If the person who created a trust was a New York domiciliary when the trust became irrevocable, but every trustee later becomes domiciled outside New York and the trust's assets and income have no New York connection, does the trust still owe New York income tax?

Plain-English summary

Petitioners are the trustees of an inter vivos trust created on May 12, 1961 by Harry J. Benton (the "Grantor"), who was domiciled in New York both when he created the trust and when it became irrevocable on July 31, 1961 (he retained a right to modify or amend the trust only until that date, and he never exercised it). The Grantor is now domiciled in Colorado. Since 1988 - when the last New York-domiciled trustee, Frederick E. Winkler, died and was replaced by a Florida trustee - every trustee of the trust has been domiciled outside New York. The trust's entire corpus consists of intangible property: stock and notes of a Delaware broadcasting corporation operating in California, a note secured by Colorado real estate, and cash, government obligations, and securities held through Lazard Freres & Co. in New York City. None of the trust's assets are used in a business carried on in New York, and all of its income and gains come from sources outside New York, determined as if the trust were a nonresident. The trustees asked whether the trust is exempt from New York State and New York City personal income tax under 20 NYCRR § 105.23, particularly given the trustees' plan to sell the broadcasting-company stock and recognize capital gain.

The Department first confirmed that the trust is technically a New York "resident trust." Tax Law § 605(b)(3)(C) defines a resident trust by reference to the grantor's domicile at the moment property was transferred to the trust or at the moment the trust became irrevocable - and because Harry Benton was domiciled in New York at both of those moments in 1961, the trust's resident status was locked in then and does not change just because he later moved to Colorado.

But being a resident trust doesn't automatically mean the trust owes New York tax. 20 NYCRR § 105.23(c) carves out an exception: no New York State personal income tax is imposed on a resident trust for any year in which (1) all trustees are domiciled outside New York, (2) the entire corpus, including any real or tangible property, is located outside New York, and (3) all income and gains are derived from sources outside New York, determined as if the trust were a nonresident. Citing its own prior opinion in the Charles B. Moss Trust matter, TSB-A-94(7)I, along with Safe Deposit & Trust Co. v Virginia, Mercantile-Safe Deposit and Trust Co. v Murphy, and Taylor v State Tax Commission, the Department reaffirmed that the situs of a trust's intangible assets is deemed to be at the domicile of the trustee - not at the location of whatever bank or brokerage physically holds the assets. So even though the trust's cash and securities were literally held by Lazard Freres in New York City, that did not count as corpus "located" in New York for purposes of the second condition, because the relevant situs followed the trustees' out-of-state domicile. All three conditions were satisfied beginning in 1988, once the trust's last New York-domiciled trustee was gone. The Department concluded that for every taxable year in which all three conditions are met, no New York State personal income tax is imposed on the trust - and because the New York City personal income tax under Article 30 is administered the same way as the State tax under Article 22, no New York City tax is imposed either, including on the anticipated capital gain from selling the broadcasting-company stock.

What this means for you

Trustees and beneficiaries of trusts with a New York-domiciled grantor

A trust doesn't shed its New York "resident trust" label just because the person who created it later moves out of state - that label is fixed permanently at the moment of the original transfer or the moment the trust became irrevocable. If your trust was created (or became irrevocable) while the grantor lived in New York, expect it to remain a New York resident trust for as long as it exists, regardless of where the grantor lives now. The practical tax question isn't whether the label applies, but whether the § 105.23(c) exception - out-of-state trustees, out-of-state corpus, and non-New York-source income - is satisfied for a given year.

Accountants and tax professionals administering out-of-state trusts with New York-connected origins

When evaluating whether a resident trust owes New York tax, don't assume that using a New York City bank, brokerage, or custodian to hold cash and securities breaks the "corpus located outside New York" condition. This opinion confirms that the situs of intangible assets follows the trustee's domicile, not the physical location of the institution holding the account. Track trustee domicile carefully instead - a single trustee moving into (or being replaced by someone domiciled in) New York could flip the exception off for that year, even if nothing else about the trust's assets or income changes.

Common questions

Q: Does the trust stop being a "New York resident trust" now that the Grantor lives in Colorado?
A: No. Resident-trust status under Tax Law § 605(b)(3)(C) is determined by the grantor's domicile at the time property was transferred to the trust or at the time the trust became irrevocable - both of which happened in 1961 while Harry Benton was a New York domiciliary. His later move to Colorado does not change that classification.

Q: If the trust is still a "resident trust," why doesn't it owe New York tax?
A: Being a resident trust only determines a label, not automatic tax liability. 20 NYCRR § 105.23(c) exempts a resident trust from New York State personal income tax for any year in which all trustees are domiciled outside New York, the entire corpus (including real and tangible property) is located outside New York, and all income and gains come from non-New York sources.

Q: The trust's cash and securities are held by a brokerage in New York City - doesn't that put the corpus "in" New York?
A: No. The Department held that the situs of intangible assets (like cash, securities, and notes) is deemed to be at the domicile of the trustee, not at the location of the bank or brokerage that physically holds them. Because all the trustees were domiciled outside New York, the corpus was deemed located outside New York even though Lazard Freres & Co. held the assets in New York City.

