MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
FROM: Sylvia Hartwell, Specialist Partner (Tax) Calderwood & Harkness LLP 375 Park Avenue, 42nd Floor New York, NY 10152
TO: Jonathan R. Caldwell 418 East 72nd Street, Apt. 14A New York, NY 10021
CC: Victoria Chambers, Responsible Partner Monica Reyes, Lead Associate Elliot Nguyen, Working Associate
DATE: May 10, 2023
RE: State Income Tax Planning Considerations — Delaware Situs for the Caldwell Family Dynasty Trust and Grantor Trust Treatment of GRATs
MATTER NO.: 1034-00004
BILLING CODE: 78412-JRC
This memorandum is a confidential attorney-client communication prepared by Calderwood & Harkness LLP for the exclusive use of Jonathan R. Caldwell. It is protected by the attorney-client privilege and the work product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP, except as necessary for consultation with Strathmore Corporation & Greaves LLP (Martin J. Prescott, CPA) and Havensbrook Wealth Advisors LLC (Diana R. Linden, CFP®) in connection with the matters discussed herein.
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I. Executive Summary
The purpose of this memorandum is to analyze the state income tax implications arising from the selection of Delaware as the situs for the Caldwell Family Dynasty Trust (the "Dynasty Trust"), to address the interplay of grantor trust status for GRATs A, B, and C during their respective annuity terms, and to identify ongoing state filing obligations applicable to these structures. This memorandum is intended to complement the broader estate and gift tax planning analysis set forth in our separate memoranda and to provide actionable guidance for the implementation and administration of the Caldwell family's trust structures.
Our principal conclusions are as follows:
The Delaware situs for the Dynasty Trust provides significant state income tax advantages with respect to undistributed trust income. Under current Delaware law, the Dynasty Trust should not be subject to Delaware state income tax on accumulated income, provided that none of its beneficiaries are Delaware residents — a condition that is presently satisfied. However, New York's source income rules and New York's resident beneficiary taxation rules require careful monitoring and coordination to preserve these advantages. As discussed in greater detail below, two specific structural issues currently threaten the Dynasty Trust's ability to qualify as an "exempt resident trust" under New York Tax Law § 605(b)(3)(D), and we strongly recommend that these issues be addressed promptly.
The Caldwell Family Dynasty Trust was established on April 1, 2023, and is governed by Delaware law. Northgate Trust Company of Delaware, located at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801, serves as institutional co-trustee. The trust is structured to avoid New York and other state income taxation on accumulated trust income to the maximum extent permissible under current law.
All three Grantor Retained Annuity Trusts — the Caldwell 2023 Securities GRAT (funded April 15, 2023), the Caldwell 2023 Realty GRAT (funded May 1, 2023), and the Caldwell 2023 Carried Interest GRAT (funded June 1, 2023) — are treated as grantor trusts under Internal Revenue Code §§ 671–679 during their respective annuity terms. As a consequence, all income generated by these GRATs is reported on your personal New York resident income tax return during the annuity periods. This grantor trust treatment does not create any incremental state tax cost relative to your holding the underlying assets individually, but the transition from grantor trust status to non-grantor trust status upon GRAT termination is the critical juncture at which the Delaware situs advantage is realized.
Coordination with your accounting firm, Strathmore Corporation & Greaves LLP — specifically Martin J. Prescott, CPA, located at 600 Third Avenue, 28th Floor, New York, NY 10016 — is essential for state tax filing compliance throughout the planning period. We have identified a number of filing obligations and coordination items that require timely attention, as discussed in Section VII below.
II. Background and Factual Context
A. Client Overview
Jonathan R. Caldwell (date of birth: March 14, 1956) is sixty-seven years of age and is a resident of the State of New York, domiciled at 418 East 72nd Street, Apartment 14A, New York, New York 10021. Mr. Caldwell has been a New York domiciliary for over thirty-five years and maintains no residence in any other state.
Based on the information provided to our firm and reviewed in connection with the comprehensive estate plan, Mr. Caldwell's gross estate is estimated at approximately $300,000,000, comprising the following principal categories of assets:
• Liquid Securities: Approximately $112,000,000 in publicly traded stocks, bonds, and other marketable securities, held in brokerage accounts at Ridgeline & Co. and Meridian Savings Bank.
• Real Estate (via Stonecrest Realty Holdings LLC): Approximately $134,000,000 in real property interests held through Stonecrest Realty Holdings LLC, a Delaware limited liability company. Stonecrest's portfolio includes multiple commercial and residential properties, several of which are located in New York City (discussed in detail in Section IV below).
• Carried Interest and Fund Stakes (Caldwell Ridgeline Capital): Approximately $38,000,000 in limited partnership interests and carried interest allocations in Caldwell Ridgeline Capital Fund IV LP ($12,000,000), Fund V LP ($14,000,000), and Fund VI carried interest ($12,000,000). Mr. Caldwell co-founded Caldwell Ridgeline Capital in 2006 and retains these legacy interests following his transition to a limited advisory role.
• Art and Collectibles: Approximately $9,000,000 in fine art, decorative objects, and collectibles, principally housed at the East 72nd Street residence and in a climate-controlled storage facility operated by Brightmoor Industries in Long Island City, New York.
• Other Assets: Approximately $7,000,000 in miscellaneous assets, including cash, personal effects, automobiles, and a membership interest in a Nantucket beach club.
Mr. Caldwell is married to Eleanor V. Caldwell (date of birth: September 22, 1958), who is also a New York resident domiciled at the same address. Mrs. Caldwell is not directly involved in the trust structures discussed in this memorandum, although her residency and tax status are relevant to certain ancillary planning considerations.
Mr. and Mrs. Caldwell have three adult children:
1. Thomas R. Caldwell (age 38), a New York resident domiciled at 55 Perry Street, Unit 3, New York, New York 10014. Thomas is a managing director at Whitmore Partners LLC and is currently serving as the family co-trustee of the Dynasty Trust.
