By Thomas M. Fafinski
On June 21, 2019, the United States Supreme Court affirmed a North Carolina Supreme Court decision that the presence of in-state beneficiaries does not provide the state the authority to tax trust income that has yet to be distributed to the beneficiaries where the beneficiaries do not have a right to the demand income from the trust.
In NORTH CAROLINA DEPARTMENT OF REVENUE v. KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST, Jeffrey Lee Rice III formed a trust for the benefit of his children, who resided in New York. He also appointed a New York trustee and provided the trustee with absolute discretion with regard to distributions. His daughter, Kimberley Rice Kaestner, moved to North Carolina. The trustee divided the assets into three separate sub-trusts. North Carolina sought to tax the income based upon a North Carolina statute authorizing taxes on trusts for beneficiaries of its residents. North Carolina imposed a tax from 2005-2008 totaling $1.3 million during which time Kaestner had no rights to distributions, the Trust had no physical presence in the state nor did it invest in any North Carolina based investments.
The United States Supreme Court applied a due process analysis in affirming the North Carolina Supreme Court’s decision, finding that the presence of the beneficiary alone does not provide the minimum connection necessary to sustain the state tax.
Importantly, the Court limited its holding to the facts of this case with language stating that it did not intend to “imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets” were different than those of this case.