Q: When did the trust first qualify for the exception?
A: Beginning in 1988, when the trust's last New York-domiciled trustee, Frederick E. Winkler, died and was replaced by a trustee domiciled in Florida. From that point on, all three conditions of § 105.23(c) were satisfied.

Q: Does the exception cover New York City personal income tax too, or only New York State tax?
A: Both. The Department explained that the New York City personal income tax under Article 30 of the Tax Law is administered by New York State the same way as the State tax under Article 22, so for any taxable year in which the § 105.23(c) conditions are met, neither New York State nor New York City personal income tax is imposed on the trust.

Q: Would the anticipated capital gain from selling the broadcasting-company stock be taxed by New York?
A: Not for a taxable year in which the § 105.23(c) conditions are satisfied. Since the trust's assets, trustees, and income sources were all outside New York, the anticipated gain from the planned stock sale would fall within the exception like the trust's other income and gains.

Citations and references

• Tax Law § 605(b)(3)(C) - defines a resident trust based on the domicile of the person whose property funds the trust, measured at the time of transfer or at the time the trust became irrevocable
• 20 NYCRR § 105.23(c) - no New York State personal income tax is imposed on a resident trust if all trustees are domiciled outside New York, the entire corpus is located outside New York, and all income and gains derive from non-New York sources
• TSB-A-94(7)I (Charles B. Moss Trust, April 8, 1994) - prior Department opinion holding that the situs of a trust's intangible assets is deemed to be at the domicile of the trustee, not the location of the custodian holding those assets
• Safe Deposit & Trust Co. v Virginia, 280 US 83 - cited for the principle that intangible property's situs follows domicile rather than the location of a custodian
• Mercantile-Safe Deposit and Trust Co. v Murphy, 19 AD2d 765, affd 15 NY2d 579 - cited for the same situs-of-intangibles principle
• Taylor v State Tax Commission, 85 AD2d 821 - cited for the same situs-of-intangibles principle

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a96_4i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-96 (4) I
Income Tax
October 25, 1996

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I960712B

On July 12, 1996, a Petition for Advisory Opinion was received from Manley
P. Caldwell, Jr., and Carol Benton Peterson, Trustees u/a dtd 5/12/61 by Harry
J. Benton, c/o Caldwell & Pacetti, 324 Royal Palm Way, Suite 300, Palm Beach,
Florida 33480-4352.
The issue raised by Petitioner, Manley P. Caldwell, Jr., and Carol Benton
Peterson, Trustees u/a dtd 5/12/61 by Harry J. Benton, is whether Petitioner is
exempt from New York State and New York City personal income tax pursuant to
section 105.23 of the Personal Income Tax Regulations.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
Petitioner is an inter vivos trust (the "Trust") created on May 12, 1961
by Harry J. Benton (the "Grantor"), who at that time was a New York domiciliary.
The Grantor is presently a domiciliary of Colorado. In relevant part, the Trust
provides for the distribution of income and/or principal in the discretion of the
Trustees among a class consisting of the Grantor's mother, the Grantor's wife and
the Grantor's issue. Upon the death of the survivor of the Grantor's wife, his
daughter, Carol Benton (now Carol Benton Peterson) and his mother, the Trust
terminates and the principal is distributable to the Grantor's then living issue,
per stirpes. Pursuant to Article 6 of the Trust, the Grantor retained the right
to "modify, alter and amend" the Trust until July 31, 1961, at which time he
released the right and the Trust became irrevocable. The Grantor never exercised
this right to amend the Trust.
No other person other than the Grantor has
transferred property to the Trust.
The initial Trustees of the Trust were Frederick E. Winkler and Paul B.
Benton, both of whom were domiciliaries of New York. Trustee Paul B. Benton died
on March 9, 1983.
Shortly thereafter, Margot M. Benton was appointed as a
successor Trustee to Paul B. Benton. Margot Benton was a domiciliary of Florida
at the time of her appointment. Margot Benton died on January 3, 1986, and Carol
Benton Peterson was appointed as a successor Trustee to Margot Benton. Mrs.
Peterson was a domiciliary of Minnesota at the time of her appointment. She
subsequently became a domiciliary of Colorado, where she is presently domiciled.
Trustee Frederick E. Winkler died in 1988 and Manley P. Caldwell, Jr. was
appointed as a successor Trustee to Mr. Winkler. Mr. Caldwell is a domiciliary
of Florida. Since the appointment of Mr. Caldwell as Trustee in 1988, all of the
Trustees of the Trust have been domiciled in a state other than New York State.