2. Katherine C. Hartfield (age 35), a Connecticut resident domiciled at 210 Briarcliff Lane, Greenwich, Connecticut 06830. Katherine is married to William J. Hartfield and is a member of the Distribution Committee of the Dynasty Trust.
3. Olivia G. Caldwell (age 30), an Illinois resident domiciled at 1240 North Dearborn Street, Apartment 807, Chicago, Illinois 60610. Olivia is an associate at the law firm of Linden & Fairchild LLP in Chicago and is also a member of the Distribution Committee.
Mr. and Mrs. Caldwell have four grandchildren:
• James W. Hartfield (age 8), residing with his parents in Greenwich, Connecticut.
• Charlotte M. Hartfield (age 5), residing with her parents in Greenwich, Connecticut.
• Lucas T. Caldwell (age 3), son of Thomas R. Caldwell, residing in New York, New York.
• Nora E. Caldwell (age 1), daughter of Thomas R. Caldwell, residing in New York, New York.
The residency of each beneficiary is significant for state income tax purposes, as discussed throughout this memorandum. Changes in any beneficiary's domicile could alter the state tax analysis materially.
B. Relevant Structures
The following trust structures are relevant to the state income tax analysis set forth in this memorandum. Each is described in summary form below; complete terms are set forth in the governing instruments, copies of which are maintained in our files.
1. Caldwell Family Dynasty Trust
The Caldwell Family Dynasty Trust is an irrevocable trust established under Delaware law, executed on April 1, 2023. The trust is sitused in Delaware, and its institutional co-trustee is Northgate Trust Company of Delaware, a Delaware-chartered trust company located at 1201 North Market Street, Suite 1600, Wilmington, Delaware 19801. The family co-trustee is Thomas R. Caldwell. The trust protector is Victoria Chambers, a partner at Calderwood & Harkness LLP.
The Dynasty Trust was initially funded with $5,000,000 in cash, representing a completed gift by Jonathan R. Caldwell. The trust is expected to receive substantial additional funding from the remainder interests of GRATs A, B, and C upon termination of their respective annuity terms.
The beneficiaries of the Dynasty Trust are Mr. Caldwell's three children — Thomas, Katherine, and Olivia — and their issue, per stirpes. The trust's distribution standard is an ascertainable standard for health, education, maintenance, and support ("HEMS"), supplemented by broader discretionary distribution authority subject to Distribution Committee approval. The Distribution Committee consists of Thomas, Katherine, and Olivia, and its approval is required for any distribution exceeding $100,000 per beneficiary per calendar year.
Delaware's perpetual trust statute applies to the Dynasty Trust, meaning the trust is not subject to a rule against perpetuities and may continue in existence for the benefit of future generations indefinitely. This perpetual duration is a key feature of the dynasty trust design and is integral to the long-term wealth transfer objectives.
The Dynasty Trust is a non-grantor trust for both federal and state income tax purposes. Jonathan R. Caldwell does not retain any power over the trust that would cause it to be treated as a grantor trust under IRC §§ 671–679. This distinction is critical to the state income tax analysis and differentiates the Dynasty Trust from the GRATs discussed below.
2. GRAT A — Caldwell 2023 Securities GRAT
The Caldwell 2023 Securities GRAT ("GRAT A") was funded on April 15, 2023, with $60,000,000 in publicly traded securities. GRAT A has a two-year annuity term, with an annual annuity payment of $32,195,122. The applicable Section 7520 rate for March 2023 (the month of the transaction) was 5.0%. Jonathan R. Caldwell serves as grantor and trustee. The GRAT is designed as a "zeroed-out" GRAT, meaning the present value of the annuity payments equals the value of the assets transferred, resulting in a taxable gift of approximately zero. The remainder interest at the expiration of the annuity term is payable to the Caldwell Family Dynasty Trust. GRAT A's annuity term is expected to expire on or about April 15, 2025.
3. GRAT B — Caldwell 2023 Realty GRAT
The Caldwell 2023 Realty GRAT ("GRAT B") was funded on May 1, 2023, with $80,000,000 in membership interests in Stonecrest Realty Holdings LLC, representing approximately 59.7% of Stonecrest's total equity (based on a total entity value of approximately $134,000,000). GRAT B has a three-year annuity term, with an annual annuity payment of $29,375,859. The applicable Section 7520 rate for April 2023 was 5.0%. A combined valuation discount of 25% was applied to the Stonecrest membership interests, reflecting lack of marketability and minority interest considerations, as supported by the appraisal prepared by Ashford Valuation Group LLC (Dr. Leonard K. Whitfield). Jonathan R. Caldwell serves as grantor and trustee. The remainder interest at the expiration of the annuity term is payable to the Dynasty Trust. GRAT B's annuity term is expected to expire on or about May 1, 2026.
The Stonecrest Realty Holdings LLC membership interests are a significant concern for purposes of the New York state income tax analysis, as Stonecrest holds multiple properties located within New York City. This issue is discussed at length in Section IV below.
4. GRAT C — Caldwell 2023 Carried Interest GRAT
The Caldwell 2023 Carried Interest GRAT ("GRAT C") was funded on June 1, 2023, with $38,000,000 in limited partnership interests and carried interest allocations in Caldwell Ridgeline Capital Funds IV ($12,000,000), V ($14,000,000), and VI carried interest ($12,000,000). GRAT C has a three-year annuity term, with an annual annuity payment of $13,953,759. The applicable Section 7520 rate for May 2023 was 5.0%. Blended valuation discounts were applied: 35% on the limited partnership interests and 30% on the carried interest, yielding a post-discount fair market value of $25,300,000. Jonathan R. Caldwell serves as grantor and trustee. The remainder interest at the expiration of the annuity term is payable to the Dynasty Trust. GRAT C's annuity term is expected to expire on or about June 1, 2026.
