Tax Jurisdiction on a Beneficiary IRA
A trust is the owner of a beneficiary IRA and is situs in Illinois.
However, the beneficiary of the IRA is a Michigan resident. In what state is the return generated for distributions?
According to our custodian, if the Michigan resident’s address is listed on the account, a Michigan return must be generated. However, the accountant is claiming that because the trust is situs in Illinois, an Illinois return must be generated. Which party is correct?
Permalink Submitted by Bruce Steiner on Sat, 2021-03-13 18:05
Each state has different rules for determining when a trust is taxable in that state.
To answer your question, one would need to know in what state the deceased IRA owner resided at the time of his/her death, in what state the trustee(s) reside, and if there’s more than one trustee, in what state is the trust primarily managed.
State income taxation of trusts is especially important in the case of a traditional IRA since (ignoring the possibility of basis) distributions from a traditional IRA are fully taxable, whereas with other assets only the income and gains are taxable.
To the extent the trustees distribute income (which, ignoring the possibility of basis, would include any IRA distributions), the distributions would generally be taxable by the trust and taxable to the beneficiary (in his/her home state).
Bruce Steiner