Are irrevocable trusts created by New York grantors exempt from filing New York State income tax returns once all their trustees live outside New York?

Plain-English summary

Two irrevocable trusts were created on December 26, 2000 by grantors who were both New York residents at the time. Because the grantors were domiciled in New York when the trusts became irrevocable, the trusts were New York resident trusts under Tax Law § 605(b)(3)(C). The initial trustees were one New York-connected trustee (Trustee 1) and Jane Kline Poirier (Trustee 2), who later moved to Connecticut. In 2005, Trustee 1 resigned, leaving Trustee 2 - by then a Connecticut resident - as sole trustee. Also in late 2005 or early 2006, the grantors themselves moved to Florida. Before that move, $50,000 had been contributed to each trust (the "New York resident portion"); afterward, another $120,000 was contributed to each trust (the "non-resident portion"). Each trust's corpus consisted solely of securities.

Because the grantors were New York domiciliaries when the trusts were funded and made irrevocable, but later contributed additional funds after becoming Florida domiciliaries, the Department found the trusts were simultaneously New York resident trusts and Florida resident trusts - the New York-resident portions taxable under the resident trust rules, and any non-resident portions potentially taxable as New York source income of a nonresident trust under Tax Law § 631 if the trusts had New York source income.

A New York resident trust escapes New York income tax only if it meets all three conditions of Tax Law § 605(b)(3)(D): all trustees are domiciled outside New York, the entire corpus (including real and tangible property) is located outside New York, and all income and gains are derived from sources outside New York. Here, the trusts never owned real or tangible property in New York and had no New York source income, satisfying the second and third conditions. But while Trustee 1 remained a co-trustee, the first condition failed, so the trusts owed tax on their New York-resident portions. Once Trustee 1 resigned, leaving only the Connecticut-resident Trustee 2, all three conditions were met and the trusts stopped being subject to New York income tax.

The Department went on to flag a separate, newer requirement: even though the trusts qualify for the § 605(b)(3)(D) exemption from tax, a 2010 change means an exempt resident trust can no longer simply skip filing. Starting with tax year 2010, such a trust must file Form IT-205 (Fiduciary Income Tax Return) and attach Form IT-205-C (New York Resident Trust Nontaxable Certification), as explained in TSB-M-10(5)I.

What this means for you

Trustees and grantors of New York-connected trusts

If a trust became irrevocable while its grantor was domiciled in New York, it is a New York resident trust - even if the grantor later moves away and even if the trust also becomes a resident trust of another state on the same facts. Whether that trust actually owes New York tax depends on trustee domicile, where the corpus sits, and where its income arises, tested under the three-part Tax Law § 605(b)(3)(D) standard, not on where the grantor currently lives.

Anyone relying on the "exempt resident trust" status

Meeting the § 605(b)(3)(D) exemption stops New York from taxing the trust, but as of tax year 2010 it does not stop New York from requiring a return. An exempt resident trust must file Form IT-205 with Form IT-205-C attached; failing to file after 2010 is a filing failure even though no tax is owed.

Common questions

Q: Why were these trusts considered resident trusts of both New York and Florida?
A: Because the grantors were domiciled in New York when the trusts were created and became irrevocable, and later, after moving to Florida, made additional contributions to the same trusts. The New York-origin portion and the Florida-era portion each carry residency characteristics from the grantors' domicile at the time of contribution.

Q: What changed when Trustee 1 resigned?
A: With Trustee 1 gone, Trustee 2 - a Connecticut resident - was the sole trustee, so all trustees were domiciled outside New York. Combined with the corpus and income already being outside New York, that satisfied all three conditions of Tax Law § 605(b)(3)(D), and the trusts stopped owing New York income tax from that point on.

Q: Do these trusts still need to file anything with New York now that they're exempt from tax?
A: Yes. Starting with tax year 2010, a resident trust that meets the § 605(b)(3)(D) exemption must file Form IT-205, Fiduciary Income Tax Return, and attach Form IT-205-C, New York Resident Trust Nontaxable Certification, per TSB-M-10(5)I.

Q: Would New York have taxed the "non-resident portion" of the trusts?
A: Only if the trusts had New York source income, in which case that portion would be taxed as a nonresident trust's New York source income under Tax Law § 631. Here, the trusts had no New York source income, so this did not apply.