5. Caldwell Family Insurance Trust (ILIT)
The Caldwell Family Insurance Trust (the "ILIT") was established on March 15, 2023, under Delaware law, with Northgate Trust Company of Delaware as sole trustee. The ILIT holds a second-to-die universal life insurance policy issued by Beacon Life Assurance Company (Policy No. BLA-2023-77419) with a death benefit of $15,000,000 and an annual premium of $187,500. The ILIT is a Delaware-situs trust and is relevant to the state income tax analysis to the extent it generates investment income within the trust. The death benefit itself, however, is not subject to income tax under IRC § 101(a) and does not raise state income tax concerns.
III. Delaware State Income Tax Treatment of Trusts
A. General Framework — Delaware's Trust Income Tax Rules
Delaware has long been recognized as one of the most favorable jurisdictions in the United States for the establishment and administration of irrevocable trusts. Among the principal advantages of Delaware as a trust situs is the state's exceptionally favorable income tax treatment of trust income.
Under Delaware law, the state imposes no state income tax on trust income in cases where the trust's only connection to Delaware is its situs and the presence of a Delaware corporate trustee, provided that the trust has no Delaware-resident beneficiaries. More specifically, Delaware does not tax the undistributed income of trusts that have no beneficiaries who are residents of Delaware, even where a Delaware trust company serves as trustee, the trust instrument designates Delaware as the governing law, and the trust's principal place of administration is in Delaware.
This rule represents the single most significant advantage of the Delaware situs for the Caldwell Family Dynasty Trust. So long as trust income is accumulated within the trust — that is, not distributed to beneficiaries — no Delaware state income tax is due, regardless of the amount of income generated, the nature of the underlying assets, or the character of the income (whether ordinary, capital, or tax-exempt). This applies equally to interest, dividends, capital gains, rental income, and all other categories of taxable income.
Delaware's favorable trust income tax regime is well-established, has been in place for decades, and is widely relied upon by trust practitioners and high-net-worth families throughout the country. While no guarantee can be given that Delaware will not alter its trust taxation rules in the future, the state has a strong institutional interest in maintaining its competitive position as a trust situs, and significant legislative change is not anticipated in the near term.
B. Application to the Caldwell Family Dynasty Trust
The Caldwell Family Dynasty Trust satisfies the requirements for exemption from Delaware state income tax on its accumulated income. The institutional co-trustee, Northgate Trust Company of Delaware, is a Delaware-chartered trust company with its principal offices in Wilmington, Delaware. The trust's situs is Delaware, and its governing law is Delaware law.
Critically, none of the current beneficiaries of the Dynasty Trust are residents of Delaware. The three primary beneficiaries — Thomas R. Caldwell (New York), Katherine C. Hartfield (Connecticut), and Olivia G. Caldwell (Illinois) — reside in other states. The four grandchildren currently reside in New York (Lucas T. Caldwell and Nora E. Caldwell, minor children of Thomas) and Connecticut (James W. Hartfield and Charlotte M. Hartfield, minor children of Katherine). No beneficiary is currently domiciled in Delaware, and there is no present indication that any beneficiary intends to relocate to Delaware.
Based on these facts, the undistributed income of the Dynasty Trust should not be subject to Delaware state income tax under current law. This is the case regardless of the nature or amount of income generated within the trust, and regardless of whether the income is ordinary income, capital gains, rental income from real property located outside Delaware, or any other category of taxable income.
We note that the trust protector, Victoria Chambers, has been granted the power under the trust instrument to change the situs of the Dynasty Trust to another jurisdiction. This power is designed to serve as a safety valve in the event that Delaware modifies its trust income tax rules, or in the event that a beneficiary relocates to Delaware. Should either event occur, the trust protector could direct a change of situs to another favorable jurisdiction, such as Nevada or South Dakota, both of which impose no state income tax on trust income and offer comparable trust-friendly statutory frameworks.
As a practical matter, Delaware imposes a $200 annual administrative fee on trusts that have a Delaware trustee. This fee is nominal and does not constitute an income tax. Northgate Trust Company of Delaware will handle payment of this fee as part of its administrative responsibilities.
C. Delaware Incomplete Non-Grantor Trust (DING) Considerations
A brief discussion of the Delaware Incomplete Non-Grantor Trust (commonly referred to as a "DING" trust) is warranted to distinguish that planning technique from the structure employed for the Caldwell Family Dynasty Trust.
A DING trust is a specific planning technique in which a New York resident grantor creates a Delaware trust that is treated as a non-grantor trust for income tax purposes. This is accomplished by carefully calibrating the grantor's retained powers so that they are insufficient to trigger grantor trust status under IRC §§ 671–679 (thereby causing the trust to be treated as a separate taxpayer for income tax purposes), while simultaneously retaining enough powers to render the transfer to the trust an incomplete gift for federal gift tax purposes (thereby avoiding any taxable gift on the initial funding). The result is that the trust's income is not taxed to the grantor on the grantor's New York personal return, and — if the trust is properly sitused in Delaware with no Delaware-resident beneficiaries — the trust's accumulated income is not subject to any state income tax.
The DING structure is not being used for the Caldwell Family Dynasty Trust. The Dynasty Trust was funded with completed gifts: the initial $5,000,000 cash contribution utilized a portion of Mr. Caldwell's remaining lifetime gift and GST exemption, and the GRAT remainder interests that will pour into the Dynasty Trust upon termination of the annuity terms are also completed gifts for gift tax purposes (the taxable gift, if any, at the time of GRAT funding is measured by the excess of the transfer value over the present value of the retained annuity interest). Jonathan R. Caldwell does not retain any power over the Dynasty Trust that would cause it to be treated as a grantor trust under §§ 671–679, and no such power was intentionally retained.
Once the initial $5,000,000 cash was contributed and Jonathan relinquished all retained interests in the transferred property, the Dynasty Trust became — and remains — a completed-gift, non-grantor trust for both federal and state income tax purposes.
