Originally published in the Portsmouth Herald.
On June 28, 2012, the New Hampshire Legislature significantly
changed the tax rules for trusts as part of ongoing efforts to make
New Hampshire more attractive for locating trusts. Overriding
Governor Lynch's veto, the Legislature exempted trusts from New
Hampshire's Interest and Dividends Tax (I&D Tax). The
Legislature's action also eliminates (1) the requirement that
trusts file state income tax returns and (2) the taxation of
interest and dividend income accumulated in a trust. The change is
effective for the 2013 tax year. The change provides certain trusts
with favorable tax treatment, creating planning opportunities for
many New Hampshire residents and business owners.
Background
Pursuant to RSA 77, New Hampshire currently imposes the I&D
Tax at a rate of 5% on interest and dividends received by New
Hampshire residents. Individuals, partnerships, limited liability
companies, associations and, prior to June 28 of this year, certain
trusts were subject to the tax. Grantor trusts, are not regarded as
separate taxpayers from their settlor for federal purposes and are
also disregarded for I&D Tax purposes. Currently, the settlor
of a grantor trust must include grantor trust interest and dividend
income on his or her own state tax return. Also currently, other
types of trusts are required to file an I&D Tax return if they
have a New Hampshire trustee and their interest and dividend income
exceeds $2,400. Trusts subject to the tax may exclude income
attributable to non-New Hampshire beneficiaries. Additionally, a
trust with "freely transferable" beneficial interests is
not subject to the tax, though distributions from such a trust to
New Hampshire beneficiaries are considered income for I&D tax
purposes.
Finally, under the current I&D Tax law, New Hampshire
resident beneficiaries who receive a Schedule K-1 from a trust
indicating an allocation of interest and dividend income must
include that income on their personal I&D Tax return. If the
distributing trust paid tax on the income, the beneficiary could
exclude the distributed interest and dividend income in determining
his or her tax.
Effect of changes in the law
Under the new law, all trusts will be completely exempt from New
Hampshire's I&D Tax. The exemption is effective for tax
years ending on or after December 31, 2013. Because trusts file on
a calendar year basis, the exemption will be effective beginning in
tax year 2013, such that I&D tax will not apply to trust income
earned after January 1, 2013. Additionally, trusts beneficiaries
will be subject to I&D Tax only to the extent that income
distributed to them by a trust is taxed federally as interest or
dividends. Technical Information Release 2012-002, published by the
Department of Revenue Administration on July 10, 2012, includes a
brief discussion of the I&D Tax changes.
Because of these changes, after 2012 trusts need not file New
Hampshire I&D tax returns. Trustees of trusts, and tax
professionals who prepare trust returns, should therefore evaluate
their 2012 estimated tax payments on trust income and make
necessary adjustments to minimize the extent to which estimated tax
payments will exceed actual 2012 tax liability. Trusts must
still file a 2012 I&D tax return. The Department of Revenue
Administration has not stated whether 2012 trust returns should be
marked as final returns.
The changes to the I&D tax may provide planning opportunities
for certain individuals. New Hampshire residents might consider
that placing interest and dividend-producing assets in a trust for
estate planning purposes may also be beneficial in managing their
New Hampshire I&D Tax liability. New Hampshire resident owners
of pass-through businesses such as S Corporations, partnerships and
limited liability companies taxed as partnerships might consider
consulting with a tax professional to determine if introducing a
trust into the ownership structure could help manage their I&D
tax liability. At the same time, they should be mindful of the
requirement to have a business purpose other than tax avoidance to
justify an ownership structural change.
Steven M. Burke is Chair of the Tax Department of McLane, Graf, Raulerson & Middleton, P.A. Beth Fowler is a Senior Attorney in the group.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.