Did a Virginia-created resident trust owe Virginia fiduciary income tax when its trustee, beneficiary, and securities were outside Virginia?

Subject

Virginia resident trust lacked current taxable nexus

Plain-English summary

The trust was a Virginia resident trust but did not then have enough Virginia nexus to owe tax or file a return. It was resident by statute because a Virginia domiciliary created and funded it. After his death, the trustee and beneficiary lived elsewhere, and the securities account was administered from another state.

The Department considered the current locations of the trustee, beneficiaries, and trust property. None was in Virginia. A Virginia investment advisor did not change the result because the trustee retained final investment authority.

Result: no Virginia fiduciary return or tax was required on the stated facts. Nexus had to be reevaluated if a trustee, beneficiary, or property later moved into Virginia.

What this means for you

• Statutory trust residence and taxable nexus are separate questions.
• Track where trustees, beneficiaries, property, and administration are located.
• A Virginia advisor may not create nexus when control remains with an out-of-state trustee.
• Revisit the analysis whenever people, assets, or administration move.

Common questions

Q: Was the trust a Virginia resident trust?

A: Yes. Its Virginia creator and property source met the statutory definition.

Q: Why was no return required?

A: After the grantor's death, the relevant parties, property, and administration were outside Virginia.

Q: Did the Virginia investment advisor create nexus?

A: No. The trustee retained authority and directed the advisor.

Citations and references

• Va. Code §§ 58.1-302 and 58.1-381.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-184

Original ruling text

September 14, 2016

Re: Request for Ruling: Fiduciary Income Tax

Dear *:

This will reply to your letter in which you seek a ruling regarding whether a trust has nexus with Virginia and is required to file a Virginia fiduciary income tax return.

FACTS

A Virginia resident created a trust (the “Trust”) and funded it with cash and securities. The trust became irrevocable upon his death. The trustee and beneficiary are residents of * (State A). The trust property currently consists of securities in an account held by a brokerage firm with offices throughout the United States and abroad. The account is administered from one of the firm's offices located in State A. The trustee, however, consults an investment advisor located in Virginia. The trustee requests a ruling concerning whether the Trust has nexus with Virginia and is required to file a Virginia fiduciary income tax return.

RULING

Residency

Virginia Code § 58.1-381 provides that all resident 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. A “resident trust” is defined in Va. Code § 58.1-302 and includes:

1. An estate of a decedent who was domiciled in Virginia at the time of their death;

2. A trust created by will of a decedent who was domiciled in Virginia at the time of their death;

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

4. A trust or estate that is administered in Virginia.

Because the Trust was created by, and consists of the property of, an individual who was domiciled in Virginia, it is a resident trust.

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 beneficiary is a Virginia resident. The trust property consists of securities held by a national brokerage firm and administered from an office in State A. Therefore, it appears that the Trust would not have nexus with Virginia and, thus, would not be subject to Virginia income tax or be required to file a Virginia fiduciary income tax return.

In the Department's opinion, the fact that the Trust's investment advisor is located in Virginia does not change the result. The Trustee may consult with the investment advisor, and the advisor may initiate investment changes at the Trustee's direction. Ultimately, however, the authority to make investment decisions remains with the Trustee. The Department recognizes that trustees may employ various third parties such as attorneys, accountants, investment advisors and property agents to assist in the administration of a trust. Such third parties typically act at the trustee's direction, and administrative control over the trust remains with the trustee. As such, the Department will not normally consider the location of such third parties when determining whether a trust has nexus with Virginia.

The trustee should be aware, however, that under Virginia law the Trust is a Virginia resident trust. As such, the examination of the relationship between the Trust and Virginia is continuous and ongoing. Should the trustee, beneficiary or any trust property become located in Virginia, sufficient nexus might then exist to impose Virginia fiduciary income tax.

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/1-6368216395.M