THE SITUS OF A TRUST

By Alan J. Straus, JD, CPA

Pursuant to New York State law, and New York is often a representative state, if a resident individual establishes a trust, that trust is deemed to be a "resident" trust. A trust established while the grantor is alive is known as an "inter vivos trust," and if it is established under someone's Last Will it is known as a "testamentary trust." If the decedent was a resident of New York when he or she died, the estate would be a resident estate. Any testamentary trusts established by the decedent's Will would be resident trusts. Usually the trustee and beneficiaries of the trust are residents of the same state as the person who established the trust. What happens when the trustee and/or beneficiaries are not residents of the same state as the grantor?

As is often the case, a New York resident individual may have established a testamentary trust naming, for example, his brother as the trustee for his children, who are the beneficiaries. During the course of several years, the brother and the children may have migrated to Florida or some other warmer place and no longer be domiciled in New York. Eventually, it may be concluded that it no longer makes sense to continue to file New York State fiduciary income tax returns, since no one now connected with the trust has any nexus to New York.

Until July 1996, it seemed clear that there was a responsibility to continue to file New York State returns and pay whatever New York State tax might be due since the trust was a New York trust established by a New Yorker. The state finally issued TSB-M-96(1) which clarifies the filing responsibility in the circumstances described above. Basically, it holds that as long as the trustee and beneficiaries are domiciled outside of New York and the corpus of the trust consists of intangibles, there is no need to file a New York State income tax return for this trust. Presumably, the result would be the same if there were tangible assets in the trust that were not located in New York (e.g., a piece of real estate located in New Jersey). Further, there is no mention in the TSB about where the portfolio of intangible assets (e.g., marketable securities) was being kept. It should not make a difference if the brokerage account is maintained at an office in New York or elsewhere, but there is no consideration in the TSB of this issue.

Also absent from the TSB is a discussion of whether a New York State return would have to be filed if the trustee resided out of state but the beneficiaries were domiciled in New York. It is safe to conclude, however, that under these circumstances a New York return would have to be filed. New York's regulations still require the filing of a partnership tax return for any partnership that has a New York domiciliary as a partner even if that entity has no other nexus with New York. Therefore, in this situation where the ties are stronger, it would seem logical to expect a requirement to file.

The financial planner should be aware of any additional filing requirements that trustees, grantors, and beneficiaries may face when they reside in different states. For instance, the State of Florida has successfully argued that its intangibles tax applies to a trust established by a non-Florida domiciliary for a non-Florida beneficiary when the trustee takes residence in Florida and moves the securities portfolio to a Florida brokerage office. Some states, on the other hand, take a liberal position and would not tax a trust established by a nondomiciliary under another states' laws merely because the trustee happened to move into that state at some future date. It is important to do careful research rather than merely accept what was filed; circumstances may differ from those originally encountered at the establishment of the trust or the estate.

A case focusing on this issue for an important, but different, reason is the Estate of Willis Clack v. United States, 106 T.C. 131. The case, decided in February 1996, involved a question of the allowability of a certain deduction for an estate. The actual point in controversy is not relevant to this discussion. What is, is a discussion by Judge Parker in his dissenting opinion. The case involved an estate of a decedent who resided in Arkansas while the executor of his estate resided in Wisconsin. Each of these states is in a different Federal Circuit for purposes of determining where an appeal of a Tax Court decision can be filed. This is important because under the Golsen rule, the Tax Court is bound to follow the decisions that have been reached in that Circuit. The question depended upon whether the Tax Court would follow the Court of Appeals in the Circuit where the decedent resided prior to his death held and find in favor of the taxpayer or whether the Tax Court was free to rehear the issue and decide it independently because the Court of Appeals in the Circuit in which the executor resided had not yet decided the issue. The case turned on who the "petitioner" was for purposes of filing the suit.

While the Tax Court held the petitioner was the decedent, Judge Parker made a very convincing case that the court was wrong and that the petitioner was the executor. That would make the situs for the appeal, the state in which the executor resided. While such a determination would have had a profound effect on the above case, a close reading of the case could also present possible novel arguments, either for or against, as to when a particular state would be successful in imposing income tax upon a particular trust or an estate.