This distinction is important for two reasons. First, the non-grantor status of the Dynasty Trust means that the trust's undistributed income is taxed at the trust level for federal income tax purposes, rather than on Jonathan's personal return. Second, the non-grantor status is what makes the Delaware situs advantageous for state income tax purposes: because the trust is a separate taxpayer, the question of which state may tax the trust's income is governed by the trust's connections to various states — its situs, the domicile of its trustees, the location of its assets, and the residency of its beneficiaries — rather than by the residency of the grantor.
By contrast, the three GRATs (discussed in Section V below) are grantor trusts during their annuity terms. All GRAT income is reported on Jonathan's personal New York return during the GRAT terms, and the Delaware situs advantage does not apply to the GRATs until the annuity terms expire and the remainder interests pass to the Dynasty Trust.
As a potential future consideration, we note that if New York or another state were to enact legislation specifically targeting Delaware-situs trusts created by New York residents — as some commentators and legislators have suggested — the trust protector could exercise her powers to decant the trust or change situs to another favorable jurisdiction under Delaware's broad decanting statute (12 Del. C. § 3528). We will continue to monitor legislative developments and advise accordingly.
IV. New York State Income Tax Considerations
A. New York Taxation of Trusts — General Rules
New York imposes its state income tax on the income of a "resident trust," which is defined under New York Tax Law § 605(b)(3) as a trust, or a portion of a trust, consisting of property transferred by will of a decedent who at the date of death was domiciled in New York, or a trust, or portion of a trust, consisting of property transferred by a lifetime transfer by a person domiciled in New York at the time such property was transferred to the trust — in other words, a trust created by a New York domiciliary (commonly referred to as a "New York resident trust").
Jonathan R. Caldwell is a New York domiciliary. Therefore, all trusts that he creates as grantor — including the Caldwell Family Dynasty Trust, all three GRATs, and the ILIT — are technically classified as "resident trusts" under New York law. This classification, standing alone, would subject the accumulated income of these trusts to New York state income tax at rates applicable to trusts, which currently reach a top marginal rate of 10.9%.
However, New York provides a critically important exemption from this general rule. A trust that is classified as a New York resident trust is nonetheless exempt from New York state income tax — and is not required to pay New York tax on its accumulated income — if it meets all four of the following conditions, commonly referred to as the "exempt resident trust" test, codified at New York Tax Law § 605(b)(3)(D):
1. Trustee Domicile: All of the trustees of the trust are domiciled outside of New York State.
2. No New York Source Income: The trust does not have any New York source income, as defined under New York Tax Law Article 22.
3. No New York Real or Tangible Personal Property: The entire corpus of the trust, including accumulated income, does not include any real or tangible personal property located in New York State.
4. No New York Trust Administration: No trustee of the trust conducts trust administration activities in New York State, including maintaining trust records, making discretionary distribution decisions, or communicating with beneficiaries regarding trust administration.
If all four conditions are satisfied, the trust is classified as an "exempt resident trust" and is not subject to New York income tax on its accumulated income. A trust that fails any one of the four conditions is a taxable New York resident trust, and its accumulated income is subject to New York income tax at trust rates.
We note that the exempt resident trust test is applied on an annual basis. Accordingly, a trust that qualifies as exempt in one year could lose that status in a subsequent year if circumstances change — for example, if a New York resident is appointed as trustee, or if the trust acquires assets that generate New York source income. Conversely, a trust that is taxable in one year could become exempt in a subsequent year if the disqualifying conditions are cured.
B. Application of the Exempt Resident Trust Test to the Caldwell Family Dynasty Trust
We have analyzed each of the four prongs of the exempt resident trust test as applied to the Caldwell Family Dynasty Trust. Our analysis reveals that the Dynasty Trust currently fails the first prong and is at significant risk of failing the second and third prongs in the near future. Each prong is discussed in turn below.
Trustee Domicile Test (Prong 1)
The Caldwell Family Dynasty Trust currently has two co-trustees: Thomas R. Caldwell, serving as family co-trustee, and Northgate Trust Company of Delaware, serving as institutional co-trustee. Northgate is a Delaware-chartered trust company domiciled in Wilmington, Delaware, and satisfies the out-of-state domicile requirement. However, Thomas R. Caldwell is a New York resident, domiciled at 55 Perry Street, Unit 3, New York, New York 10014.
Because the exempt resident trust test requires that all trustees be domiciled outside New York, Thomas's service as a New York-domiciled co-trustee causes the Dynasty Trust to fail the first prong of the test. This failure alone is sufficient to render the Dynasty Trust a taxable New York resident trust, subject to New York income tax on all of its accumulated income at rates up to 10.9%.
Critical Issue — Thomas R. Caldwell as New York Co-Trustee
This is the single most significant structural issue identified in our analysis. So long as Thomas R. Caldwell serves as a co-trustee and remains domiciled in New York, the Dynasty Trust cannot qualify as an exempt resident trust, and its accumulated income — including income from the initial $5,000,000 cash funding and, eventually, income from the substantial GRAT remainder assets — will be subject to New York state income tax. Over the projected life of the Dynasty Trust, the aggregate state income tax cost of failing the exempt resident trust test could be extremely significant, potentially amounting to millions of dollars in additional tax liability.
Mitigation Strategies
We have identified three potential approaches to resolve this issue:
(a) Remove Thomas as Co-Trustee and Replace with a Non–New York Individual or Entity. The trust protector, Victoria Chambers, has the power under the Dynasty Trust instrument to remove and appoint trustees. This power can be exercised to remove Thomas as co-trustee and to replace him with a non–New York individual — such as Katherine C. Hartfield (a Connecticut resident) or Olivia G. Caldwell (an Illinois resident) — or to designate Northgate Trust Company of Delaware as the sole trustee. This is the most straightforward and reliable solution.
(b) Restructure Thomas's Role as a Non-Trustee Advisor or Distribution Committee Member Only. Thomas already serves on the Distribution Committee alongside Katherine and Olivia. His role in trust governance could be preserved by limiting his participation to the Distribution Committee function, which does not constitute service as a trustee and should not trigger the trustee domicile prong of the exempt resident trust test. This approach would preserve meaningful family involvement in distribution decisions while eliminating the structural impediment to exempt resident trust status.
