Did one Virginia-resident co-trustee make a Pennsylvania testamentary trust a Virginia resident trust when that trustee could not act alone?

Subject

One resident co-trustee did not alone establish Virginia trust residency

Plain-English summary

One Virginia-resident co-trustee did not, by that fact alone, make the trust a Virginia resident trust. The trust was created under the will of a Pennsylvania domiciliary, and the Virginia trustee could not exercise authority individually. Trust decisions required agreement from at least one of the two nonresident co-trustees.

If the co-trustee group was not operating or controlled in Virginia, the resident trustee's membership did not make the trust administered in Virginia. But the ruling did not establish unconditional nonresident status: the trust would still be administered in Virginia if its assets were located there or it was supervised by a Virginia court.

Result: if the trust was nonresident, it did not have to file a Virginia fiduciary return unless it had Virginia taxable income from Virginia sources.

What this means for you

• A resident co-trustee is important, but authority and actual administration matter.
• Review whether any Virginia trustee can act alone or controls the trustee group.
• Check the location of trust assets and the supervising court.
• A nonresident trust may still have a Virginia filing obligation when it has Virginia-source taxable income.

Common questions

Q: Did beneficiary status change the analysis?

A: The ruling noted that the Virginia trustee also had a future beneficial interest, but based its administration analysis on the trustee's inability to act without a nonresident co-trustee.

Q: Did Virginia conclusively rule that the trust was nonresident?

A: No. The result remained conditional on administration, asset location, court supervision, and Virginia taxable income.

Citations and references

• Va. Code §§ 58.1-302, 58.1-381, and 58.1-362.
• 23 VAC 10-115-10.
• 20 Pa. Cons. Stat. § 7763.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-156

Original ruling text

August 12, 2015

Re: Request for Ruling: Fiduciary Income Tax

Dear *:

This is in response to your letter in which you request a ruling concerning whether a trust is a resident trust and is required to file a Virginia fiduciary income tax return.

FACTS

The residuary trust under the * (the "Trust") was created under the will of a decedent who died as a domiciliary resident of Pennsylvania. The Trust has three co-trustees, one of whom is a resident of Virginia. The Virginia resident co-trustee is also entitled to a share of the remaining principal and undistributed income of the Trust upon the death of the current income beneficiary, the decedent's surviving spouse. The trustees seek a ruling that the Trust does not have nexus with Virginia for fiduciary income tax purposes and is not required to file a Virginia fiduciary income tax return.

RULING

Virginia Code § 58.1-381 provides that all resident estates and trusts which are required to file a federal income tax return or that have any Virginia taxable income must file an income tax return in Virginia. "Resident estate or trust" is defined in Va. Code § 58.1-302 as:

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.

The Trust does not fit within the first three definitions of a resident estate or trust under Va. Code § 58.1-302. Therefore, the issue is whether the Trust is being administered in Virginia.

Title 23 of the Virginia Administrative Code (VAC) 10-115-10 provides that "a trust or estate is being 'administered in Virginia' if, for example, its assets are located in Virginia, its fiduciary is a resident of Virginia, or it is under the supervision of a Virginia court." In this case, the request does not indicate whether the Trust's assets are located in Virginia or whether the Trust is under the supervision of a Virginia court. One of the trustees, however, is a Virginia resident.

In Public Document (P.D.) 02-101 (6/24/2002), the Department analyzed whether adding a Virginia resident to a committee which directed the trust would cause the trust to become a resident trust for Virginia income tax purposes. No member of the committee could exercise authority over the trust individually. Instead, the committee made decisions by majority or the consensus of its members. Therefore, it was the committee that administered the trust and not the individual members. As long as the committee did not operate in Virginia or was not controlled in Virginia, membership in the committee by a Virginia resident would not make the trust a resident trust for Virginia income tax purposes. See also P.D. 07-164(10/10/2007).

Similarly, in P.D. 13-18 (2/5/2013), the trust at issue had two co-trustees. One trustee was a Virginia resident and the other was a corporate trustee located in Florida, where the trust was administered. The Department ruled that because the Virginia resident trustee could only exercise power or discretion over the trust with the consent of the nonresident trustee, the trust would not be considered to be "administered in Virginia" on the basis of the one trustee's Virginia residency.

In this case, one trustee is a resident of Virginia, but he cannot make decisions regarding the Trust individually either by the terms of the Trust or under Pennsylvania law, which allows co-trustees to act by majority decision if a unanimous decision cannot be reached. See 20 Pa. Cons. Stat. § 7763. Instead, any power or discretion he has over the Trust may be exercised only if at least one of the other co-trustee agrees, neither of whom are Virginia residents. Therefore, if the committee of co-trustees is not operating or controlled in Virginia, the fact that one trustee is a Virginia resident will not, by itself, cause the trust to be considered to be administered in Virginia. As indicated above, however, the Trust would be considered to be administered in Virginia if its assets are in Virginia or it is under the supervision of a Virginia court.

If the Trust is a nonresident trust, it would not be required to file a Virginia fiduciary income tax return unless it has Virginia taxable income. See Va. Code § 58.1- 381.A 2. Virginia Code § 58.1-362 provides that the Virginia taxable income of a nonresident trust is its share of income, gain, loss and deduction attributable to Virginia sources with certain adjustments.

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, regulation, and public documents 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/1-5944785746.M