We no longer support this browser. Using a supported browser will provide a better experience.

Please update your browser.

Close browser message

Taxes

Looking to reduce or eliminate state taxes on your trusts? It's possible.

Where a trust “lives” might make a big difference financially to your beneficiaries.



Do you want to make sure that more of the assets you plan to give to your family (and the income those assets earn) actually gets to them?

Then you might want to take some steps to help ensure that the non-grantor trusts you create pay as little as possible in state income taxes.

One such step could be to reduce, if not eliminate, the trusts’ duty to pay any state income taxes. This feat might be arranged simply by making sure the trustees of your (new and/or already established) non-grantor trusts reside in the “right” state or that the trust owns only the right kind of assets.


What types of trusts owe state income taxes?

For U.S. income tax purposes, there are two types of trusts: 

  • “Grantor trusts”—The person who created the trust (the grantor), or his or her spouse,1 retains sufficient powers over the trust that he or she is deemed to own the assets and therefore must pay any taxes on any income the trust earns and any gains it recognizes. This is the case even if the creator (or grantor) of the trust has forever and irrevocably relinquished the right to benefit from the trust’s assets.2
  • “Non-grantor trusts”—The trust itself is considered the owner of the assets in the trust. Consequently, the trust itself must pay taxes on the income it accumulates and the gains it recognizes. (This type of trust is often created upon the grantor’s death.)

Meanwhile, state tax law governs how much—and even whether—a specific non-grantor trust must pay in taxes to that state.


Yes, it can get complicated

We’re talking about taxes, so of course there are complications:

Management matters

How a trust is managed can make a difference. Non-grantor trusts don’t always owe taxes even when they “live” in a state that generally taxes “resident” non-grantor trusts. 

For example, if a trust pays all of its income annually to a beneficiary, its net income could be close to zero. As a result, its state income tax burden could be relatively small. (In that case, the beneficiary would owe tax on the income the trust had earned, based on the beneficiary’s state of residence.)

What’s in the trust matters

Even if a trust “lives” in a state that does not tax income at all, the trust might still owe taxes to another state, one that does tax income.

For instance, if a trust owns real property, or an interest in a “pass-through” entity (such as a partnership) that does business in a state with income taxes, the trust may owe taxes to that state on the income the property or business earns.

Where the beneficiaries live can matter

Some states, such as California, look at the beneficiaries’ residence when determining whether, and to what extent, to tax trust income. 

Meanwhile, New York has a “throwback” tax that, in certain circumstances, can subject New York resident beneficiaries to tax on income earned by some non-grantor trusts in earlier years.


You might be able to do something about that tax bill

Sometimes (though certainly not always), all you need to do to reduce or eliminate state-level taxes on non-grantor trust assets is to simply replace all trustee(s) residing in states that have an income tax with trustees (plus any other fiduciaries) with trustees and other fiduciaries who are residents of another state. 

Of course, it is not easy to find capable and trustworthy trustees in any state. That is why many corporate fiduciaries such as J.P. Morgan who can serve as trustees have trust companies in tax-friendly jurisdictions.

For example: Let’s assume Grace,3 a New Jersey resident, at her death funds a $5 million trust for the benefit of her only son, Frank. Grace’s sister, Lily, also a New Jersey resident, is the sole trustee. This trust allows the trustee (Lily) to accumulate or distribute income and principal to the beneficiary (Frank). But Frank is well off and does not need any income from the trust. 

Option 1—Pay a lot in state taxes
Let’s say the trust invests exclusively in a portfolio of publicly traded stocks and bonds and earns $300,000 in taxable income. Lily distributes none of the income to Frank. Result: The trust would owe around $19,000 to New Jersey in income taxes. 

Option 2—Pay no state taxes
Let’s take the same scenario but make someone other than Lily trustee. Let the trustee be someone who lives in New York, or J.P. Morgan, which has a trust company in Delaware. The result then would almost surely be that the trust owes no state income taxes—not to New Jersey, and probably not to the state of the trustee’s residence.4


Not for taxes alone

Residence alone should not govern your decisions about who should be the trustee (and other fiduciaries) of the trusts you create. 

Rather, when you pick a trustee, it should be because your answer to this question is “Yes”:

  • Does this person (or professional) have the time, willingness, capabilities and longevity to discharge a trustee’s many and complicated duties over the life of the trust?  

If all else is close to equal, you may want to consider choosing a trustee whose mere residence would save the trust, and ultimately your beneficiaries, money.

And if you already have a trust in a high-tax state, that condition almost certainly can be changed. The trustee’s lawyers usually handle the process of changing trustees, which modern trust agreements generally streamline. Of course, the cooperation of the existing trustees in any transition helps. So too would be the cooperation of courts, which would almost always be involved in the succession process for trusts created under the terms of a decedent’s Will.


We can help

All decisions about trustees should be made in consultation with your tax advisors and estate planning lawyers.

Your J.P. Morgan team is available to work closely with them—and you—to help you ensure the choices you make today support the long-term goals you have for yourself and your family.
 

1.In some circumstances, a third party might be deemed the grantor of a grantor trust—for instance, in the case of a trust under which a beneficiary has power to distribute trust income and principal to himself or herself.
2. Irrevocable grantor trusts are generally seen as excellent tools for preserving family wealth. That’s because grantors, as owners of the assets, must pay any taxes due on trust income. These payments reduce the value of the grantors’ estates. That, in turn, eventually reduces the estate taxes due when the grantors die. Meanwhile, until then, the assets in trust grow undiminished by those tax payments.
3.All case studies are shown for illustrative purposes only, and are hypothetical. Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.
4.In making decisions about whether, and in what amounts, distributions should be made to beneficiaries, trustees of non-grantor trusts should also consider the fact that a trust’s accumulated ordinary income in excess of, in 2022, $13,450 would be subject to U.S. income tax at a rate of 37%, whereas the top marginal rate for beneficiaries, whether filing singly or as married filing jointly is well over $500,000. Distribution of some trust income might therefore be advisable to preserve overall family wealth, even if the trust is not subject to state-level income tax and beneficiary is.



All market and economic data as of March 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

RISK CONSIDERATIONS

  • Past performance is not indicative of future results. You may not invest directly in an index.
  • The prices and rates of return are indicative, as they may vary over time based on market conditions.
  • Additional risk considerations exist for all strategies.
  • The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
  • Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.

 

IMPORTANT INFORMATION

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

All market and economic data as of March 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

The information presented is not intended to be making value judgments on the preferred outcome of any government decision


Taxes

Check the background of Our Firm and Investment Professionals on FINRA's BrokerCheck

To learn more about J. P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our  J.P. Morgan Securities LLC Form CRS and  Guide to Investment Services and Brokerage Products.

This website is for informational purposes only, and not an offer, recommendation or solicitation of any product, strategy service or transaction. Any views, strategies or products discussed on this site may not be appropriate or suitable for all individuals and are subject to risks. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation. 

This website provides information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). When JPMS acts as a broker-dealer, a client's relationship with us and our duties to the client will be different in some important ways than a client's relationship with us and our duties to the client when we are acting as an investment advisor. A client should carefully read the agreements and disclosures received (including our Form ADV disclosure brochure, if and when applicable) in connection with our provision of services for important information about the capacity in which we will be acting.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Equal Housing Opportunity logo

J.P. Morgan Chase Bank N.A., Member FDIC Not a commitment to lend. All extensions of credit are subject to credit approval 

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Please read additional Important Information in conjunction with these pages.