Managing a Trust Across State Lines: What Changes When You Live in a Different State Than the Trust

Quick Insights

• More than one state can have a claim on a trust's income. Where the trust was created, where the trustee and beneficiaries live, and where the trust's property is located can all matter.
• A trustee who lives in a different state than the trust can create new state filing requirements for the trust.
• Income from property in a particular state, such as rent, can be taxed by that state regardless of where the trustee lives.
• Checking state requirements when you take over as trustee, and again whenever something changes, helps avoid surprises.

Say your mother set up a trust while living in one state. She has passed away, you have taken over as trustee, and you live in another state. The trust owns a brokerage account and a rental property, and your sister, who is a beneficiary of the trust, lives in a third state.

Which state, or states, can tax the trust's income?

The answer depends on rules that differ from state to state, and many new trustees are surprised to learn that more than one state may have a say. This article covers state income tax. Estate and inheritance taxes, and questions about what the trust document allows, are best taken up with the trust's attorney.

How States Decide Where a Trust Is Taxed

The federal rules stay the same wherever the trustee lives. When the person who created a revocable trust dies, the trust generally becomes a separate taxpayer. It typically files Form 1041 once it meets the federal filing requirements, as we describe in our Form 1041 guide. State rules are a separate matter, because each state decides for itself when a trust has to file and what income it can tax.

A state can claim a trust's income for two reasons:

• Residency. The trust has enough connections to the state that the state taxes some or all of its income, wherever the income was earned.
• Source. The income comes from inside the state, such as rent from a house located there.

One trust can face a residency claim from one state and a source claim from another.

To decide whether a trust belongs to them, states look at connections like these:

• Where the person who created the trust lived
• Where the trustee lives
• Where the trust is managed
• Where the beneficiaries live

Some states focus on one of these, and others weigh several together. A trustee's home address matters, and the trust's tax residency can depend on other facts too. Because these rules vary significantly, each state's requirements need to be reviewed separately.

How Multiple States Could Be Involved

Let's go back to the opening example. Your mother lived in State A when she created the trust, you serve as trustee from State B, and your sister lives in State C.

State A may treat the trust as its own because of your mother's connection to it. State B may claim the trust because you live and manage it there. State C may have rules that apply to income paid to your sister. If the rental property is in State A, the rent may be taxable there regardless of where the trust is managed.

The trust may have filing or tax obligations in more than one state, while your sister may have separate obligations in hers. The trustee needs to review each state's rules before deciding where to file and whether credits are available.

What Changes When the Trustee Lives in a Different State

For a trustee, the practical effect is usually extra paperwork and, in some cases, extra tax.

Some states treat a trust as theirs because the trustee lives there, even when the trust was created somewhere else. California is one example. Its Franchise Tax Board says a trustee may have to file a California return when the trustee, or certain beneficiaries, live in California and the trust has income above certain amounts.

A trustee's location can also reduce a trust's tax exposure. Some states reduce or eliminate taxes on trusts that have limited connections to the state, and whether any trustees live there can be an important factor. A filing may still be required to document the exemption.

When two states tax the same income, credits for taxes paid to the other state may be available. Those credits may not apply to every trust or every type of income, so a trust can sometimes face overlapping taxes. Reviewing the rules before filing helps identify credits and avoid unnecessary tax.

Beneficiaries may have their own obligations as well. When a trust pays out income, the beneficiary may owe tax on it in the state where they live, and the trust reports the amount on a Schedule K-1. Not every payment from a trust is taxable, so a tax professional can confirm what applies. A beneficiary who moves is also worth mentioning to your tax professional.

Practical Steps for Trustees Managing Across State Lines

1. Gather the basic facts. Read the trust agreement. Write down where the person who created the trust lived, where each trustee lives, where the trust's property is, and where each beneficiary lives.
2. Confirm where the trust files. Check each state's trust tax return instructions, or ask a preparer who works with trusts. Ask whether a return is needed even when no tax is expected.
3. Revisit the question when something changes. The death of the person who created the trust is often the first change, because the trust may start filing its own returns. A trustee moving, a co-trustee joining or stepping down, a property being bought or sold, and a beneficiary relocating can each change the answer again.
4. Keep clean, separate records. Hold the trust's accounts and records apart from your own, and note where decisions are made.
5. Talk to the attorney before changing trustees. The trust document and state law control who can serve and how a trustee is replaced. Tax is one factor, alongside who is able to do the job well.

Keeping Track of a Trust That Spans States

Where a trust files depends on facts that change over time: where people live, who is serving as trustee, and what the trust owns. Trustees managing a trust across state lines should address these questions early, ideally with a CPA and an attorney working together.

At Revonary, we work alongside trustees and their attorneys on the accounting and tax side of administration, including trust accounting, trust tax return preparation, and distribution planning. Trustees who live in a different state than the trust can contact Revonary and we will help sort out which states may be involved and what the trust needs to file.