Where to Pay State Income Taxes on an Estate - dummies

By Margaret Atkins Munro, Kathryn A. Murphy

There are state-specific rules regarding where you pay income tax on the income in an estate or trust. The obvious one is that you file, and pay taxes, in the state where the estate or trust is resident, meaning that:

  • The decedent was a resident of that state when he or she died, or the grantor was resident of that state when he or she funded the trust.

  • In some states, the fiduciary must also be a resident of the same state.

Of course, depending on the rules in place in the state of administration, sometimes a trust doesn’t reside anywhere, and no state returns are required. In this case, there will be no state taxes on income that accumulates in the trust and on the capital gains.

In other instances, you may have an estate or trust that must file tax returns in multiple states because it owns a business or real estate interest in a state other than its state of residence.

For example, a trust that’s resident in Massachusetts may own New York real estate and have to file a New York income tax return showing only the New York sourced income, that is, the rental income. All the income will be included on the Massachusetts return, but Massachusetts will give a credit for any state taxes paid to New York.

And, if you have a resident trust or estate, but non-resident beneficiaries to whom you’ve made distributions, they pay income taxes in their state of residence, not in the trust or estate’s state. Are you having fun yet?

The moral of the story is that if you’re going to have a state income tax obligation for your estate or trust, estimated tax rules will apply. These are typically similar to federal estimated tax rules, but the penalty thresholds are usually lower.