If you have a trust, you probably don’t think of it as having a residence. After all, it’s not a person, or even an entity; technically, a trust is a relationship between the person who created it (the grantor), the person who administers it (the trustee) and those who benefit from it (beneficiaries). How can a relationship have a residence—and why would it need one?
The answer: because in Ohio, trusts are not subject to Ohio income tax unless they are “residents” of Ohio. What makes a trust a resident of a state? Ohio Revised Code section 5747.01(I)(3) defines Ohio resident trusts as having both been created by an Ohio resident, and having at least one Ohio resident as a “qualified beneficiary.” A qualified beneficiary is one to whom some trust income might be paid, whether or not it is actually paid.
While it is the trust that gets taxed, the trustee is the taxpayer, signing and filing the return. The trustee also pays the tax and claims credit for the payment in trust accounts. Some states tax trusts as residents of the state in which their trustee resides, but not Ohio. In fact, the Ohio statute doesn’t even refer to where the trustee lives or where the trust is administered when discussing income taxation of trusts.
Why does it even matter where a trust resides? Because some recent cases—one a Supreme Court case—might be paving the way for a declaration that the way Ohio, and states like it, apply income tax to trust is unconstitutional.
In June of 2019, the United States Supreme Court heard a case on the taxation of trusts. In North Carolina Dept. of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, 139. S.Ct. 91, 202 L. Ed. 641 (2019), the Court held that the State of North Carolina could not tax the trust named in the suit. The trust, which had been established nearly 30 years prior, had no connections with North Carolina.
The grantor, trustee, and beneficiaries of the trust at the time it was created lived outside the state. The trust’s current beneficiary had since moved to North Carolina, though she and her family did not receive any income from the trust. The U.S. Supreme Court upheld the lower court rulings that the trust did not have sufficient contacts with the state for North Carolina to classify the trust as a resident for taxation purposes.
Later that same month, the Supreme Court declined to hear another case on a similar issue. In that case, the Minnesota Commissioner of Revenue had tried to appeal a ruling of the Minnesota Supreme Court. The Minnesota Supreme Court had held that Minnesota’s trust income tax was unconstitutional as applied to the trust in question. Unlike the North Carolina case, the Minnesota trust had been created by a Minnesota resident, and at least one of the current beneficiaries was a Minnesota resident. The problem, as far as the court was concerned, was with the trustee: the trustee was not, and never had been, a resident of Minnesota.
Recall that under current Ohio law, the residence of the trustee doesn’t matter as far as taxation is concerned. But the Supreme Court’s refusal to hear the appeal of the Minnesota Supreme Court’s ruling means that that ruling stands—and could have implications for income taxation of trusts in other states, including Ohio.
In Ohio, income tax on trusts is generally a tax on capital gains to the trust; most real income of the trust is paid to individual beneficiaries, and taxed to them. But if state income tax of trust income is burdensome, it might be worth it to discuss with your attorney whether it is worth challenging the constitutionality of the tax, especially in light of recent case developments. Although Ohio continues to tax the income of trusts that are Ohio “residents,” it’s possible that Ohio income taxation of trusts will be on its way out in years to come.
If you have questions about your trust, or income taxation of trusts in general, consult an experienced estate planning and tax attorney.