Imagine this: A multimillionaire private equity investor in New York transfers interests in one of his private equity funds to a trust and appoints as his trustee an attorney who lives in Connecticut. The beneficiaries of the trust are his adult daughter and her three children (his grandchildren), who live in North Carolina. The terms of the trust allow the Connecticut attorney to decide when to distribute money or other trust property to the daughter and the grandchildren, but he can’t distribute the money to anyone else. And of course, the attorney is unlikely to override the wishes of the private equity investor, who — after all — is a major client of the Connecticut attorney’s law firm.
The trust generates income — lots of it. Indeed, it appears that the trust earned more than $13 million in 2007 alone. Presumably it should pay tax on this income to some state. But where?
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