Using Bank Of America As Trustee Can Be Costly For Massachusetts Residents

This post was originally published on Forbes Jun 23, 2015

Reading between the lines a bit, I'm thinking that the suit Bank of America NA as Trustee for Certain Trusts v Commissioner or Revenue  decided by the Massachusetts Appellate Tax Board was the bank taking a shot at defending its trustee business against law firms.  BOA filed abatement claims for 2008 on behalf of 2,987 trusts on which it is trustee.  In one of those procedural things, beyond the ken of a mere CPA, the decision is about 34 of the trusts - presumably the answer will be the same for the other 2,953 trusts.

Short Course In Massachusetts Income Taxation of Fiduciaries

A trust that is deemed to be resident in Massachusetts is taxed pretty much the same as an individual who lives in Massachusetts.  Income that is actually distributed to beneficiaries is not taxed at the trust level.  But you have to be careful there.  Generally capital gains are not considered to be income for that purpose and are credited to principal.  And if the trust is accumulating income for unascertained beneficiaries that income is going to be taxed by Massachusetts.  Fundamentally having a dynasty trust be domiciled in Massachusetts is not such a hot idea.

The interesting thing is that there is a fairly easy way for a trust to avoid Massachusetts taxation.  In order for a trust to be considered resident in Massachusetts, it must have both a Massachusetts grantor and a Massachusetts trustee.  Once the trust has become irrevocable, there is not anything you can do about the grantor, but trustees can change.  One trick I heard mentioned was the Boston law firms having partners who lived in Connecticut  be designated trustees.

What Is A Resident Trustee?

Here is the fact pattern on one of the thirty four trusts.

Roy K. Elliot established an Indenture of Trust dated April 21, 1960 (“R.K. Elliot Trust”). The appellant filed a Fiduciary Income Tax Return (“Form 2”) for the tax year at issue for the R.K. Elliot Trust on March 29, 2008, and paid the tax. Later, in the belief that the R.K. Elliot Trust was not a resident inter vivos trust 3 subject to tax under G.L. c. 62, § 10, the appellant filed an Application For Abatement (“Form CA-6”) with the Commissioner on April 4, 2011, requesting an abatement of tax and a refund of all tax paid. The Commissioner did not act on the appellant's Form CA-6 within six months of its filing and on November 10, 2011, the appellant withdrew its consent under G.L. c. 58A, § 6. On November 14, 2011, the appellant, as trustee of the R.K. Elliot Trust, filed its petition with the Board appealing the deemed denial of its abatement application.

The appellant is BOA and it is claiming that the trust is non-resident in Massachusetts, because BOA is not resident in Massachusetts.

Well you could have fooled me.  As I sit here in North Oxford, MA (birthplace of Clara Barton), I could drive fifteen minutes max, in just about any direction, and come to a BOA branch.  I love how convenient those guys are.  If they would only go back to paying me some interest on my money - don't get me started.

The Board went into a little more detail on what BOA does in Massachusetts.

a. sought out, developed, and entered into banking and other commercial relationships with individual residents of the Commonwealth and with entities that conducted business in the Commonwealth, including making loans secured by tangible personal property or real property located within the Commonwealth;
b. the appellant conducted business in more than 200 branch offices in the Commonwealth and US Trust in two offices, all of which were staffed by the Trustees' employees;
c. employed residents of the Commonwealth and independent contractors doing business within the Commonwealth;
d. exhibited, promoted, and made known their presence in the Commonwealth by means of advertising;
e. were financial institutions engaged in business within the Commonwealth within the meaning of G.L. c. 63, §§ 1, 2, and 2A;
f. operated and staffed offices, for the purpose of fulfilling some of the their obligations as trustees of the Trusts;
g. maintained relationships with the beneficiaries of the Trusts and, with respect to the appellant, decided when to make distributions of trust assets to beneficiaries in accordance with the terms of the documents establishing certain of the Trusts;
h. administered the assets of the Trusts, created and retained certain records regarding the administration of the assets of the Trusts;
i. consulted with clients and prospective clients about available trust services;
j. discussed accounts with grantors and/or beneficiaries of existing trusts;
k. reviewed with clients and their representatives proposed trust instruments;
l. provided a place for persons to execute trusts which named one of the Trustees as fiduciary; and
m. researched issues involving the Trusts in certain instances and discussed such issues with grantors, beneficiaries and/or their representatives.

They did point out that BOA's commercial domicile was in North Carolina and its main offices were in New York, but that did not do the trick.

The analysis was that of a statutory resident.  If an individual has a place to stay in Massachusetts and is in Massachusetts for more than  183 days (sometimes called the New York rule), then that individual is a statutory resident, regardless of domicile.

Why This Might Be a Big Deal

The abatement applications for the 34 trusts totaled $2,287,707.  The Massachusetts income tax rate in 2008 was 5.3%.  I've been trying to do a back of the envelope computation to estimate how much in assets under management must be there and then project that to nearly 3,000 trusts.  I'm going to go with many billions.  It would seem that the beneficiaries of these trusts would be a lot a better off, if the trusts were domiciled some place other than Massachusetts.  If they suggest to BOA, that it should resign in favor of such a trustee, what is its counterargument? Then there is the question of future trust business.  It seems like there are some really high stakes here.  It may be that the solution will be to drop the trustee function into a subsidiary in a friendlier jurisdiction maybe Alaska or Florida, which have rewritten their perpetuity rules to allow for dynasty trusts that are really dynastic.  Then again, Massachusetts might redesign its fiduciary income tax system to hang onto white collar jobs.  It should be interesting.