Tax Type
Fiduciary Income Tax
Description
Returns of estates and trusts; Qualified funeral trusts
Topic
Estates and Trusts
Date Issued
12-10-1997
December 10, 1997
Re: Request for Ruling: Trust Income Tax
Dear**********
This will reply to your letter of September 24, 1997 requesting a ruling on the impact on Virginia of the amendments to Internal Revenue Code (IRC) § 685 made by the Taxpayer Relief Act of 1997.
FACTS
The IRC § 685 amendment of the Taxpayer Relief Act of 1997 amends the federal tax treatment of pre-need funeral trusts. A pre-need funeral trust is an arrangement where an individual purchases services or merchandise from a funeral home or cemetery in advance of the individual's death. The individual enters into a contract with the provider of the services or merchandise whereby the individual selects the services or merchandise to be provided upon his death, and agrees to pay for them in advance of his death. These amounts are held in trust during the individual's lifetime and are paid to the seller upon the individual's death.
Under pre-97 Act law, pre-need funeral trusts generally were treated as grantor trusts, and the annual income earned by the trusts was taxed to the purchaser/grantor of the trust. Any amounts received from the trust by the seller was includible in the gross income of the seller. Accordingly, the trust reported earnings to each of its customer beneficiaries by sending a K-1 form. The individual beneficiary was required to report these earnings as part of their gross income on their federal tax returns.
The new law makes several changes. The Act allows a trustee of a pre-need funeral trust to elect special income tax treatment for "qualified funeral trusts". A "qualified funeral trust" must satisfy the following requirements: 1) the trust arises from a contract with a person engaged in the business of providing funeral or burial services or property necessary to provide the services; 2) the sole purpose of the trust is to hold, invest, and reinvest funds in the trust and to use the funds solely to make payments for the funeral services or property; 3) the only beneficiaries of the trust are those persons who will receive the funeral services or property; 4) the only contributions to the trust are contributions by or for the benefit of the beneficiaries; 5) the trustee makes an election; and 6) the trust would be treated as owned by the purchasers of the contracts under the grantor trust rules.
If an election is made, the trust is treated as an ordinary trust, not a grantor trust. Trustees will not issue individual K-1 forms to all the beneficiaries. Instead, an annual federal fiduciary income tax return will be filed by the trustee which reports the aggregate income from all of the trusts administered by the trustee and separately listing the amount of income earned with respect to each purchase. The amount of tax paid on behalf of each purchaser is made in accordance with the income tax rate schedule applicable to estates and trusts. If the contract is canceled, no gain or loss is made on the payout and any basis in trust property is carried over to the beneficiary.
You ask whether Virginia will adopt the election provisions of IRC § 685 for the taxation of funeral trusts and whether Virginia's adoption of IRC § 685 will include the simplification provisions allowing for the aggregation of each trust's Virginia income tax on a single return to be filed by the trustee.
RULING
Virginia's conformity to federal law is set forth in Code of Virginia § 58.1-301, copy enclosed, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the IRC. For Virginia, federal adjusted gross income (FAGI), the starting point for determining income taxable in Virginia for individuals, is identical to that as defined by the IRC. Thus, under pre-97 law, the income from pre-need funeral trusts was included in the beneficiary's Virginia taxable income. After the 1997 change, the income from qualified funeral trusts will no longer be included in the beneficiary's Virginia taxable income.
The fiduciary of a resident estate or trust must file a Virginia fiduciary income tax return (Form 770) if the estate or trust is required to file a federal fiduciary income tax return ( A resident estate or trust means: 1) the estate or a decedent who at death was domiciled in Virginia; 2) a trust created by the will of a decedent who at his death was domiciled in Virginia; 3) a trust created by, or consisting of property of, a person domiciled in Virginia; or 3) an estate or trust that is being administered by a resident of Virginia or that is under the supervision of a Virginia court. See Title 23 VAC 10-115-10 of the Virginia Administrative Code, copy enclosed). See Title 23 VAC 10-115-110 of the Virginia Administrative Code, copy enclosed. The fiduciary of a nonresident estate or trust must file a Virginia fiduciary income tax return (Form 770) if the estate or trust had income derived from Virginia sources and was required to file a federal fiduciary income tax return.(Income or gain derived from Virginia sources means income or gain derived from: 1) real or tangible personal property located in Virginia; 2) A business, trade or profession or occupation carried on in Virginia; or 3) intangible personal property, including annuities, dividends, interest, royalties and gains to the extent that the income is attributable to a business, trade or occupation carried on in Virginia. See Title 23 VAC 10-115-10 of the Virginia Administrative Code. ) See Title 23 VAC 10-115-110 of the Virginia Administrative Code. Thus, the fiduciary of the qualified funeral trusts must file a Virginia fiduciary income tax return. The Virginia fiduciary income tax return requires the reporting of aggregate income for all beneficiaries. Individual beneficiaries will not receive K-1's nor will they be required to include income from qualified funeral trusts to their FAGI on their federal returns.
Revenue Official
Code of Virginia § 58.1-203, copy enclosed, provides that the Tax Commissioner shall have the power to issue rulings related to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department. All policy questions should be sent to my attention.
I trust that this ruling answers your questions. If you have any questions, you may contact ***********at *******.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/13155B
Rulings of the Tax Commissioner