In a case readers may find relevant for their estate planning work, the Supreme Court held Friday (June 21, 2019) that a beneficiary's presence alone was not enough for that domicile state (North Carolina in this case) to tax the assets held in trust, set up by someone from another state, for which they were beneficiaries. This holding is narrow, so don't get too excited or creative with your DIY estate planning. Many factors in future litigation could change the outcome (resulting in a state's authority to tax the out-of-state trust assets), including the settlor's residence or domicile in the state that would like to tax, assets located in the taxing state, assets earning money from sources within the state, in-state beneficiaries' right to take withdrawals from the trust assets, and many other factors reviewed in the case and concurrences.
The clerk's summary of the ruling is a good place to start for further details:
Joseph Lee Rice III formed a trust for the benefit of his children in his home State of New York and appointed a fellow New York resident as the trustee. The trust agreement granted the trustee “absolute discretion” to distribute the trust’s assets to the beneficiaries. In 1997, Rice’s daughter, Kimberley Rice Kaestner, moved to North Carolina. The trustee later divided Rice’s initial trust into three separate subtrusts, and North Carolina sought to tax the Kimberley Rice Kaestner 1992 Family Trust (Trust)—formed for the benefit of Kaestner and her three children—under a law authorizing the State to tax any trust income that “is for the benefit of” a state resident, N. C. Gen. Stat. Ann. §105–160.2. The State assessed a tax of more than $1.3 million for tax years 2005 through 2008. During that period, Kaestner had no right to, and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in the State. The trustee paid the tax under protest and then sued the taxing authority in state court, arguing that the tax as applied to the Trust violates the Fourteenth Amendment’s Due Process Clause. The state courts agreed, holding that the Kaestners’ in-state residence was too tenuous a link between the State and the Trust to support the tax.
Held: The presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. Pp. 5–16. ...
Note that this case is about a state's power to tax trust assets held in another state, governed by documents in another state that select the other state's law as the governing authority. The full slip opinion is currently (June 2019) available from the SCOTUS website here: https://www.supremecourt.gov/opinions/18pdf/18-457_2034.pdf. Google Scholar will definitely post it soon. North Carolina v. Kaestner, Slip Op. No. 18–457 (June 2019).
Happy reading and estate planning!
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