ISSUES: What are the filing and withholding requirements for Able as trustee of a grantor trust set up by Baker, a non-resident grantor?

What are Baker's filing requirements as the non-resident grantor of such a trust?

DISCUSSION: Every trustee or other fiduciary who receives gross income in excess of $100 must generally file a return. G.L. c. 62C, § 6(b). Some trusts are taxed as separate entities and file Form 2; a grantor trust, however, acts as a conduit and income from the trust is taxed not to the trust but to the grantor. See Internal Revenue Code, §§ 671-678; G.L. c. 62, § 10(e).

The trustee of a grantor trust must still file an information return, Form 2G, "Grantor's or Other Owner's Share of Income, Deductions, Credits, Etc. of a Grantor Type Trust." G.L. c. 62, § 10(f). Form 2G is due on the fifteenth day of the fourth month following the close of the trust's taxable year. A copy of Form 2G must also be sent to the grantor.

Non-resident Grantor

In the case of a non-resident grantor, these additional rules apply:

(a) The Trustee: In addition to filing Form 2G, the trustee must, where the grantor is a non-resident of the Commonwealth, withhold tax on behalf of the grantor based on the trust's Massachusetts source income. G.L. c. 62, § 10(g). There is no withholding requirement on income not subject to Massachusetts taxation. Tax is withheld at a rate applicable to income of that particular class (i.e., 5% or 10%) and paid over to the Commonwealth using declarations of estimated tax, Form 1-ES, Estimated Income Tax Payment Voucher. Id. For due dates, See AP 607, "Estimated Tax Payments." Form 2G will state the amount withheld and paid over by the trustee.

Since the trustee is responsible for withholding tax on income subject to Massachusetts taxation, failure to withhold will make the trustee liable for the full amount of tax not withheld, plus any interest and penalties for underpayment or late payment. However, if the estimated taxes due are properly paid by the grantor rather than the trustee, the trustee will be credited with those payments.

(b) The Non-Resident Grantor: Under ordinary circumstances, the non-resident grantor is not required to make estimated tax payments with regard to income from the grantor trust. If the trustee fails to withhold, however, the grantor must make estimated tax payments if he reasonably expects the tax on the trust income to exceed $200. G.L. c. 62B, § 13. If the grantor fails to make the required payments, he will be liable for interest and penalties. G.L. c. 62B, § 14. The grantor is always liable for the full payment of any tax due, and must file Form 1-NR, taking credit for any amount withheld by the trustee (attached Form 2G) or any estimated tax payments he himself has made.

Thus, in the situation where the trustee fails to withhold tax and the grantor fails to pay estimated taxes to the Commonwealth, the trustee is liable for:

(1) taxes not withheld; and
(2) any interest and penalties.

The grantor is liable for:

(1) interest and penalties on failure to pay estimated tax; and
(2) the tax due.

In this situation, if the grantor pays the tax due, the Department of Revenue will not require the trustee to pay the taxes not withheld. The trust must, however, pay the full amount of the interest and penalties due for failure to withhold. The grantor will continue to be liable for interest and penalties due to his failure to make estimated tax payments.

DIRECTIVES: Able, as trustee of a grantor trust with a non-resident grantor, must deduct and withhold the appropriate amount of tax from the grantor trust's Massachusetts source income; these amounts must be paid over to the Department of Revenue on Form 1-ES at stated intervals. Able must also file Form 2G with DOR and send a copy of it to the grantor.

Baker as a non-resident grantor must file Form 1-NR to report his Massachusetts source income from the trust, attaching a copy of Form 2G to the return. On his return, Baker will take credit for any amounts withheld and paid over by the trust.

REFERENCE: I.R.C. §§ 671 - 678; G.L. c. 62, § 10(e), (b), (g); G.L. c. 62B §§ 13, 14; G.L. c. 62C, § 6(b); Administrative Procedures, AP 607 (MASSTAX Guide, vol. 6).

/s/Stephen W. Kidder
Stephen W. Kidder
Commissioner of Revenue

March 15, 1989

DOR-D 89-4


This Directive represents the official position of the Department of Revenue on the application of the law to the facts as stated. The Department and its personnel will follow this Directive, and taxpayers may rely upon it, unless it is revoked or modified pursuant to 830 CMR 62C.01(5)(e). In applying this Directive, however, the effect of subsequent legislation, regulations, court decisions, Directives, and TIRs must be considered, and Department personnel and taxpayers may rely upon this Directive only if the facts, circumstances and issues presented in other cases are substantially the same as those set forth in this Directive.