The U.S. Supreme Court recently issued a unanimous decision regarding the taxation of trusts. In the case of North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, the Court held that the North Carolina law authorizing the state to tax all of a trust’s income that “is for the benefit of” a state resident, regardless of the state where the trust was filed, violated the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution. The North Carolina law was premised on only one factor: the beneficiary of the Kaestner Trust simply resided in the state of North Carolina. In this case, the beneficiary never received a distribution from the Trust and has no authority to demand a distribution from the Trust that was established and administered in the state of New York.
It is rare when cases involving the taxation of a trust by a state are brought before the U.S. Supreme Court. A few of the factors the Court has previously ruled on include having an in-state trustee, having significant administration of a trust in a state, or having a beneficiary residing in a state while having control, possession, or the enjoyment of a trust. Kaestner brought to light how states tax trusts differently, how they might make changes to the taxation of trusts, and how small factors that may seem insignificant could potentially lead to a surprise state tax.
If you have questions or would like more information, please contact David Poh at dpoh@windes.com or 844.4WINDES (844.494.6337).