Did an irrevocable trust have to file a Virginia fiduciary return when its parties, administration, governing law, and property were outside Virginia?

Subject

Resident and nonresident estates and trusts are liable for Virginia income tax

Plain-English summary

Virginia ruled that the irrevocable trust did not have to file a Virginia fiduciary income-tax return on the facts presented. The grantor and beneficiary were no longer Virginia residents, the trustee was a Pennsylvania trust company, Pennsylvania law governed the trust, and none of its property was in Virginia.

The Department first found that the trust did not meet any of the four resident-estate-or-trust categories in Va. Code § 58.1-302. It therefore was a nonresident trust for Virginia purposes.

Virginia taxes a nonresident trust only on Virginia-source income, reduced by attributable expenses and Virginia-source income distributed to beneficiaries. Because this trust had no Virginia property, the ruling found it had no Virginia-source income and no filing requirement under Va. Code § 58.1-381 A 2.

What this means for you

• Trust residence and filing depend on the statutory categories, administration, governing facts, and source of income.
• A nonresident trust can still owe Virginia tax and have to file if it has Virginia-source income.
• The absence of Virginia property was central to the ruling's conclusion that this trust had no Virginia-source income.
• A change in trustee, property, administration, parties, or income source can change the result.

Common questions

Q: Was the trust treated as a Virginia resident trust?
A: No. The Department said it did not meet any of the four categories in Va. Code § 58.1-302.

Q: Can a nonresident trust ever owe Virginia income tax?
A: Yes. Virginia taxes a nonresident trust on Virginia-source income under the provisions cited in the ruling.

Q: Why was no return required here?
A: The trust had no Virginia property and therefore, on these facts, no Virginia-source income.

Citations and references

• Va. Code §§ 58.1-360, 58.1-302, 58.1-362, 58.1-363, and 58.1-381 A 2.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-160

Original ruling text

August 29, 2008

Re: Request for Ruling: Fiduciary Income Tax

Dear *:

This will reply to your letter in which you request a ruling regarding the filing requirements for your client, an irrevocable trust.

FACTS

In 1972, a Virginia resident (the "Grantor") funded an irrevocable trust (the "Trust") for the benefit of his daughter (the "Beneficiary"). At the time the trust was established, the Beneficiary was also a Virginia resident. The Grantor and the Beneficiary are no longer Virginia residents. The trustee is a trust company located in Pennsylvania (State A) and the trust instrument states that the Trust is governed by State A law. None of the Trust's property is located in Virginia. The Taxpayer requests a ruling as to whether the Trust is required to file a Virginia fiduciary income tax return.

DETERMINATION

Virginia Code § 58.1-360 provides that both resident and nonresident estates and trusts are liable for Virginia income tax on Virginia taxable income. Pursuant to Va. Code § 58.1-302, a resident estate or trust is one of the following:

1)The estate of a decedent who at his death was domiciled in the Commonwealth;

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 or estate which is being administered in the Commonwealth.

Based on the information provided, the Trust does not meet any of the four criteria set out in Va. Code § 58.1-302. As such, the Trust would not be considered to be a resident trust for Virginia income tax purposes.

Virginia taxes a nonresident trust on its gross, income from sources within Virginia less expenses attributable to the income from Virginia sources reduced by the amount of income from Virginia sources distributed to beneficiaries. See Va. Code §§ 58.1-362 and 58.1-363. As long as the Trust has no property in Virginia, it would have no Virginia source income and would not be required to file a fiduciary income tax return under Va. Code § 58.1-381 A 2.

This ruling is based on the facts provided as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

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

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-2294292185.B