On June 21, 2019, the U.S. Supreme Court unanimously decided North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, holding that The Due Process Clause does not permit a state to tax a trust’s income when the state’s only connection to the trust is the residence of a trust beneficiary.
Kimberley Rice Kaestner was the beneficiary of trust formed by her father that was governed by New York law. The trust agreement gave the trustee “absolute discretion” whether to distribute income to the trust beneficiary. The trust maintained no physical presence, made no direct investments, nor held any real property in North Carolina. As such, the trust’s only connection to North Carolina was the residence of one of the trust beneficiaries.
The U.S. Supreme Court noted that, under the Due Process Clause, “a State has the power to impose a tax only when the taxed entity has certain minimum contacts with the State such that the tax does not offend traditional notions of fair play and substantial justice,” and that “only those who derive benefits and protection from associating with a State should have obligations to the State.”
As a result, a state may not tax a trust’s income where the state’s only contact with the trust is the residence of a trust beneficiary who received no income from the trust and had no right to demand income from the trust. It is now apparent that a trust must share sufficient “minimum contact” with a state for its income to be taxed while satisfying the due process requirements.
If you have any questions about the impact of Kaestner on the state income taxation of a trust, please feel free to contact our office.
Posted in: Tax