Journal of Accountancy
By Sally P. Schreiber, J.D. June 21, 2019
North Carolina cannot tax a trust when the trust's only connection to the state is the residence of a beneficiary, the U.S. Supreme Court held Friday in a unanimous decision (North Carolina Dep't of Rev. v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457 (U.S. 6/21/19)). The court's opinion, written by Justice Sonia Sotomayor, held that such a tax would violate the Due Process Clause of the 14th Amendment because the trust lacked minimum contacts with the state.
The North Carolina statute at issue in the case (N.C. Gen. Stat. §105-160.2) allows a trust to be taxed solely because it has a North Carolina beneficiary. The statute was held to be unconstitutional by the North Carolina Supreme Court during the earlier stages of litigation (Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Dep't of Rev., 814 S.E.2d 43 (N.C. 2018), aff'g 789 S.E.2d 645 (N.C. Ct. App. 2016), aff'g 12 CVS 8740 (N.C. Sup. Ct., Wake Cty. 4/23/15)).
The trust involved in the case had no connections to North Carolina other than the beneficiary's residence, and the trustee had absolute discretion over distributions to the beneficiaries. Nonetheless, North Carolina assessed a tax of more than $1.3 million on income earned by assets in the trust for tax years 2005 through 2008 — a period during which the beneficiary had no right to, and did not receive, any distributions. The trustee paid the tax under protest and then filed suit in state court arguing that the tax violated due process. Read more.