This is an historic tax jurisdiction case in which the U.S. Supreme Court addressed whether the due process clause of the U.S. Constitution prohibits states from taxing trusts based solely on trust beneficiaries’ in-state residency.
North Carolina taxed the Kimberley Rice Kaestner 1992 Family Trust on income the trust earned from 2005 to 2008 even though the income wasn’t generated in North Carolina and the Kaestners had no right to, and did not receive, any distributions. The trust did not have a physical presence, make any direct investments, or hold any real property in the state, and the trust was originally created in New York. The trust paid more than $1.3 million in taxes to North Carolina, but sued for a refund.
The Court rejected North Carolina’s regime for taxing trusts which only looks to the beneficiary’s residency for taxing a trust regardless of whether the beneficiary is certain to receive trust assets. In a unanimous opinion, the Court held that the in-state residence of trust beneficiaries alone does not supply the minimum connection necessary to sustain the state’s taxation of trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are not guaranteed to receive it in the future.
Although the Court’s decision is limited in its scope in that it does not address the validity of taxes based on state laws that consider the in-state residency of a beneficiary as one of a combination of factors, it well illustrates how state trust and fiduciary law vary widely and why families are well advised to choose carefully the jurisdiction of their family trusts and implies how a well-advised family could potentially save tax in transmitting family wealth.
Withers wrote an amicus brief on behalf of several trust company jurisdiction states and in the interest of our clients.