Trust Reform

Under current law, a New York resident trust is NOT subject to tax if all three of the following conditions are met:
• All trustees are domiciled outside of NY;
• All real & tangible trust property is located outside of NY; and
• All trust income & gain is derived from sources outside of NY.

This treatment offers a tax planning opportunity known as a Delaware Incomplete Gift Trust.  These trusts are treated as grantor trusts under Federal gift tax law, so that the transfer is NOT subject to gift tax, but as non-grantor trusts for federal income tax purposes, so that the trust is a separate taxpayer from the grantor.  As a result, neither the resident trust nor the beneficiaries of the trust pay income tax to NY.  The Commission understands that the principal reason taxpayers set up these trusts is to avoid NYS income tax.

Reform Proposal

One option to address this issue would be to decouple from federal treatment of Delaware Incomplete Gift Trusts.  Thus, these trusts would be treated as grantor trusts for NY income tax purposes.  As a consequence, the trust income would be included in the taxable income of the grantor.  In addition, NY could adopt California’s approach, which creates an addition modification equal to distributions to resident beneficiaries by trusts not subject to California tax.  This option would address concerns raised by the estate & trusts industry regarding certain proposals that have previously been offered to address this issue.