In a move that places another nexus case before the highest court, the United States Supreme Court granted certiorari in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust.1 The issue to address is whether taxation of a trust, based solely on the residence of the beneficiary, violates the Due Process Clause.
The Kaestner case involved a New York trust with assets located in Massachusetts and the trustee residing in Connecticut. No distributions were made by the trust to the beneficiary who resided in North Carolina during the years at issue. Trust income is generally taxable—either to the trust if the income stays in the trust, or to the beneficiary if the income is distributed to the beneficiary. There is no question that the trust distributions are taxable to the beneficiary in the beneficiary’s state of residence. The North Carolina statute taxed the undistributed income of the out-of-state trust based solely on the residence of the beneficiary.
The North Carolina Court of Appeals found that the trust did not maintain any physical presence in the state and had never held assets located in the state, with its only connection to the state being the residence of the beneficiary. The Court determined, and the North Carolina Supreme Court agreed, that the statute allowing taxation based only on the residence of the beneficiary violated the Due Process Clause.
The Department of Revenue sought review by the United States Supreme Court, citing that various states have addressed this issue with differing results from the courts. The decision could be far-reaching, as currently 11 states tax trusts based on the residency of the beneficiaries. Minnesota Department of Revenue has also requested review of a similar trust case, William Fielding, et al. v. Commissioner of Revenue.2
1814 S.E.2d 43 (N.C. 2018).
2916 N.W.2d 323 (Minn. 2018).
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Mark Nachbar
Principal
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Mary Bernard
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