I’m proud that my article examining Connecticut’s odd rules for taxing trusts was published last year by the Connecticut Bar Association’s Estates and Probate Section newsletter, and I thank them for allowing me to re-post the article here.
The bad news about Connecticut’s income tax laws for trusts is that they can have very unfair consequences that depend on seemingly insignificant factors, especially for clients who set up trusts for beneficiaries living outside the state of Connecticut.
The good news is that with proper planning, clients can be sure to avoid the nastiest pitfalls. If you are a Connecticut resident who would like to establish a trust for someone who lives outside the state, or who may live outside the state in the future, it is best if you create and fund the trust during your life rather than creating it or funding it under your will. If the trust is created and funded during your life, there is the potential for the trust eventually not to be subject to Connecticut income tax if the beneficiary lives in another state. However, a trust created or funded under a will may always be subject to Connecticut income tax, even if the beneficiary lives in another state that has no income tax.
If you’d like some help thinking about these issues and making sure you and your beneficiaries are protected, please contact us!