Dynasty Trust Transfer Advice from Financial Planners

Recent immigration reforms impacting the domiciliary status of many residents in the United States have led to important estate law reforms. Trust administrators are faced with specific changes to the taxable status of estate asset transfers. The federal Internal Revenue Service (IRS) rules for fiduciary income taxation rules applying to U.S. residents with foreign income (I.R.C. §§ 1, 61) offers guidelines for estates and generation skipping asset transfers (I.R.C. §§ 2001, 2031-2046, 2601). Non-U.S. residents continue to be subject to U.S. income tax rules applying to domestic earnings, as well as tax treatment of estate, gift and generation skipping transfer of U.S. situs assets. IRS rules are consistent with the estate laws of individual states. Example is New York’s Consolidated Laws, Estates, Powers and Trusts Law (EPTL), applying strict rules to asset transfers by filers reporting foreign domiciliary.

Definition of “Domiciliary” in Tax Law

The following outline general provisions related to the transfer of trust assets, taxation, and rules of domiciliary. Review the rule of the individual states involved in both estate formation and the transaction in question. In most states, trust asset transfers are categorized according to three categories of domiciliary: 1) resident, 2) nonresident, and 3) exempt resident.

  • Resident –estate asset transfer by will, irrevocable trust, or revocable trust while a transferor is residing in the state are subject to domestic and state taxation rules. Revocable trust transfers are generally eligible for irrevocable status if the transferor is a resident domiciliary in the state where the trust was formed; or has absolved the right to revocation; or by proxy at the time of a decedent’s death.
  • Nonresident –revocable trusts may become irrevocable after the transferor is no longer a domiciliary of the state where the trust was formed. Taxation rules apply to property transferred to beneficiaries of other states depending on the domiciliary rules where they reside; or where an estate has a trustee reporting domiciliary in another state.
  • Exempt Resident – exemptions apply to certain asset transfers of intangibles and income distribution subject to specific estate rules of an individual estate. Transfers performed by an estate under will guided by the domiciliary of the state where it is administered, or where the trustee is residing in another domiciliary, as well. If it is determined trust income is sourced in a particular jurisdiction with separate rules, or where a trust’s intangible assets are sitused outside the state, an estate’s trust may be exempt from taxation. Exempt resident trusts are responsible for filing an IRS Form IT-205-C with an annual return to certify tax-exempt status.

Domiciliary and Probate

Probate courts permit proportional designation of income taxation for beneficiaries once an estate has come into effect. Rules of domiciliary may affect the actual tax treatment of those proceeds based on the residency of individual inheritors. In a probate matter where domiciliary is addressed, proportional distribution of tax burden accorded resident and nonresident beneficiaries would be determined by the court according to jurisdictional rules of fractional contribution. The formula for proportional distribution of separate asset transfer value from the entire value of the trust defines the amount of tax contribution. Planned giving specialists can find out more about how rules of domiciliary and probate affect contributions to existing nonprofit charitable giving plans.

In the context of immigration reforms, trust administrators and probate courts are faced with new rules for the taxable status of estate asset transfers accorded by domiciliary.

Planned Giving Wiki

This is the definitive resource for professional gift planners. It covers all of the relevant information you’ll ever need as far as technical details go.