98-028

Response April 30, 1998

REQUEST LETTER

April 6, l998

Re: Request for Advisory Opinion

Dear Mr. McKeown:

I am writing to request an advisory opinion as to whether the trusts described below ("Trust I and Trust II") would be considered resident trusts for Utah state tax purposes, if the trusts are considered to be resident trusts for Utah state tax purposes, then I request an advisory opinion on whether or not the Utah State Tax Commission will waive the penalties for

late filing of Utah fiduciary income tax returns.

During his life the decedent established two trusts for the benefit of his spouse. The decedent died domiciled in Utah. He bequeathed to the inter vivos trusts securities and other property. The surviving spouse is the sole Trustee of Trust II and a co-Trustee with the decedent's nephew of Trust I. The trust instrument provided that "the administration of any

trusts created herein shall be governed, insofar as it can be provided by the law of the domicile of the fiduciary serving at the time of the occurrence of the facts governed by the law sought to be determined." The decedent's surviving spouse was a resident of Utah at the time of her husband's death, but she moved to STATE in 1992. The decedent's nephew is a resident of

Utah. One of the trusts (Trust I) holds only a, note which is in STATE. Trust II holds only publicly traded securities held in street name in three brokerage accounts in Utah and STATE.

In preparing the fiduciary income tax returns for 1992 the accountant who lived and practiced in Utah determined to file the state fiduciary income tax returns in STATE. Since 1993, I have continued to file the state returns in STATE on behalf of the trustee. The surviving spouse remains a resident of STATE and administers both trusts in STATE. Under section

58.1-302 of the Code of STATE, the trusts are "resident trusts" of STATE since they are administered in STATE and the trusts are therefore subject to STATE income tax.

Utah Code section 59-10-103(k) defines a "resident trust" as "a trust, or a portion of a trust, consisting of property transferred by will of a decedent that at his death was domiciled in this state." The annotations in the Utah Code do not clarify the meaning of "property transferred by will" as used in section 59-10-103(k). It is not clear whether the phrase refers to a

testamentary trust or whether the phrase encompasses any property that flows through a decedent's will and becomes a portion of an existing inter vivos trust. If the phrase means any property flowing through a decedent's will and funding an inter vivos trust, then the trustee of such a trust may need to trace the assets in the trust and determine if they were transferred by

will. It is also unclear whether the classification of a trust as a resident trust would change if an asset of a trust originally transferred by will were sold or exchanged.

Since the law pertaining to the residency status of the trusts is not clear, and since the accountant practicing in Utah prepared STATE fiduciary income tax returns for 1992 and not Utah state returns, I request that if the trusts are considered to be resident trusts for Utah State Tax purposes, then the Utah State Tax Commission waive any penalties due. One of the trusts, Trust I, would have no Utah state income for any of the years in question. Trust II would have tax liability of approximately $$$$$ to $$$$$$ for the years 1992 through 1995 and $$$$$ for 1996.

Thank you for your time and attention to this matter I look forward to receiving your opinion letter.

Sincerely yours,

RESPONSE LETTER

April 30, 1998

RE: Advisory Opinion - Resident Trusts

Dear NAME,

We have received your request for an advisory opinion concerning whether the two trusts you describe are considered Utah resident trusts for income tax filing purposes. As gathered from your letter, both trusts were created as inter vivos trusts by a Utah resident who, when he later died, was still domiciled in Utah. Through the decedent’s will, securities and other property was transferred into the inter vivos trusts. The decedent’s surviving spouse, though domiciled in Utah at the time of her husband’s death, moved to STATE in 1992, where she now administers the two trusts. You specifically ask if the trusts are considered Utah resident trusts, if the status of the trusts changes upon the sell or exchange of trust assets, and if penalties for nonfiling of income tax returns may be waived. Let us address each question separately.

Resident Trusts. While some state statutes limit resident trusts to only those that are administered in that state, Utah is one of the states that expands the definition of resident trust. Utah Code Ann. §59-10-103(1)(k)(i) defines a “resident” trust as: 1) a trust, or portion of a trust, consisting of property transferred by will of a decedent who at his death was domiciled in this state; OR 2) a trust administered in this state. The two trusts are no longer administered in Utah, so the second condition is not met. However, as two conditions are disjunctive, satisfaction of the first one alone will qualify the trusts as Utah resident trusts.

As to the first condition, you have asked if it is satisfied only by a testamentary trust. The answer is no. An inter vivos trust is one created during and becomes effective in the lifetime of the settlor, while a testamentary trust is one created within a will and does not take effect until the death of the settlor. However, a will can transfer property to either an inter vivos or a testamentary trust. It is this transfer of property to the trust by will, not the creation of the trust by will, that determines whether a trust is a resident trust as defined in Section 103(1)(k)(i). As the two trusts at issue here had property transferred to them by the will of a decedent who at his death was domiciled in Utah, the trusts are Utah resident trusts.

Please remember, however, that while all resident trusts must file Utah tax returns, there may not necessarily be Utah income tax liability. If all of the trust income is dispersed to non- Utah beneficiaries and none of the trust income is deemed earned in Utah, then no Utah income tax liability exists. Also, should Utah income tax liability for the trusts exist, there a credit may be applied to any Utah tax liability for the amount of income taxes required to be paid to another state.

Change of Trust Status. You next ask whether Utah’s classification of a trust as a resident trust would change if the assets of the trust that were originally transferred by will were later sold or exchanged. The answer is no. For a trust which had its property transferred to it by will, the property in that trust is either the same property transferred by will or property that can be traced to the proceeds received when the original property was sold or exchanged. In either case, that property will still be considered transferred to the trust by will because of the origins of the property. The trust will remain a resident trust until the property is itself distributed to the beneficiaries and the trust dissolved.

Penalties. Lastly, you inquire about the penalties that Utah may impose on a trust which has not filed Utah income tax returns. Utah Code Ann. §59-10-539(1) requires that a penalty will be assessed when an income tax return is not filed by the statutorily required date unless it is shown that such failure is due to reasonable cause and not due to willful neglect. In addition, Utah Code Ann. §59-1-410(10) allows the Commission to waive, reduce, or compromise any of the penalties imposed upon the taxpayer making a record of its actions and upon reasonable cause shown. However, it is premature for the Commission to waive a penalty that has not yet been imposed.

Should your client be assessed a penalty, the Commission has developed a procedure through which a taxpayer can request a waiver of a penalty. Please find enclosed the Commission’s Publication 17, Waivers - Reasonable Cause, which describes this procedure.

Please contact us if you have any other questions.

For the Commission,

Joe B. Pacheco

Commissioner

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