Citations and references

• Tax Law § 605(b)(3)(C) - defines when a trust is a New York resident trust based on the grantor's domicile when the trust becomes irrevocable
• Tax Law § 605(b)(3)(D) - three-part test (trustee domicile, corpus location, income source) under which a resident trust is exempt from New York income tax
• Tax Law § 631 - New York source income of a nonresident trust
• 20 NYCRR 105.23(d), Example 2 - illustrates dual resident trust status
• TSB-M-10(5)I - explains the Form IT-205/IT-205-C filing requirement that applies to exempt resident trusts beginning with tax year 2010

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2011.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a11_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-11(4)I
Income Tax
July 27, 2011

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

PETITION NO. I110228A

The Department of Taxation and Finance received a Petition for Advisory Opinion from
name and address redacted. Petitioner asks whether the name redacted (the Trusts) are exempt
from filing New York State income tax returns.
We conclude that, when the Trusts met the conditions set forth in Tax Law
§605(b)(3)(D), the Trusts were not required to pay New York State income tax and, prior to
2010, were not required to file New York income tax returns. As of tax year 2010, however, a
trust that meets the conditions set forth in Tax Law §605(b)(3)(D) is required to file Form IT-205
Fiduciary Income Tax Return and attach Form IT-205-C New York Resident Trust Nontaxable
Certification to Form IT-205. For more information on this filing requirement please see
TSB-M-10(5)I.
Facts
The Trusts were created by names redacted on December 26, 2000. At the time the
Trusts were created, both grantors were New York residents. The initial trustees were name and
address redacted (Trustee 1) and Jane Kline Poirier of New York, New York (Trustee 2). After
the Trusts were created, however, Trustee 2 moved from New York to Connecticut. In 2005,
Trustee 1 resigned as co-trustee, leaving Trustee 2 as the sole trustee. At the time of Trustee 1’s
resignation, Trustee 2 was a resident of Connecticut where she continues to live. In late 2005 or
early 2006, the grantors moved to Florida. Prior to the grantors move to Florida, $50,000 had
been contributed to each trust (the New York resident portion); since the move, the grantors have
contributed an additional $120,000 to each trust (the non-resident portion). Further, the Trusts’
corpuses consist solely of securities.
Analysis
A trust is a New York resident trust, if at the time a grantor transfers property to the trust,
the trust is irrevocable and he or she is domiciled in New York or the trust is a revocable trust at
the time the property is transferred but subsequently becomes irrevocable and the grantor is
domiciled in New York. See, Tax Law §605(b)(3)(C) A resident trust, however, will not be
subject to tax if the following three conditions are met: (1) all of the trustees are domiciled in a
state other than New York; (2) the entire corpus of the trust, including real and tangible property,
is located outside the state of New York; and (3) all income and gains of the trust are derived
from or connected with sources outside the state of New York, determined as if the trust were a
nonresident trust. See, Tax Law §605(b)(3)(D)

-2-

TSB-A-11(4)I
Income Tax
July 27, 2011

In this case, the Petitioner’s Trusts are considered to be resident trusts in both New York
and Florida. This dual resident trust status occurs, because when the Trusts were funded and
made irrevocable, the grantors were domiciled in New York and the grantors made additional
contributions to the Trusts after they changed their domicile to Florida. As such, the New York
resident portions of the Trusts are subject to New York income tax unless they meet the
conditions set forth in Tax Law §605(b)(3)(D). Additionally, if the Trusts have New York
source income, the nonresident portions of the Trusts will be subject to New York income tax as
nonresident trusts pursuant to Tax Law §631. See, NYCRR §105.23(d), Example 2
Based on the information submitted, the Trusts never owned and do not currently own
any real or tangible property in New York and they have no New York source income.
Therefore, the Trusts met the second and third requirements of Tax Law §605(b)(3)(D).
However, because Trustee 1 was a New York resident, the Trusts did not meet the first
requirement of Tax Law §605(b)(3)(D) and initially were subject to New York State income tax
only on the New York resident portions of the Trusts. When Trustee 1 resigned as trustee,
leaving only Trusty 2, a Connecticut resident, as the sole trustee, the Trusts met all the
requirements of Tax Law §605(b)(3)(D). Accordingly, when Trustee 1 resigned as trustee, the
Trusts were no longer subject to New York income tax. As of tax year 2010, even though the
Trusts meet the conditions set forth in Tax Law §605(b)(3)(D), they are required to file Form
IT-205 Fiduciary Income Tax Return and attach Form IT-205-C New York Resident Trust
Nontaxable Certification to Form IT-205. For more information on this filing requirement,
please see TSB-M-10(5)I.

DATED: July 27, 2011

NOTE:

/S/
DEBORAH LIEBMAN
Deputy 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.