax Law section 605(b)(3)(D)(i) provides that a resident trust is not subject to New York State
income tax if all of the following conditions are satisfied:
(I) all the trustees are domiciled in a state other than New York; (II) the entire corpus of the trusts,
including real and tangible property, is located outside the state of New York; and (III) all income
and gains of the trust are derived from or connected with sources outside of the state of New York,
determined as if the trust were a non-resident trust.
For purposes of section 605(b)(3)(D)(i), intangible property shall be located in New York State if
one or more of the trustees are domiciled in the State. Tax Law section 605(b)(3)(D)(ii).
It is not clear from the facts presented whether Family Trusts 1and 2 are resident trusts. Whether the
trusts are resident trusts is moot because they would be nontaxable trusts even if they were New York
resident trusts. Their sole trustee, R, was a non-domiciliary of New York. The trusts owned no real property
or tangible personal property located in New York. Because the sole trustee is a non-domiciliary, trust
income from intangible assets is not New York source income. Charles B. Moss Trust, Adv Op Comm T& F,
April 8, 1994, TSB-A-94(7)I. Therefore, the trusts’ income is not subject to New York income tax, as long as
the conditions in Tax Law section 605(b)(3)(D)(i) are satisfied.

DATED: June 8, 2010

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion.