Journal of Accountancy
By Sally P. Schreiber, J.D.
The Supreme Court, in a unanimous decision, held that the presence of beneficiaries of a trust in a state does not alone give a state the power to tax the trust's income. The court found that the imposition of the tax violated the Due Process Clause of the 14th Amendment because the trust lacked the necessary minimum contacts with the state to sustain the tax.
Facts: A New York trust had beneficiaries who resided in North Carolina but otherwise had no connections to North Carolina, and the trustee had absolute discretion over distributions to the beneficiaries. For the years in question, 2005 through 2008, the beneficiaries received no income from the trust, had no right to demand income from the trust in that year, and could not count on ever receiving income from the trust. Nonetheless, North Carolina, under N.C. Gen. Stat. §105-160.2, which allows a trust to be taxed solely because it has a North Carolina beneficiary, assessed a tax of more than $1.3 million on income earned by assets in the trust for tax years 2005 through 2008.
The trustee paid the tax under protest and then filed suit in state court, arguing that the tax violated the 14th Amendment's Due Process Clause. The North Carolina Supreme Court held that the statute was unconstitutional, finding that the beneficiaries' residence in North Carolina was too tenuous a link between the state and the trust to support the tax (Kimberley 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)). Read more