(c) Relocation of Thomas Outside New York. If Thomas were to relocate his domicile to a state other than New York, his continued service as co-trustee would no longer disqualify the Dynasty Trust from exempt resident trust status. However, we do not regard this as a reliable or advisable planning assumption. Domicile changes are subject to scrutiny by the New York Department of Taxation and Finance, and any relocation should be genuine and well-documented. We do not recommend that the state tax planning for the Dynasty Trust be predicated on Thomas's future relocation.
Recommendation
We strongly recommend that Thomas R. Caldwell be replaced as co-trustee of the Caldwell Family Dynasty Trust. The most appropriate approach, in our view, is to designate Northgate Trust Company of Delaware as the sole institutional trustee, while Thomas continues to participate in trust governance through the Distribution Committee mechanism. Alternatively, if the family prefers to maintain an individual co-trustee, Katherine C. Hartfield (a Connecticut resident) or Olivia G. Caldwell (an Illinois resident) could be appointed in Thomas's place.
This change should be coordinated with Ridgewell & Thorn LLP (Margaret A. Colvin, counsel to Northgate Trust Company of Delaware) and with Thomas directly. We are prepared to assist Victoria Chambers in preparing the necessary trust protector instruments to effectuate this change. We recommend that this action be taken as promptly as practicable, ideally before the end of the 2023 calendar year, so that the Dynasty Trust's exempt resident trust status may be established effective January 1, 2024, or earlier.
New York Source Income Test (Prong 2) and New York Real Property Test (Prong 3)
Even if the trustee domicile issue is resolved, the Dynasty Trust must also satisfy the second and third prongs of the exempt resident trust test — namely, it must not hold assets that generate New York source income, and its corpus must not include real or tangible personal property located in New York.
New York source income, as defined under New York Tax Law Article 22, includes the following categories:
• Income from real or tangible personal property located in New York State;
• Income from a business, trade, or profession carried on in New York State; and
• Gains from the sale or other disposition of real property or tangible personal property located in New York State.
Concern — Stonecrest Realty Holdings LLC
Upon the termination of GRAT B (expected on or about May 1, 2026), any excess appreciation in the Stonecrest Realty Holdings LLC membership interests, beyond the annuity payments made to Jonathan during the three-year term, will pour into the Dynasty Trust as a remainder interest. This is a matter of significant concern for purposes of the exempt resident trust analysis.
Stonecrest Realty Holdings LLC holds a portfolio of commercial and residential real properties, several of which are located within New York City. Specifically, Stonecrest's New York properties include:
• 440 West Broadway, New York, New York (SoHo commercial/retail property)
• 15–21 Harrison Street, New York, New York (TriBeCa mixed-use property)
• 88 Mercer Street, New York, New York (SoHo residential condominium units)
• 200 West 14th Street, New York, New York (Chelsea commercial property)
Rental income, operating income, and gains from the disposition of these New York-sited properties would constitute New York source income. Moreover, the Stonecrest membership interests themselves represent an indirect interest in real property located in New York, which may cause the trust corpus to include New York real or tangible personal property for purposes of the third prong.
If the Dynasty Trust holds the Stonecrest membership interests, it will likely fail both the second and third prongs of the exempt resident trust test. This would subject the Dynasty Trust's accumulated income — not merely the New York source income, but all accumulated income of the trust — to New York state income tax.
Mitigation Strategies — Stonecrest Interests
We have identified several approaches to mitigate this issue:
(a) Structure GRAT B Annuity Payments to Return Stonecrest Interests to Jonathan. Under Treasury Regulation § 25.2702-3(b)(1), annuity payments from a GRAT may be satisfied with in-kind distributions of trust assets. If the GRAT B annuity payments are structured to return the Stonecrest membership interests to Jonathan personally — rather than retaining them in the GRAT for eventual transfer to the Dynasty Trust — only non–New York assets (i.e., any excess appreciation in non-Stonecrest assets within the GRAT, if the GRAT holds diversified assets) would flow to the Dynasty Trust as the remainder interest. This approach would effectively isolate the New York source income assets from the Dynasty Trust.
(b) Segregate Stonecrest Interests in a Separate Trust. If the Stonecrest interests do pass to the Dynasty Trust, they could be segregated into a separate sub-trust that is treated as a separate entity for New York tax purposes. The sub-trust would be subject to New York income tax on its New York source income, but the remainder of the Dynasty Trust — holding non–New York assets — could continue to qualify as an exempt resident trust.
(c) Dispose of New York Real Property Interests. The Dynasty Trust could sell or exchange the Stonecrest membership interests, or Stonecrest itself could dispose of its New York properties, after receipt of the interests from GRAT B. However, this approach would be dependent on market conditions and may trigger capital gains recognition at both the federal and (potentially) state level.
(d) Restructure Stonecrest to Exclude New York Properties. Stonecrest could distribute its New York properties to a separate entity prior to the termination of GRAT B, so that the membership interests held by the GRAT (and ultimately transferred to the Dynasty Trust) represent only non–New York assets. This approach requires careful analysis of the tax consequences of the internal restructuring of Stonecrest.
Coordination with Strathmore Corporation & Greaves
We recommend that Martin J. Prescott at Strathmore Corporation & Greaves model the tax cost of New York source income flowing through the Dynasty Trust under various scenarios, including: (i) the Dynasty Trust holds Stonecrest interests and pays New York income tax on all accumulated income; (ii) the Stonecrest interests are segregated in a sub-trust subject to New York tax, while the balance of the Dynasty Trust remains exempt; and (iii) the Stonecrest interests are returned to Jonathan via in-kind GRAT annuity payments, and only non–New York assets enter the Dynasty Trust. The comparative analysis will inform the optimal approach to GRAT B's annuity payment structure and the post-termination treatment of the Stonecrest interests.
