Using Decanting and BDOT Provisions to Avoid a Peppercorn of Income Potentially Triggering State Income Tax on a Trust’s Entire Income

This article was originally posted on Steve Leimberg’s Estate Planning Email Newsletter as Archive Message #205.

Generally, states can only tax the income of non-residents that is sourced to that state, but no more. States can tax all the income of their residents without regard to the source. However, a handful of states look to whether there is source income, or assets located in state, as a crucial factor to determine whether they may levy a tax over a trust’s entire income. For these states, avoiding such income or assets in state can be extremely important in order to avoid state income tax on income not sourced to that state.

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