March 2000


By Michael Lowitt, JD, LLM, and Marco Svagna, CPA, David Berdon & Co., LLP

The U.S. Supreme Court recently denied certiorari in Chase Manhattan Bank v. Gavin. The result is that the decision of the Connecticut Supreme Court has been upheld. The Connecticut Supreme Court had held that Connecticut's tax on the undistributed income of resident testamentary trusts is not unconstitutional, even though the trusts' administration and income production occurred outside the state. The Connecticut Supreme Court reasoned that since the decedent, the settlor of the trusts, resided in Connecticut at the time of his death, Connecticut provided legal benefits and protections that facilitated the administration process and enabled the beneficiaries to receive and enjoy the income. However, a distinction exists for inter vivos trusts.

If an inter vivos trust created by a Connecticut resident has one or more nonresident, noncontingent beneficiaries, the trust will only be taxable on a portion of the income. The portion is determined by applying a fraction to the trust income, the numerator of which is the number of Connecticut resident noncontingent beneficiaries and the denominator of which is the total number of noncontingent beneficiaries.

For purposes of the Connecticut fiduciary income tax, a noncontingent beneficiary is defined as follows:

[E]very beneficiary whose interest is not subject to a condition precedent and includes every individual to whom a trustee of a nontestamentary trust during the taxable year 1) is required to distribute currently income or corpus (or both) or
2) properly pays or credits income or corpus (or both) or
3) may, in the trustee's discretion, distribute income or corpus (or both).

[E]very beneficiary
1) to whom or to whose estate any of the trust's income for the taxable year is required to be distributed at a specified future date or event and
2) who has the unrestricted lifetime or testamentary power, exercisable currently or at some future specified date or event, to withdraw any of the trust's income for the taxable year or to appoint such income to any person, including the estate of such beneficiary.

Example: John Doe, a Connecticut resident, creates a trust for his two sons, Ray and Richard. Ray resides in Connecticut and Richard resides in New York. The trustee has discretion to distribute income and principal to each of them. In 1998, the trust had $10,000 in income that was not distributed to the two beneficiaries. Accordingly, $5,000 of the income is subject to Connecticut income tax, computed as follows:

Number of Connecticut noncontingent beneficiaries1
Total number of noncontingent beneficiaries2
Total undistributed income10,000
Fraction computed above x1/2
Income subject to Connecticut income tax$5,000

Lawrence M. Lipoff, CPA
Deloitte & Touche LLP

Alan D. Kahn, CPA
The AJK Financial Group

Contributing Editors:
Jerome Landau, CPA

Debra M. Simon, CPA
Merdinger Sruchter
Rosen & Corso P.C.

Richard H. Sonet, JD, CPA
Marks Paneth & Shron LLP

Peter Brizard, CPA

Ellen G. Gordon, CPA
Margolin Winer & Evens LLP

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