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TSB-A-96 (4) I
Income Tax
October 25, 1996

The corpus of the Trust consists of the following intangible assets:

1. Common and preferred stock interests in and notes of Quick
   Broadcasting, Inc. ("QBI"), a Delaware corporation which is
   authorized to do business in California. QBI, which has corporate
   offices in Vacaville, California, is a licensee of radio stations
   KUIC and KXBT, both of which are radio stations licensed and
   broadcasting in California.
2. A note secured by a mortgage on real property located in
   Colorado.
3. Cash in checking and money market accounts, U.S. Government
   obligations and marketable securities and notes. The cash, U.S.
   Government obligations and marketable securities and notes are held
   by Lazard Freres & Co., LLC, which is located in New York City.
   None of the assets of the Trust are employed in a business carried on in
   New York, and all income and gains of the Trust are derived from sources outside
   of New York State, determined as if the Trust were a nonresident.
   The Trustees propose to sell all or a portion of the Trust's stock
   interests in QBI. It is anticipated that the sale of these assets will result
   in the recognition of capital gains taxable to the Trust.
   Section 605(b)(3)(C) of the Tax Law defines a resident trust as
   follows:
   a trust, or portion of a trust, consisting of the property of:
   (i) a person domiciled in this state at the time such property was
   transferred to the trust, if such trust or portion of a trust was
   then irrevocable, or if it was then revocable and has not
   subsequently become irrevocable; or
   (ii) a person domiciled in this state at the time such trust, or
   portion of a trust, became irrevocable, if it was revocable when
   such property was transferred to the trust but has subsequently
   become irrevocable.
   For the purposes of the foregoing, a trust or portion of a trust is
   revocable if it is subject to a power, exercisable immediately or at
   any future time, to revest title in the person whose property
   constitutes such trust or portion of a trust, and a trust or portion
   of a trust becomes irrevocable when the possibility that such power
   may be exercised has been terminated.
   Section 105.23(c) of the Personal Income Tax Regulations provides as
   follows:
   [t]he determination of whether a trust is a resident trust is not
   dependent on the location of the trustee or the corpus of the trust
   or the source of income; provided, however, no New York State
   personal income tax may be imposed on such trust if all of the
   following conditions are met:

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TSB-A-96 (4) I
Income Tax
October 25, 1996

(1) all the trustees are domiciled in a state other than New
York State;
(2) the entire corpus of the trust, including real and
tangible property is located outside of New York State; and
(3) all income and gains of the trust are derived or connected
from sources outside of New York State, determined as if the trust
were a nonresident.
Herein, the Trust is a trust consisting of property of a person domiciled
in New York State at the time such property was transferred to the trust, and
when the trust became irrevocable. Accordingly, the Trust is a resident trust
of New York pursuant to section 605(b)(3)(C) of the Tax Law. However, this fact
does not, by itself, mean that it is subject to New York State personal income
tax under Article 22 of the Tax Law.
In Charles B Moss Trust, Adv Op Comm T & F, April 8, 1994, TSB-A-94(7)I,
it was held that the situs of intangible assets of a trust is deemed to be at the
domicile of the trustee. (See, Safe Deposit & Trust Co. v Virginia, 280 US 83);
Mercantile-Safe Deposit and Trust Company v Murphy, 19 AD2d 765, affd 15 NY2d
579; Taylor v State Tax Commission, 85 AD2d 821, 822.)
Further, it was
determined that where the three conditions of section 105.23(c) of the Personal
Income Tax Regulations were met, no New York State personal income tax was
imposed on the trust even though the trust was a New York resident trust pursuant
to section 605(b)(3)(C) of the Tax Law. In that case, the sole trustee was
domiciled in Colorado. The corpus of the trust consisted solely of intangibles
and that cash, securities and U.S. Government obligations were held by Fiduciary
Trust Company located in New York State. Also, none of the assets of the trust
were employed in a business carried on in New York and all income and gains of
the trust were derived form sources outside of New York, determined as if the
trust were a nonresident.
In this case, after 1988 the three conditions contained in section
105.23(c) of the Personal Income Tax Regulations have been met. First, after
1988 all of the trustees have been domiciled outside of New York State. Second,
the corpus of the Trust consists of intangible assets some of which are held by
Lazard Freres & Co. located in New York City. Third, none of the assets of the
Trust were employed in a business carried on in New York State and all income and
gains of the Trust were derived from sources outside of New York State,
determined as if the Trust were a nonresident. With respect to the second
condition, the situs of the intangible assets of a trust is deemed to be at the
domicile of the trustee. Therefore, the situs of the corpus of the Trust is
deemed to be outside of New York State.
Accordingly, the Trust is a New York resident trust. However, for the
taxable years that the three conditions contained in section 105.23(c) of the
Personal Income Tax Regulations have been met, no New York State personal income
tax is imposed on such trust for those years.

The New York City personal income tax is similar to the New York State
personal income tax and is administered by New York State the same as Article 22

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TSB-A-96 (4) I
Income Tax
October 25, 1996

of the Tax Law. Accordingly, for the taxable years that the Trust has met the
three conditions contained in section 105.23(c) of the New York State Personal
Income Tax Regulations, no New York State personal income tax is imposed on the
Trust, and no New York City personal income tax authorized under Article 30 of
the Tax Law is imposed on the Trust for those taxable years.

DATED: October 25, 1996

s/John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.