Trust Administration Test (Prong 4)
Assuming the trustee domicile issue is resolved (by removing Thomas as co-trustee), the trust administration prong should be satisfied so long as all trust administration activities are conducted by Northgate Trust Company of Delaware in Wilmington, Delaware. This includes the maintenance of trust records, the custody of trust assets, the preparation and filing of fiduciary income tax returns, the making of discretionary distribution decisions, and communications with beneficiaries regarding trust matters.
It is essential that no trust administration activities be conducted in New York. The Distribution Committee meetings should occur outside New York — by telephone or videoconference with the institutional trustee in Wilmington, or in person at Northgate's offices or at another out-of-state location. Trust records should be maintained at Northgate's offices in Wilmington. Any investment advisory services provided by Havensbrook Wealth Advisors LLC (Diana R. Linden) should be directed by Northgate in its capacity as trustee, rather than by any New York-based individual acting in a trustee capacity.
C. New York Taxation of Distributions to New York Resident Beneficiaries
Even if the Caldwell Family Dynasty Trust qualifies as an exempt resident trust — and is therefore not subject to New York income tax on its accumulated income — New York will tax distributions of accumulated income made to New York resident beneficiaries. This is an inherent consequence of New York's personal income tax regime, which taxes New York residents on their worldwide income, including income received as a beneficiary of a trust.
Thomas R. Caldwell, as a New York resident, will be required to include in his New York adjusted gross income any distributable net income ("DNI") distributed to him from the Dynasty Trust. Similarly, if Thomas's minor children — Lucas T. Caldwell and Nora E. Caldwell — are New York residents at the time they receive distributions from the Dynasty Trust (whether directly or through their parents as custodians), those distributions will be subject to New York personal income tax on their respective returns.
This result is unavoidable as a matter of New York tax law so long as the beneficiary receiving the distribution is a New York resident. The advantage of the Delaware situs lies not in eliminating state tax on distributions to New York beneficiaries, but rather in deferring state income tax on accumulated income that has not yet been distributed. Income that is accumulated within the Dynasty Trust and invested for the benefit of future generations will compound free of state income tax, representing a significant long-term advantage.
Planning Opportunity — Selective Distributions to Non–New York Beneficiaries
To the extent consistent with the terms of the Dynasty Trust, the trustees and Distribution Committee may wish to consider distributing income selectively to beneficiaries who reside in states with more favorable income tax rates. Katherine C. Hartfield, as a Connecticut resident, is subject to a top state income tax rate of approximately 6.99%, which is lower than New York's top rate of 10.9% (plus New York City tax of approximately 3.876% for city residents). Olivia G. Caldwell, as an Illinois resident, is subject to Illinois's flat income tax rate of approximately 4.95%, which is substantially lower than either New York's or Connecticut's top rates.
Distributing income to Katherine or Olivia, rather than to Thomas, would result in lower aggregate state income tax on the distributed amounts. Of course, any such distribution decisions must be made in accordance with the HEMS standard and the Distribution Committee approval requirements set forth in the trust instrument, and must be guided by the legitimate needs of the beneficiaries rather than solely by tax considerations. However, where the needs of multiple beneficiaries are comparable, tax-efficient distribution planning may be a relevant factor in the exercise of trustee discretion.
D. New York City Income Tax
Jonathan R. Caldwell resides in New York City and is subject to the New York City personal income tax, which currently imposes a top marginal rate of approximately 3.876%. During the annuity terms of all three GRATs, all GRAT income is reportable on Jonathan's New York City income tax return, in addition to his New York State return (as discussed in Section V below).
The Caldwell Family Dynasty Trust, if properly structured as an exempt resident trust, would not be subject to New York City income tax on its accumulated income. New York City does not impose a separate city-level income tax on trusts that are exempt from New York State income tax under the exempt resident trust rules. However, distributions of DNI to New York City–resident beneficiaries — principally Thomas R. Caldwell — would be subject to New York City personal income tax on their individual returns.
The combined state and city income tax burden on distributions to Thomas, as a New York City resident, could approach approximately 14.776% (10.9% state plus 3.876% city), exclusive of the federal income tax liability. This underscores the importance of selective distribution planning, as discussed above.
V. Grantor Trust Status of the GRATs — State Income Tax Implications
A. Federal Grantor Trust Treatment
All three GRATs — GRAT A (Caldwell 2023 Securities GRAT), GRAT B (Caldwell 2023 Realty GRAT), and GRAT C (Caldwell 2023 Carried Interest GRAT) — are treated as grantor trusts under IRC §§ 671–679 during their respective annuity terms. This grantor trust treatment arises because Jonathan R. Caldwell, as the grantor, retains the annuity interest in each GRAT and serves as the trustee of each GRAT. Under the grantor trust rules, Jonathan is treated as the owner of the entire trust for income tax purposes, and all items of income, deduction, and credit attributable to each GRAT are reported on Jonathan's personal federal income tax return (Form 1040). The GRATs are disregarded as separate taxpayers for federal income tax purposes during the annuity terms.
This treatment has important implications for both the federal and state income tax analysis. At the federal level, the grantor trust treatment ensures that Jonathan bears the income tax liability on all GRAT income, which effectively constitutes an additional tax-free gift to the remainder beneficiaries (the Dynasty Trust). The income tax paid by Jonathan on the GRAT income reduces his taxable estate without any gift tax consequence.
B. New York State Treatment During GRAT Annuity Terms
Because Jonathan is a New York resident, and because the GRATs are grantor trusts, all income generated by the three GRATs is included in Jonathan's New York adjusted gross income during the annuity terms. New York follows the federal grantor trust rules for state income tax purposes, and a grantor trust's income is taxed to the grantor on the grantor's personal return, just as at the federal level.
The state income tax implications of each GRAT during its annuity term are summarized below:
GRAT A — Caldwell 2023 Securities GRAT
GRAT A holds approximately $60,000,000 in publicly traded securities. Income from these securities — including dividends, interest, and capital gains from the sale of portfolio positions — will be reported on Jonathan's New York State income tax return (Form IT-201) and his New York City income tax return during the two-year annuity term, which is expected to expire on or about April 15, 2025. Because Jonathan would report this income on his New York return regardless of whether the securities were held in trust or individually, the grantor trust treatment does not create any incremental state tax burden during the GRAT term. The state tax cost is neutral.
