Did a Florida trust become a Virginia resident trust because one of two co-trustees lived in Virginia?

Plain-English summary

A Virginia-resident co-trustee did not by itself make this Florida trust a Virginia resident trust. The irrevocable inter vivos trust was created in Florida by a Florida resident, governed by Florida law, owned no Virginia property, and was administered in Florida.

One of the two co-trustees lived in Virginia and was also the beneficiary. But the trust required that person to serve with an independent co-trustee, and decisions had to be made by majority. The Virginia resident could replace the independent trustee only with another independent trustee and could not exercise trust powers alone.

Virginia's regulation generally treats a trust as administered in Virginia when, for example, its assets are in Virginia, its fiduciary is a Virginia resident, or it is supervised by a Virginia court. Earlier rulings, however, treated a committee as the administrator where no individual member could act alone.

Applying that committee analysis, the Department found the trust was not operated or controlled in Virginia. It therefore was not a resident trust and was not required to file a Virginia fiduciary income tax return.

What this means for you

• A Virginia-resident trustee can create a Virginia administration issue, but authority and control matter.
• Review whether any Virginia fiduciary can act alone or instead needs committee approval.
• Document where the trustee committee operates and where trust decisions are controlled.
• Virginia assets, Virginia court supervision, or different trustee powers can change the result.

Common questions

Q: Was the Virginia co-trustee also a beneficiary?
A: Yes, but beneficiary status did not give that person unilateral authority over the trust.

Q: Could the Virginia co-trustee replace the independent trustee?
A: Yes, but only with another independent trustee, and trust decisions still required agreement.

Q: Did the trust own Virginia property?
A: No.

Q: Did the trust have to file a Virginia fiduciary return?
A: No. The Department found it was not a Virginia resident trust.

Citations and references

• Va. Code §§ 58.1-302 and 58.1-381.
• 23 VAC 10-115-10.
• Virginia Public Documents 02-101 and 07-164.

Subject

Residency of a Trust; Fiduciary Income

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 13-18

Original ruling text

February 5, 2013

Re: Ruling Request: Residency of a Trust

Dear *:

This is in response to your letter, dated August 10, 2012, requesting a ruling addressing whether the enclosed trust ("the Trust") has nexus with Virginia and whether the Trust is required to file a Virginia fiduciary income tax return.

FACTS

The Trust is an irrevocable, inter vivos trust created in Florida and governed by Florida law. The grantor was a Florida resident at the time the Trust was created. The grantor has never resided in Virginia and the Trust does not own property in Virginia.

The Trust is being administered in Florida by a committee of two co-trustees. One co-trustee ("Co-Trustee 1") is a corporate trustee located in Florida. The other co-trustee ("Co-Trustee ?") is an individual and a Virginia resident. Co-Trustee 2 is also the beneficiary of the Trust.

The Trust requires Co-Trustee 2 to serve with an independent co-trustee at all times. Co-Trustee 2 may replace any independent trustee without restriction, but must replace that independent trustee with another independent trustee. The Trust provides that the co-trustees must make decisions by majority.

As the beneficiary of the Trust, Co-Trustee 2 may receive distributions of principal or income which the co-trustees determine are necessary for the health, education, support and maintenance needs of Co-Trustee 2 during his lifetime. Co-Trustee 1 may distribute income or principal to Co-Trustee 2 for any purpose that Co-Trustee 1 determines is in Co-Trustee 2's best interest.

DETERMINATION

Virginia Code § 58.1-381 provides that all resident trusts which are required to file a federal income tax return or that have any Virginia taxable income must file an income tax return in Virginia. "Resident trust" is defined in Va. Code § 58.1-302 as:

The estate of a decedent who at his death was domiciled in the Commonwealth;

A trust created by will of a decedent who at his death was domiciled in the Commonwealth;

A trust created by or consisting of property of a person domiciled in the Commonwealth; or

A trust or estate which is being administered in the Commonwealth.

The Trust does not fit within the first three definitions of a resident trust under Va. Code § 58.1-302. Therefore, the relevant issue is whether the Trust is being administered in Virginia.

Section 23 V.A.C. 10-115-10 of the Virginia Administrative Code provides that "a trust or estate is being 'administered in Virginia' if, for example, its assets are located in Virginia, its fiduciary is a resident of Virginia, or it is under the supervision of a Virginia court." Therefore, the general rule is that a trust is being administered in Virginia if its trustee is a resident of Virginia.

In Public Document (P.D.) 02-101, the Department analyzed whether adding a Virginia resident to a committee which directed the trustee would cause the trust to become a resident trust for Virginia income tax purposes. The Department determined that adding a Virginia resident to such a committee would not cause the trust to become a resident trust. No member of the committee could exercise authority over the trust individually. Instead, the committee made decisions by majority or the consensus of its members. Therefore, it was the Committee that administered the trust and not the individual members. As long as the committee did not operate in Virginia or was not controlled in Virginia, membership in the committee by a Virginia resident would not make the trust a resident trust for Virginia income tax purposes.

Similarly, in P.D. 07-164, the Department analyzed whether the inclusion of a Virginia resident trustee in committees of trustees would cause the trusts to become resident trusts for Virginia income tax purposes. The Department determined that the inclusion of a Virginia resident trustee did not cause the trusts to become resident trusts. The trustees could not make decisions individually. Instead, the trustees made decisions by majority or consensus. Therefore, as long as the committees of the trusts did not operate in Virginia and were not controlled in Virginia, the inclusion of a Virginia resident trustee in the committees of trustees would not make the trusts resident trusts for Virginia income tax purposes.

In the present case, Co-Trustee 2 is a resident of Virginia, but he cannot make decisions regarding the Trust individually. Instead, any power or discretion that he has over the Trust may be exercised only if Co-Trustee 1 agrees. Therefore, the Trust is not being administered in Virginia and is not a resident trust for Virginia income tax purposes. The Trust is not required to file a Virginia fiduciary income tax return.

CONCLUSION

Based on the forgoing, the Trust is not a resident trust for Virginia income tax purposes and the Trust is not required to file a Virginia fiduciary income tax return. The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have additional questions, please contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

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