# State Income Tax Reimbursement Statutes & Independent Trustee Guardrails

**Core Concept**: Because an IDGT / IDIT is a grantor trust, the grantor is personally responsible for paying all federal and state income taxes generated by trust income and capital gains. To protect the grantor from illiquidity, several states have enacted statutes authorizing discretionary tax reimbursement.

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### Overview of State Enabling Statutes

| State | Statute | Summary of Provision |
| :--- | :--- | :--- |
| **Delaware** | 12 Del. C. § 3344 | Authorizes an independent trustee to reimburse the grantor for income tax paid on trust income without causing estate inclusion. |
| **New York** | EPTL § 7-1.11 | Grants discretionary power to an independent trustee to pay or reimburse the grantor's income tax liability attributable to trust corpus. |
| **Florida** | Fla. Stat. § 736.08145 | Permits discretionary tax reimbursement by a non-grantor, independent trustee; explicitly states reimbursement does not create a creditor claim. |
| **Texas** | Tex. Prop. Code § 112.035(d) | Explicitly provides that trustee authority to reimburse the settlor for taxes on trust income/principal does not subject trust assets to creditor claims or defeat spendthrift protection. |

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### Crucial Drafting Guardrails (Rev. Rul. 2004-64 Compliance)

1. **Independent Trustee Discretion**: The power to reimburse the grantor MUST be granted **exclusively to an Independent Trustee** (as defined under IRC § 672(c)). Neither the grantor, the grantor's spouse, nor any related or subordinate party may hold this power.
2. **No Mandatory Language**: The trust agreement must NEVER contain mandatory reimbursement language (e.g., "The trustee shall reimburse..."). Mandatory clauses cause 100% estate inclusion under IRC § 2036(a)(1).
3. **No Prearranged Understanding**: There must be no express or implied agreement or understanding between the grantor and the trustee that the trustee will exercise the reimbursement power.
4. **Creditor Claim Protection**: Ensure state law protects the trust corpus from being reached by the grantor's general creditors under self-settled trust spendthrift rules when a discretionary reimbursement clause is included.