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Why is your trust’s residency important?

On Behalf of | Jul 10, 2023 | Trusts |

A trust provides various benefits, including potentially reducing the impact of estate taxes on your properties and the beneficiaries who will inherit them upon your death. There are several factors to consider when creating a trust, and one of the most important is your trust’s residency.

What is trust residency?

You create a trust by allowing another entity (trustee) to hold the title to your property and use this for the benefit of your intended beneficiary. Over time, the trust may earn income depending on the type of property it owns. For instance, if the trust owns real estate property, it might generate income through rent. Residency pertains to the state that charges taxes on the trust’s income.

States tend to follow different rules when defining resident trusts. For example, in Connecticut, resident trusts are often those created by grantors who were state residents upon their death or those with properties transferred into the trust by state residents.

Why does residency matter?

Residency usually affects your trust’s tax obligations. For one, the state of Connecticut generally taxes trusts on all income connected to or derived from the state. The final computation may vary depending on different factors such as the number of noncontingent beneficiaries.

Residency is one of the more complex aspects of creating your trust, but it is an essential factor to consider when estate planning. An estate planning attorney can assist you with understanding relevant state laws and finding an approach that helps you achieve your intended outcomes.