Did two trusts remain Virginia resident trusts after moving administration and assets away when one Virginia resident remained on each trustee committee?

Subject

The committee of trustees does not operate in VA and is not controlled in VA

Plain-English summary

Virginia ruled that Trusts B and C would not remain Virginia resident trusts merely because one Virginia resident served on each trustee committee, so long as the committees operated and were controlled outside Virginia. The requester conceded that Trust A would continue to have Virginia nexus.

All three trusts had previously moved their assets and administration into Virginia and filed Virginia returns. The proposed change appointed an out-of-state corporate trustee, moved assets and administration outside Virginia, and retained multiple individual trustees, including one Virginia resident.

No trustee could control a trust alone; decisions required a majority or consensus. The Commissioner treated each group as a committee of trustees. Under the cited committee precedent, a Virginia member did not create resident-trust status when the committee itself neither operated in Virginia nor was controlled from Virginia.

The official page metadata listed estate, fiduciary, and individual income tax and an October 10 date. The reproduced ruling itself addresses fiduciary resident-trust status and is dated October 17, 2007, so those body facts control this page's classification and issued date.

What this means for you

• Trust residency can turn on where assets and administration are located and how trustee power is exercised.
• A Virginia co-trustee does not automatically control when a genuine committee must act collectively.
• Actual committee operations and control matter, not just the governing document's labels.
• A trust with different trustee powers or Virginia administration may reach a different result.

Common questions

Did the ruling find all three trusts nonresident? No. The requester conceded continued nexus for Trust A; the favorable ruling addressed Trusts B and C.

Why did the Virginia trustee not create residency? The trustee could not act individually, and the committee was to operate and be controlled outside Virginia.

Did beneficiary residence alone decide the case? No. The ruling examined the collective administration, trustees, and property structure.

Citations and references

• Va. Code § 58.1-381 and § 58.1-302.
• 23 VAC 10-115-10.
• P.D. 93-189 (August 26, 1993), P.D. 97-121 (March 7, 1997), and P.D. 02-101 (June 24, 2002).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 07-164

Original ruling text

October 17, 2007

Dear *:

This is in response to your letter of June 2007, in which you requested a ruling on behalf or your clients, (Child A, Child B and Child C) regarding Virginia income tax nexus and trusts.

FACTS

The Taxpayers are the beneficiaries of three trusts, created by a nonresident in 1966 (Trust A, Trust B and Trust C). At their formation, none of the trustees or beneficiaries of the trusts were Virginia residents, all trust property was located outside of Virginia and the administration of the trusts occurred outside of Virginia.

Pursuant to an agreement among the trustees and beneficiaries, the assets of all three trusts and the situs of trust administration were moved to Virginia. The administration of the trusts was moved to Virginia with the intent of converting the trusts to Virginia resident trusts for income tax purposes. The trusts have filed Virginia income tax returns and paid income tax to Virginia since the change of situs.

Currently, the trustees and beneficiaries of the trusts reside in several states. Only one trustee/beneficiary, Child A, is a resident of Virginia. Child A is a trustee for each of the three trusts as well as being the primary beneficiary of the Trust A.

The trustees and beneficiaries of the trusts now wish to change the situs of the administration of the trust and the trust assets to another state in the following manner: A corporate trustee outside of Virginia will be appointed for each trust and the assets of the trust will be moved outside of Virginia. The individual trustees will retain their status as trustees for their respective trusts. Trust A will have three trustees: Child A, a nonresident individual and the nonresident corporate trustee. Trust B and Trust C will have four trustees: Child A, two nonresident individual trustees and the nonresident corporate trustee.

You concede that Trust A will continue to have Nexus with Virginia for income tax purposes. You ask whether Trust B and Trust C will have nexus with Virginia and be subject to Virginia income tax once the administration and trust property is moved from Virginia.

RULING

Virginia Code § 58.1-302

Virginia Code § 58.1-381 provides that all resident trusts are required to file a tax return with the Department of Taxation (TAX). The relevant portion of Virginia Code § 58.1-302 defines a "resident trust" as:

2. A trust created by will of a decedent who at his death was domiciled in the Commonwealth;

3. A trust created by or consisting of property of a person domiciled in the Commonwealth; or

4. A trust ... which is being administered in the Commonwealth.

Section 23 V.A.C. 10-115-10 of the Virginia Administrative Code provides that a trust is being administered in the Commonwealth if its "assets are located in Virginia, its fiduciary is a resident of Virginia, or it is under the supervision of a Virginia court."

Administrative Rulings

The Department of Taxation has issued several rulings related to this issue. In determining whether or not a trust has nexus in Virginia "the Department must consider... the current domicile of the trustee(s), beneficiaries, and the location of the Trust property. If any of these parties are domiciles of Virginia, the tax imposed on Virginia resident trusts or estates ...is appropriate." P.D. 93-189 (August 26, 1993). Where "neither the beneficiaries, trustees nor the Trust income property are in Virginia" none of those entities "receive the benefit or protection of Virginia law. Thus there [is not] sufficient nexus for Virginia to ...tax the undistributed assets of the Trust." Id .

As a general rule when the sole trustee is a Virginia resident a trust is deemed to have nexus in Virginia. P.D. 97-121 (March 7, 1997). This holds true even when the trust owns no property in Virginia and the investment and bookkeeping for the trust is performed by agents of the trustee outside of Virginia. Id . Where a Committee administers a trust and the members of that Committee cannot exercise control of the trust individually "so long as the Committee does not operate in Virginia or is not controlled in Virginia, membership in the Committee by a Virginia resident or residents would not make the trust a `resident trust' for Virginia income tax purposes." P.D. 02­101 (June 24, 2002).

As with the Committee members in P.D. 02-101 the trustees of Trust A, Trust B and Trust C cannot exercise control over the trust as individuals. Rather, the trustees make decisions by a majority or a consensus of the trustees; therefore, a committee of trustees is responsible for the administration of the trust not any individual trustee. Consequently, as long as the committee of trustees does not operate in Virginia and is not controlled in Virginia, the fact that a Virginia resident is a member of the committee does not make Trust B or Trust C a resident trust for Virginia income tax purposes.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of TAX's web site. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner