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My state taxes resident trusts.

A resident trust is any of the following:

a. Its settlor (or any of its settlors) was a state resident at the time the trust was created; or

b. All through its taxable year, it consists in whole or in part of real or personal property transferred to it or to another trust by a settlor or other individual, estate or trust that at the time of the transfer was a state resident; or

c. It was created by the will of a decedent who, at the time of his death, was a state resident.

I want to know if I could legally avoid state taxes by hiring an attorney who lives in a no-income tax state to draft the trust in said state, and then gift the attorney money from myself, with the condition that they transfer the money into the trust.

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No, because once you attach the condition, then the funds no longer meet the definition of a gift:

Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

You are blurring the lines by implying that the money shouldn't be returned to you, but instead to a trust, but presumably you would be directing what the trust could be used for too, which effectively means the money is still in your control.

A good way to think about this is described in this question:

...what matters most is not what the parties involved are thinking (or are attempting to accomplish), but what a 3rd party (such as an IRS auditor) would think when looking at the situation from an omniscient point of view.

  • Are there any creative solutions to avoid resident trust status besides moving to a new state? – Wandering Fool Jun 27 '18 at 22:51
  • Here's an article that talks about it: greensfelder.com/trusts-and-estates-blog/…. This sentence seems to confirm it: "you can avoid state income taxes by moving the location of the trustee and administration of the trust to another state." Sounds like you may have to move if you are one of those roles. – TTT Jun 27 '18 at 22:56

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