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Trust Nexus Tax Case on SC Docket Could Have Wide Ranging Implications

By Arfa Scott

Following its June 2018 decision in Wayfair, the U.S. Supreme Court continues to focus on cases that deal with how much taxation states can impose and in what circumstances.  In January 2019, the nation’s highest court agreed to look at under what circumstances a state can impose its income tax on a trust by granting certiorari in the case of North Carolina Dept. of Revenue v. Kaestner Family Trust.

The Kaestner Trust case involves a New York trust whose only contact with North Carolina was the trust beneficiaries who were residents of North Carolina. North Carolina imposed tax on the trust’s undistributed income held for the benefit of the beneficiaries.  The North Carolina Supreme Court issued a decision concluding that the law violated the trust’s Due Process rights because the trust did not have sufficient minimum contacts with the state.

In its petition for cert, the North Carolina Department of Revenue told the justices that there is significant state court splitting on whether the due process clause allows states to tax a trust based on where the beneficiary lives. According to North Carolina’s petition, there are four states where courts have either held or implied that a beneficiary’s residency can support the imposition of tax on the trust’s income: California, Connecticut,  Illinois, and Missouri. Court decisions in several other states, including Minnesota, New Jersey, and New York (as well as North Carolina), however, have indicated that such taxation violates Due Process.  Interestingly, in the Minnesota case, Fielding v. Commissioner of Revenue, Minnesota has also asked for review by the U.S. Supreme Court.  The Supreme Court has yet to announce if it will agree to review the Fielding case.

The Kaestner case is being watched with great interest because as in Wayfair, if the Supreme Court finds North Carolina’s imposition of tax to be permissible in this case, other states may amend their laws to impose tax on out-of-state trusts in a similar way.  This would be in addition to the states that already have nexus provisions allowing them to impose tax based on a trust’s in-state beneficiaries.  In its petition to the Supreme Court, North Carolina highlighted the significance of the issue, noting the more than $120 billion of income that is a vital source of tax revenue for the states that currently tax trusts on this basis.

With such large amounts of tax revenue on the line, the Kaestner case is one to watch.  The case is North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, case number 18-457, in the U.S. Supreme Court.

Arfa Scott, JD, is the Director of Trusts & Estates at Wiss & Company, LLP with 15 years of professional experience in the trusts and estate field. You can contact her at (973) 577-2552 or ascott@wiss.com.

beneficiaries, KaestnerTrust, NorthCarolina, SupremeCourt, Wayfair

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