GRAT B — Caldwell 2023 Realty GRAT
GRAT B holds approximately $80,000,000 in Stonecrest Realty Holdings LLC membership interests. Income attributable to these interests — including rental income, depreciation deductions, and gains from the sale of real property held by Stonecrest — will be reported on Jonathan's New York return during the three-year annuity term, which is expected to expire on or about May 1, 2026.
Importantly, the income from Stonecrest's New York-sited properties constitutes New York source income that Jonathan would be required to report as a New York resident regardless of whether the interests were held in a GRAT or directly. Accordingly, the grantor trust treatment of GRAT B does not create any additional state tax burden during the annuity term. Jonathan's state tax liability on Stonecrest income is the same during the GRAT term as it would be if the interests were held individually.
However, as discussed in Section IV.B above, the treatment of the Stonecrest interests after the expiration of the GRAT B annuity term is of critical importance. Once the remainder interest passes to the Dynasty Trust, the income from Stonecrest — including New York source income — will be generated within a non-grantor trust, and the New York exempt resident trust analysis becomes controlling.
GRAT C — Caldwell 2023 Carried Interest GRAT
GRAT C holds approximately $38,000,000 in limited partnership interests and carried interest in Caldwell Ridgeline Capital Funds IV, V, and VI. Income attributable to these interests — including Jonathan's allocable share of fund income, carried interest distributions, and all items reported on Schedule K-1 — will be reported on Jonathan's New York return during the three-year annuity term, which is expected to expire on or about June 1, 2026.
To the extent that the Caldwell Ridgeline Capital funds generate New York source income — for example, income from New York-based portfolio company investments, or income from portfolio companies that are engaged in a trade or business in New York — this income is captured on Jonathan's New York return as a New York resident. No incremental state tax cost arises from the grantor trust treatment during the GRAT term.
Key Implication
The grantor trust status of the GRATs does not create any incremental state tax cost during the annuity terms. Jonathan would be required to report this income on his New York State and New York City income tax returns whether the assets were held in trust or owned individually. The state tax treatment during the GRAT terms is neutral relative to direct ownership.
C. Transition from Grantor Trust to Non-Grantor Trust at GRAT Termination
The critical inflection point in the state income tax analysis occurs at the expiration of each GRAT's annuity term, when the remainder interest is transferred to the Caldwell Family Dynasty Trust.
Upon the expiration of the annuity term, the GRAT ceases to exist as a separate entity. The assets constituting the remainder interest — that is, any excess of the GRAT's assets over the annuity payments made to Jonathan during the term — pass to the Dynasty Trust. At that moment, these assets are no longer held in a grantor trust. They become assets of the non-grantor Dynasty Trust, and the income generated by these assets is no longer reported on Jonathan's personal return. Instead, the income is taxable to the Dynasty Trust as a separate taxpayer (to the extent accumulated) or to the beneficiaries who receive distributions of DNI (to the extent distributed).
This transition is the moment at which the Delaware situs advantage is realized. If the Dynasty Trust qualifies as an exempt resident trust under New York Tax Law § 605(b)(3)(D), income generated by the former GRAT assets — now held within the Dynasty Trust and accumulated for the benefit of future generations — will escape New York state income tax entirely. This represents a permanent state income tax savings, which will compound over the life of the Dynasty Trust.
The timing of the GRAT terminations, and the corresponding dates on which remainder assets will pass to the Dynasty Trust, is as follows:
• GRAT A Remainder: On or about April 15, 2025 (end of two-year annuity term).
• GRAT B Remainder: On or about May 1, 2026 (end of three-year annuity term).
• GRAT C Remainder: On or about June 1, 2026 (end of three-year annuity term).
Each of these dates represents a planning milestone. In advance of each GRAT termination, we should confirm that the Dynasty Trust satisfies all four prongs of the exempt resident trust test, so that the incoming GRAT remainder assets will generate income that is exempt from New York state income tax.
GST Exemption Allocation Note
We note that generation-skipping transfer ("GST") tax exemption cannot be allocated to the GRAT remainder interests during the estate tax inclusion period ("ETIP"). The ETIP for each GRAT extends through the end of the annuity term. Once the annuity term expires and the ETIP ends, GST exemption may be allocated to the remainder assets passing to the Dynasty Trust. This allocation should be coordinated with Strathmore Corporation & Greaves at the time of each GRAT termination to ensure timely and proper reporting on the applicable gift tax return.
VI. Connecticut and Illinois State Income Tax Considerations
A. Connecticut — Katherine C. Hartfield
Katherine C. Hartfield resides in Greenwich, Connecticut, at 210 Briarcliff Lane, Greenwich, Connecticut 06830, and is a resident of the State of Connecticut for income tax purposes.
Connecticut imposes its state income tax on trust income in two principal circumstances: (i) trusts created by a Connecticut resident grantor, and (ii) trusts that have a Connecticut-resident trustee or that are administered in Connecticut. The Caldwell Family Dynasty Trust was created by Jonathan R. Caldwell, who is a New York resident — not a Connecticut resident. The trust has no Connecticut-resident trustee (the co-trustees are Thomas R. Caldwell, a New York resident, and Northgate Trust Company of Delaware, a Delaware entity). Accordingly, Connecticut should not assert taxing jurisdiction over the accumulated income of the Dynasty Trust.
However, distributions of distributable net income to Katherine as a Connecticut resident will be subject to Connecticut personal income tax on her individual Connecticut income tax return. Connecticut's top marginal income tax rate is currently approximately 6.99%, which is substantially lower than the combined New York State and New York City rate applicable to Thomas. Distributions to Katherine therefore carry a lower aggregate state income tax cost than distributions to Thomas, a factor that may be relevant to the trustees and Distribution Committee in exercising their distribution discretion.
