How state taxes can affect an Oklahoma trust

Traditionally, state tax laws regarding trusts have been relatively stable and predictable. However, there have recently been some successful challenges to the ability of a state to collect taxes on trusts. Therefore, trustees may need to spend more time thinking about their fiduciary duty as it relates to possibly lowering the amount of tax owed. Further complicating the issue of state taxation is the fact that most people no longer stay in one state.

In many cases, a trust is created in a jurisdiction where there are low or no state taxes on trusts. Even so, a trust may be taxed in a state where a trust is created or be taxed on assets that are sourced to that state. This can create a confusing maze when it comes to understanding how much tax is owed on which assets.

The matter of taxing a trust may depend on what type of trust is created. States generally claim a permanent connection to a testamentary trust, which goes into effect when the creator of the trust passes on. However, a court may use the facts of the specific case when determining if a state has a connection and the ability to collect taxes on an estate. To avoid a possible connection to a state with high taxes, experts say it may be a good idea to create an irrevocable or revocable trust.

Trusts can be a good tool for advanced estate planning. They may allow an individual to avoid estate taxes by holding money outside of an estate through a trust. Certain types of trusts allow individuals to pass assets to a spouse, which would delay the need to pay estate taxes on some or all assets. An estate planning attorney may be of assistance to anyone interested in creating a trust.

Source: Wealth Management , "The Evolving Landscape of State Income Taxation of Trusts", James Cundiff and L. Timothy Halleron, December 19, 2014

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