The Clack case, upon careful reading, makes it very clear that the issue of trust (or estate) situs should not be taken lightly. The person responsible for the return preparation must carefully research the rules in all states that may have an interest in the trust or estate. If it is an initial return, it may be wise to obtain from council a written opinion or an opinion in writing from that particular state. It is an unpleasant experience having to explain to a client that tax returns should have been filed in past years in a particular state especially when that state had recently concluded an amnesty period. *

NEW LEGISLATION MEANS SOME RELIEF FOR INVESTMENT ADVISERS

By John Vazzana, CPA, Buchbinder Tunick & Co. LLP

On October 11, 1996, President Clinton signed the Securities Reform Bill into law. Title III of this bill, the Investment Advisers Supervision Coordination Act "IASCA" or the "act," provides regulatory relief for investment advisers and increases uniformity in state regulation. The act makes long awaited amendments to the Investment Advisers Act of 1940 and will be of greatest benefit to smaller investment advisers.

Basically, IASCA divides responsibility for regulation of investment advisers between the various state regulatory authorities and the Federal government. Under the act, an investment adviser with less than $25 million of assets under management is exempt from Federal regulation. Thus, such an investment adviser is required to comply with the investment adviser regulations of any state wherein it maintains its principal place of business. If the adviser is located in a state that does not require registration, the SEC will continue to be the regulatory authority. An investment adviser with more than $25 million of assets under management and advisers of investment companies are regulated solely by the Federal government and must register with the SEC.

Changes were also made to the Employee Retirement Income Security Act of 1974 to allow advisers of ERISA plans to continue as such in situations where the adviser is now regulated by a state and not by the SEC. The changes regarding ERISA plans expire two years after the date of the act's enactment, giving Congress a chance to review them.

Although investment advisers with more than $25 million of "assets under management" are exempt from state registration, states may continue to enforce issues of fraud against them and to require them to file documents for notice purposes. States can also collect filing or registration fees from otherwise preempted investment advisers. Furthermore, to help ensure that states receive payment, the act gives any state the authority to require registration of an exempted investment adviser that fails to pay the required state fees within three years of enactment. Representatives of exempt investment advisers may still be subject to state regulation.

The act also creates a national de minimis standard under which an investment adviser would not have to register in a state in which the adviser has no place of business and, during the preceding 12-month period, had fewer than six clients who were residents of that state.

For investment advisers that are required to register in more than one state, IASCA eliminates the inconvenience of dual compliance. If an adviser is in compliance with the regulations of the state wherein it has its principal place of business, then the adviser does not have to meet in most instances additional requirements of another state. For instance, no state may enforce any law or regulation that would require an investment adviser to maintain any books or records in addition to those required by the state wherein it is required to register. Also, no state may enforce any law or regulation that would require an investment adviser to maintain a higher minimum net capital or post any bond in addition to that required under the laws of such state.

IASCA also gives the SEC authority to require advisers to register, file a report, and/or pay a fee to a third party established by the SEC such as a central filing depository for investment advisers. The act gives the SEC the power to bar convicted felons from registering as advisers. IASCA also authorizes that $20 million be added to the SEC's budget in both years 1997 and 1998 for the enforcement of the investment adviser program, although no appropriation has yet been made. In addition, the act provides for the "establishment and maintenance of a readily accessible telephonic or other electronic process to receive inquiries regarding disciplinary actions and proceedings involving investment advisers." A toll-free telephone number and access through the Internet are possibilities. The provisions of IASCA take effect 180 days after the date of enactment. *

Editors:
Milton Miller, CPA
Consultant

William Bregman, CPA\PFS

Contributing Editors:
Alan Fogelman, CPA
Clarfield & Company P.C.

David Kahn, CPA\PFS
Goldstein, Golub Kessler & Company, CPAs P.C.

David Marcus, CPA
Paneth Haber Zimmerman
& Co. LLP