We note that if Katherine's residency were to change in the future — for example, if she were to relocate to New York — the comparative state tax analysis would shift accordingly. Conversely, if Katherine were to relocate to a state with no income tax (such as Florida or Texas), distributions to her would bear no state income tax cost at all.
B. Illinois — Olivia G. Caldwell
Olivia G. Caldwell resides in Chicago, Illinois, at 1240 North Dearborn Street, Apartment 807, Chicago, Illinois 60610, and is a resident of the State of Illinois for income tax purposes.
Illinois imposes its state income tax on trust income of trusts created by Illinois residents or trusts with Illinois-based administration. Because Jonathan R. Caldwell is not an Illinois resident, and because the Dynasty Trust has no connection to Illinois other than Olivia's residency as a beneficiary, Illinois should not assert taxing jurisdiction over the accumulated income of the Dynasty Trust.
Distributions of distributable net income to Olivia as an Illinois resident will be subject to Illinois personal income tax on her individual Illinois income tax return. Illinois currently imposes a flat income tax rate of approximately 4.95%, which is the lowest rate among the states in which the Caldwell family beneficiaries reside. Distributions to Olivia therefore carry the lowest state income tax cost of any current beneficiary, a factor that may be relevant in distribution planning.
We note that Olivia is currently employed as an associate at Linden & Fairchild LLP in Chicago. Her Illinois residency status should be confirmed periodically, as any change in her employment or living arrangements could affect her domicile. If Olivia were to relocate to another state, the state income tax analysis for distributions to her would need to be updated accordingly.
VII. Coordination with Strathmore Corporation & Greaves LLP on State Filing Obligations
Proper and timely compliance with all state fiduciary income tax filing obligations is essential to the success of the Caldwell family's trust planning. This section summarizes the principal filing obligations applicable to each trust structure and outlines the coordination required with Strathmore Corporation & Greaves LLP (Martin J. Prescott, CPA, 600 Third Avenue, 28th Floor, New York, New York 10016).
A. GRAT Filing Obligations During Annuity Terms
During the annuity terms of the three GRATs, no separate state fiduciary income tax returns should be required for the GRATs, because they are treated as grantor trusts for income tax purposes. All income, deductions, and credits of the GRATs are reported on Jonathan's personal New York State resident income tax return (Form IT-201) and his New York City income tax return. The GRATs do not file separate New York fiduciary income tax returns.
Strathmore Corporation & Greaves should ensure that Jonathan's personal returns properly reflect all income attributable to the three GRATs, including:
• Dividends, interest, and capital gains from the publicly traded securities held in GRAT A;
• Rental income, depreciation, amortization, and gains from the Stonecrest Realty Holdings LLC membership interests held in GRAT B, as reported on Stonecrest's Schedule K-1;
• Jonathan's allocable share of fund income, carried interest distributions, management fee income, and all other K-1 items from Caldwell Ridgeline Capital Funds IV, V, and VI held in GRAT C.
Estimated tax payments should be calculated to account for GRAT income, particularly the substantial income flows from the Stonecrest properties and the Caldwell Ridgeline Capital fund interests. Underpayment penalties could be significant given the magnitude of the income involved, and quarterly estimates should be adjusted as necessary throughout the year.
B. Dynasty Trust Filing Obligations
The Caldwell Family Dynasty Trust has the following filing obligations:
Federal Filing
The Dynasty Trust must file Form 1041 (U.S. Income Tax Return for Estates and Trusts) for each taxable year in which it has gross income of $600 or more, or has any taxable income. The first filing year will be the short period beginning April 1, 2023 (the date of establishment and initial funding with $5,000,000 cash) and ending December 31, 2023, assuming a calendar year is elected. The Form 1041 should report all income earned on the initial $5,000,000 cash funding (e.g., interest on deposits, money market returns) and any deductions for trustee fees, administrative expenses, and state taxes paid.
Delaware Filing
The Dynasty Trust is required to pay the annual $200 Delaware filing fee applicable to trusts with a Delaware trustee. No Delaware state income tax return is required so long as the trust has no Delaware-resident beneficiaries, a condition that is currently satisfied. Northgate Trust Company of Delaware will handle the payment of the annual filing fee as part of its administrative responsibilities.
New York Filing
The New York filing obligation depends on the Dynasty Trust's classification under the exempt resident trust rules:
• If the Dynasty Trust is determined to be a taxable New York resident trust (e.g., because Thomas R. Caldwell serves as co-trustee and the trust fails the first prong of the exempt resident trust test), the trust must file Form IT-205 (New York Fiduciary Income Tax Return) and pay New York state income tax on its accumulated income at trust income tax rates, with a top marginal rate of 10.9%. This filing obligation arises for each year in which the trust fails the exempt resident trust test.
• If the trustee issue is resolved and the trust qualifies as an exempt resident trust, a New York filing may still be required — New York requires that exempt resident trusts file an informational return (Form IT-205) to establish their exempt status — but no New York income tax would be due on accumulated income. This informational filing is important to document the trust's exempt status and to preserve the trust's position in the event of a state audit.
• If the trust holds assets generating New York source income (e.g., Stonecrest Realty Holdings LLC membership interests following the termination of GRAT B), a New York nonresident trust income tax return may be required to report and pay tax on the New York source income, even if the trust otherwise qualifies as an exempt resident trust with respect to its non–New York income. This is because the exempt resident trust rules apply to the trust's accumulated income generally, but New York source income may be taxed separately under the nonresident trust provisions.
Connecticut and Illinois Filing
The Dynasty Trust does not have a filing obligation in Connecticut or Illinois unless it is required to file in those states as a nonresident trust with source income in those states. Neither state currently imposes a filing obligation on trusts that have no connection to the state other than the presence of a resident beneficiary. Distributions to Katherine (Connecticut) and Olivia (Illinois) are reported by the beneficiaries on their own personal state income tax returns, not by the trust.