Re: Mass Tax Still Due on Irrevocable Trust?
posted at 3/29/2013 7:33 AM EDT
In response to bcbw's comment:
Hi, we are trying to determine if we have to file a Massachusetts tax return on an irrevocable trust. The trust was created while the beneficiary was a resident of Massachusetts. The beneficiary and the trustees now live in another state with no state taxes. The trustee with the fiduciary responsiblity, living out of state, will file the federal return for the trust, but do they still need to file a Massachusetts state return for the trust as well? They send a K1 to the beneficiary, who includes that in their federal return.
According to Massachusetts tax provisions, the question revolves around the person who set up the trust, the trustee and/or the source of the income in the trust.
If the income is from property (a rental, for example) or a business that operates in Massachusetts, the income will be taxed to the trust, if it retains the income) or the beneficiary (if and to the extent the income is deemed to be distributed to the beneficiary). In this situation, a Massachusetts tax return will be required of the trust, regardless of other circumstances.
As you have labeled the trust “irrevocable”, it is assumed, for purposes of framing an answer to your question, that the person who created the trust did so during their lifetime. The trust will be treated as a resident of Massachusetts (requiring a return, regardless of the source of the items of income in the trust) if two tests are met. Test one requires that at least one of the trust fiduciary/trustees is a Massachusetts resident. Test two requires that either; the person who set up the trust was a Massachusetts resident at the time they set up the trust; or that person resided in Massachusetts at any time during the year in question; or that person was a Massachusetts resident at the time of their death.
Given these conditions, if the implications of the facts that you set out – that there is only one trustee/fiduciary – and that person no longer resides in Massachusetts, the trust, under the tests set out in the discussion, above, would no longer be a resident of Massachusetts. In that case, a return would only have to be filed with Massachusetts to report income as discussed in the situation where the income is treated as Massachusetts sourced. If there is no income of that type, no return need be filed with Massachusetts.
Hope this helps in preparing your returns!
Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal
Katz, Nannis + Solomon, P.C.