Information System

in Gov. Andrew Cuomo’s budget bill for

the next biennium and effective April

1, 2014, the state’s treatment of grantor

and nongrantor trusts was “decoupled”

from federal tax law. New York extend­

ed the classification of what is a grantor

trust, for state tax purposes, to include

the kind of irrevocable trusts that are

being created by New York residents

under Delaware and Nevada law. If the

trust is a grantor trust, the plan fails.

More broadly, a subcommittee of the

Multistate Tax Commission intends to

explore whether uniform rules should be

put in place for consistent treatment of

determining the residency of a trust. It

is the very presence of inconsistency on

trust situs and trust taxation across the

states that can create opportunities for

knowledgeable tax practitioners to assist

clients in minimizing their families’tax

burdens—call it trust law arbitrage.

The takeaway from these develop­

ments is that, while it is worthwhile for

high-income and high-net-worth clients

to explore DING trust planning, they

must do so with possible law changes

in mind. Trust agreements will need to

be drafted and implemented with terms

that account for law changes that could

render the trust arrangement useless, or

worse, that increase taxes for the family.

From Scott Swartz, J.D., LL.M.,

Walter I Haverfield LLP, Cleveland (not

affiliated with Cohen & Co. Ltd.)

Removing Capital Gains

From Trusts

W ith more assets held in trust and

higher marginal tax rates, many clients

and advisers are now considering distri­

butions from trusts to beneficiaries as a

way to shift the tax burden to individuals

in lower tax brackets. However, under

the traditional definition of fiduciary ac­

counting income (FAI), capital gains are

typically excluded from distributable net

income (DNI) and, thus, are taxed at the

trust level.

The implementation of the Uniform

Principal and Income Act of 1997

538 August 2014

(UPAIA) and the 2004

revisions...