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For quite a few years now, New Hampshire has been making strides to make this the best state in which to create and administer trusts through the passage of sweeping, trust-favorable legislation, which included the Uniform Trust Code and the Trust Modernization Act. These trust laws have given New Hampshire residents and non-residents alike a strong incentive to create and administer their trusts in New Hampshire. In furtherance of this objective, New Hampshire has recently passed yet another piece of legislation to enhance the favorability of trust administration in New Hampshire — Chapter 286, Laws of 2012 (SB 326).
The relevant sections of SB 326 amend the Interest and Dividends Tax, RSA Ch. 77. The Interest and Dividends Tax historically imposed on non-grantor trusts is now eliminated. Unlike a "grantor trust", the income of which is reported by the trust's 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, then any trust beneficiary who is a resident of New Hampshire may be subject to Interest and Dividends Tax on a portion of the distribution which constituted 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, the 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, and 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 Interest and Dividends Tax. Subsequent distributions from the trust to the trust's 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. Since 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 grantor's 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.
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The trust planning opportunities available under the new law will be applicable for all tax periods ending on or after December 31, 2013. For trusts which 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 January 1, 2013.
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Please contact any member of the Tax Practice Group at (603) 669-1000 regarding the recent change to the Interest & Dividends Tax or to discuss the many trust planning opportunities that will be available under the new law.
Our Tax Practice Group can assist you or your clients in reviewing statutory provisions to determine how they may be applicable to you or your clients that are operating or residing in New Hampshire. Members of our group can assist practitioners and their clients with tax planning or tax representation matters before the Internal Revenue Services or the various States’ Departments of Revenue.
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The Devine, Millimet & Branch Tax Group offers this free periodic Newsletter to provide information regarding tax news and other tax-related topics. If you have any questions about this e-mail, or if you know of others who may be interested in receiving these alerts, please contact us at mgilbert@devinemillimet.com.
This is not a legal document nor is it intended to serve as legal advice or a legal opinion. Devine, Millimet & Branch, P.A. makes no representations that this is a complete or final description or procedure that would ensure legal compliance and does not intend that the reader should rely on it as such.
© Copyright 2012 Devine Millimet & Branch, Professional Association
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