Perpetual Dynasty Trusts and Domestic Asset Protection Trusts
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ACTEC Heart of America Fellows Institute Minimizing or Eliminating State Income Taxes on Trusts and Jurisdictional Issues Regarding Fiduciary Income Tax Richard W. Nenno, Esquire Senior Trust Counsel and Managing Director Wilmington Trust Company Rodney Square North 1100 North Market Street Wilmington, Delaware 19890-0001 Tel: (302) 651-8113 Fax: (302) 427-4920 [email protected] May 2, 2019 This document, with commentary, is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management, and other services. International corporate and institutional services are offered through Wilmington Trust Corporation’s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Wilmington Trust Company operates offices in Delaware only. Note that a few states, including Delaware, have special trust advantages that may not be available under the laws of your state of residence, including asset protection trusts and directed trusts. IRS CIRCULAR 230: To ensure compliance with requirements imposed by the IRS, we inform you that, while this document is not intended to provide tax advice, in the event that any information contained in this document is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein. ©2019 Wilmington Trust Company. All rights reserved. Table of Contents Page I. INTRODUCTION .........................................................................................................1 A. Background ..........................................................................................................1 B. The Opportunity ...................................................................................................2 1. Introduction ....................................................................................................2 2. The Stakes Are High ......................................................................................2 3. The Opportunities Are Great .........................................................................3 4. Federal vs. State Tax Savings ........................................................................3 5. People Are Doing It .......................................................................................4 6. The Risks of Inaction Are Real ......................................................................5 7. Implications of the 2017 Tax Act ..................................................................5 C. How to Approach the Issue ..................................................................................6 D. Scope ..................................................................................................................6 E. Caveats .................................................................................................................7 1. Resident vs. Domiciliary ................................................................................7 2. Section 645 Election ......................................................................................7 II. STATE APPROACHES TO TAXATION OF TRUST INCOME..................................8 A. Introduction ..........................................................................................................8 B. Bases of Taxation .................................................................................................9 C. Trust Created by Will of Resident .......................................................................10 D. Inter Vivos Trust Created by Resident.................................................................11 E. Trust Administered in State .................................................................................12 F. Resident Trustee...................................................................................................12 G. Resident Beneficiary ............................................................................................13 III. DETERMINING WHETHER IMPOSITION OF TAX IS VALID ................................13 A. Introduction ..........................................................................................................13 B. Limitations on Personal Jurisdiction ....................................................................15 1. General Principles ..........................................................................................15 2. Perils of Litigating in Foreign Court ..............................................................21 C. Early U.S. Supreme Court Cases .........................................................................23 1. Introduction ....................................................................................................23 2. Brooke v. City of Norfolk ..............................................................................23 3. Safe Deposit and Trust Company v. Virginia ................................................24 4. Guaranty Trust Company v. Virginia ............................................................24 5. Greenough v. Tax Assessors of Newport ......................................................25 6. Comment ........................................................................................................25 D. State Court Cases Before Quill ............................................................................26 1. Introduction ....................................................................................................26 2. Mercantile-Safe Deposit & Trust Company v. Murphy ................................26 3. Taylor v. State Tax Commissioner ................................................................26 i 4. Pennoyer v. Taxation Division Director ........................................................27 5. Potter v. Taxation Division Director ..............................................................27 6. In re Swift ......................................................................................................28 7. Blue v. Department of Treasury.....................................................................29 8. Westfall v. Director of Revenue ....................................................................30 E. Quill Corporation v. North Dakota ......................................................................30 1. The Case.........................................................................................................30 2. Implications of the Case.................................................................................33 F. Post-Quill State Court Cases ................................................................................33 1. Introduction ....................................................................................................33 2. District of Columbia v. Chase Manhattan Bank ............................................33 3. Chase Manhattan Bank v. Gavin ...................................................................37 G. Recent State Court Cases .....................................................................................40 1. Introduction ....................................................................................................40 2. Residuary Trust A U/W/O Kassner v. Director, Division of Taxation ..........40 3. Linn v. Department of Revenue .....................................................................41 4. Fielding for MacDonald v. Commissioner of Revenue .................................43 5. McNeil v. Commonwealth .............................................................................45 H. South Dakota v. Wayfair, Inc. .............................................................................50 1. The Case.........................................................................................................50 2. Implications of the Case.................................................................................51 I. Constitutional Analysis of Taxation Based on Residence of Testator/Trustor ....51 J. Taxation of Trust Administered in State ..............................................................54 1. Introduction ....................................................................................................54 2. Wisconsin Department of Taxation v. Pabst ..................................................54 3. Pabst v. Wisconsin Department of Taxation..................................................55 K. Taxation of Resident Trustee ...............................................................................56 1. Greenough v. Tax Assessor of