Did a trust administered outside Virginia have to file a Virginia fiduciary return when its creator and primary beneficiary had Virginia ties?

Subject

Virginia beneficiary supplied nexus for resident trust taxation

Plain-English summary

The trust was a Virginia resident trust and had sufficient Virginia nexus to be taxed because its primary beneficiary lived in Virginia.

The Virginia decedent exercised a power of appointment in his will to establish the trust and supplied its governing terms. Under Va. Code §§ 58.1-302 and 64.2-719, the Commissioner concluded that the will created the trust. The assets did not need to have been included in the decedent's federal gross estate or probate estate for that classification.

The trustee and all trust property were in State A, but the decedent's spouse—the primary beneficiary—resided in Virginia. Her receipt of the benefit and protection of Virginia law supplied the additional nexus the Department required for taxation of a resident trust after its grantor's death.

What this means for you

• Exercising a power of appointment in a Virginia decedent's will can create a Virginia resident trust.
• Estate-tax or probate-tax inclusion was not required by the resident-trust definition applied here.
• Trustee and asset location were not the only nexus factors; beneficiary residence also mattered.

Citations and references

• Va. Code §§ 58.1-381, 58.1-302, and 64.2-719.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-12

Original ruling text

January 12, 2015

Re: Request for Ruling: Fiduciary Income Tax

Dear *:

This will reply to your letter in which you seek a ruling regarding the filing requirements for a testamentary trust.

FACTS

An individual (the "Decedent") died in 2011. At the time of his death, the Decedent was a resident of Virginia. He had been the beneficiary of a trust established by the will of his father, a resident of * (State A). The father's will gave the Decedent a power of appointment, exercisable in the Decedent's will, to distribute the assets of the trust to his descendants outright or hold the assets in further trust for their benefit. The Decedent could also choose to distribute the net income of any assets remaining in trust to his spouse.

In his will, the Decedent exercised the power of appointment to establish a trust (the "Trust") for the benefit of his spouse and descendants. The Trust is administered by a trustee located in State A. None of the Trust's property is located in Virginia. The Decedent's spouse, however, is currently the primary beneficiary and resides in Virginia. You request a ruling as to whether the Trust is required to file a Virginia fiduciary income tax return.

RULING

Resident Trust

Pursuant to Va. Code § 58.1-381, every resident trust required to file a federal income tax return for the taxable year must also file a Virginia fiduciary income tax return. Pursuant to Va. Code § 58.1-302, a resident trust includes "a trust created by will of a decedent who at his death was domiciled in the Commonwealth."

Two classes of residents, a domiciliary resident and an actual resident, are set forth in Va. Code § 58.1-302. The domiciliary residence of a person means his permanent place of residence and the place to which he intends to return even though he may reside elsewhere. An actual resident of Virginia means a person who, for an aggregate of more than 183 days of the taxable year, maintained his place of abode within Virginia.

In this case, you state that the Decedent was a resident of Virginia at the time of his death. For purposes of this ruling, the Department will assume that the Decedent was a domiciliary resident of Virginia. The question, therefore, becomes whether the Decedent's will created the Trust.

Virginia Code § 64.2-719 provides, in relevant part, that a trust may be created by the exercise of a power of appointment in favor of a trustee. In this case, the Decedent exercised a power of appointment in his will to establish the Trust for the benefit of his wife and children. In addition, the will contained all of the terms and conditions governing the administration of the Trust. In the Department's opinion, therefore, the will created the Trust. As such, the Trust is a Virginia resident trust.

You contend that because the assets of the Trust were not includable in the Decedent's gross estate for federal estate tax purposes or in his probate estate for probate tax purposes, the Trust should not be considered a Virginia resident trust. Virginia Code § 58.1-302, however, contains no requirement that the assets of a testamentary trust must have been subject to estate, probate or any other type of tax to be classified as a Virginia resident trust.

Taxation Nexus

The Department has found that even if a trust is a resident trust, it must also have sufficient nexus with Virginia to be subject to taxation. See Public Document (P.D.) 93-189 (8/26/1993). Pursuant to P.D. 93-189, when the grantor is deceased, the Department will consider more than the domicile of the grantor at the time the trust was created. The Department will also consider the current domicile of the trustee(s), beneficiaries and the location of the trust property. The Department will not impose fiduciary income tax on a resident trust in situations in which a Virginia grantor is deceased and no other party or trust property is located in Virginia. If any of the other parties or property is located in Virginia, however, fiduciary income tax will be imposed.

In this case, neither the trustee nor the assets of the Trust are located in Virginia, but the Trust's primary beneficiary, the Decedent's spouse, is a Virginia resident. Because this beneficiary, who receives the benefit and protection of Virginia law, resides in Virginia, there is sufficient nexus for the taxation of the trust income.

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

The Code of Virginia sections and public document cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,

Craig M. Burns
Tax Commissioner

AR/1-5670028060.M