Avoiding Massachusetts Taxation After the Bank of America Case: What Works and What Doesn’t Work

Massachusetts families of means often establish trusts with Massachusetts resident fiduciaries for the benefit of unborn and unascertained beneficiaries. Later, some of these families leave Massachusetts and reestablish themselves as domiciliaries and residents of other states or even foreign countries. Their unborn children and unascertained beneficiaries may never become Massachusetts residents. Under Massachusetts law, however, an irrevocable intervivos trust with a Massachusetts resident trustee must generally pay taxes on income accumulated for the benefit of these “unborn and unascertained” trust beneficiaries. Families who leave Massachusetts often think it unfair that their trust has to pay income taxes to Massachusetts on income accumulated for the benefit of these out-of-state beneficiaries.

 

The recent Bank of America case (Bank of America, N.A. trustee vs. Commissioner of Revenue, 474 Mass 702 (2016)) describes when a corporate trustee is considered a resident of Massachusetts for Massachusetts fiduciary income tax purposes. Why does this matter? The state taxation of fiduciary income depends on the state residency of a combination of people and entities: decedents, grantors, trustees and beneficiaries. In Massachusetts the presence or absence of a Massachusetts resident trustee can determine whether or not an irrevocable intervivos trust is subject to Massachusetts income taxation. Resident trustees include both natural persons and corporate trustees.

 

On December 2, 2016, I presented before the Trusts and Estates Section of the Boston Bar Association along with two other panelists: Attorney Richard James of U.S. Trust, Boston, MA; and Attorney Michelle M. Arruda of Devine Millemet & Branch, Concord, NH. In my talk and presentation materials, I described how Massachusetts fiduciaries are taxed on:

 

  • Income from Massachusetts Sources
  • Income in Respect of a Decedent
  • Income from the Estates and Testamentary Trusts of Massachusetts Decedents
  • Income from Revocable Intervivos Trusts
  • Income from Irrevocable Intervivos Trusts

 

I also discussed techniques to avoid fiduciary taxation on irrevocable intervivos trusts consistent with the Bank of America case:

 

  • Before trust documents are signed;
  • After revocable trust documents are signed but before trusts become irrevocable; 
  • After trusts become irrevocable.

 

Some tax avoidance techniques work well and are easy to accomplish. Other techniques do not work well and may even contain serious traps for the unwary, such as hidden domicile issues.

 

My presentation was contained in the following three documents.

 

Although copyrighted, these documents have been uploaded to our website and are available to all as a service to the profession.

Our firm has counselled individuals, families, and “fiduciaries” (executors, trustees, agents under powers of attorney, and legal guardians) on a wide variety of estate planning, probate, and trust administration matters. We are available to consult with individuals and families, along with their estate planning and tax advisors who need assistance in:

 

  • Determining how best to avoid Massachusetts taxation of fiduciary income;
  • “Running the Numbers” to learn what the benefits and costs of tax avoidance might be; and
  • Preparing fiduciary income tax returns for Massachusetts and other states to minimize Massachusetts fiduciary taxation.

 

Finally, as I pointed out in my talk, there is nothing sinister in tax avoidance. As I mentioned,

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.”

Judge Learned HandHelvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934),

aff’d, 293 U.S. 465 (1935)

 

So please call if you think we can help. We never charge for an initial 20 minute telephone conference.

 

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