Tax Law : Interest & Dividends Tax Relief for New Hampshire Trusts
By: Anu Mullikin
New Hampshire has taken strides over the past few years toward making this the best state in which to create and administer trusts. Through the passage of sweeping, trust-favorable legislation, including the Uniform Trust Code and the Trust Modernization Act, New Hampshire residents and non-residents have been given a strong incentive to create and administer their trusts in New Hampshire. Recently, the state passed yet another piece of legislation to enhance the favorability of trust administration here Ė Chapter 286, Laws of 2012 (SB 326).
The relevant sections of SB 326 eliminated the Interest and Dividends Tax historically imposed on non-grantor trusts. Unlike a "grantor trust," the income for which is reported by the trustís creator for federal income tax purposes, a non-grantor trust is taxed as a separate entity for federal income tax purposes. Non-grantor trusts are used for a wide variety of estate tax planning purposes, including the use of the temporarily available $5.12 million gift tax exemption.
With the passage of this new legislation, the interest and dividends earned by non-grantor trusts will not be subject to Interest and Dividends Tax in the year the interest and dividends are earned at the trust level. Instead, in any year that there is a distribution to one or more trust beneficiaries, any trust beneficiary who is a resident of New Hampshire may be subject to Interest and Dividends Tax on a portion of the distribution, proportional to interest and dividends earned in that year by the trust.
If a non-grantor trust accumulates interest and dividends over a period of years, those interests and dividends will not be subject to Interest and Dividends Tax. In a future year when the accumulated interest and dividends are distributed to the trust beneficiaries, the beneficiaries who are New Hampshire residents will be subject to Interest and Dividends Tax, only on their pro rata share of the interest and dividends earned in the year of distribution.
In other words, interest and dividends earned by the trust in prior years when no distributions were made will never be subject to Interest and Dividends Tax. Moreover, if the beneficiaries of the trust are out-of-state residents, they will not be subject to Interest and Dividends Tax at all, in which case the interest and dividends earned by the trust will completely escape the Interest and Dividends Tax.
There is another, possibly more important, feature of the new law. Distributions from S corporations and certain limited liability companies and partnerships are taxed as dividends for purposes of the Interest and Dividends Tax. Now, if an interest in any S corporation, or a partnership or limited liability company with transferrable shares, is transferred into a New Hampshire non-grantor trust, then distributions from those business entities to the trust will not be subject to Interest and Dividends Tax, because non-grantor trusts are no longer subject to the tax.
Subsequent distributions from the trust to the trustís beneficiaries will then only be subject to Interest and Dividends Tax at the beneficiary level, to the extent that the distribution carries out income that is federally taxed as interest or dividends.
Because distributions from S corporations, LLCs and partnerships are generally not taxed federally as dividends, distributions from the trust to its beneficiaries should not be subject to Interest and Dividends Tax to the beneficiaries, either.
The interest and dividends taxation of grantor trusts has not been changed. In the case of a grantor trust, if the grantor is a New Hampshire resident, then the interest and dividends earned by the grantor trust will be taxable on the grantorís personal Interest and Dividends Tax return. While there are a number of different types of grantor trusts, the most common is the traditional estate planning revocable trust.
The trust planning opportunities available under the new law will be applicable for all tax periods ending on or after Dec. 31, 2013. For trusts that file on a calendar-year basis, this favorable legislation will apply to interests and dividends earned, and distributions made, to a New Hampshire non-grantor trust any time after Jan. 1, 2013.