On April 17, 2019 we posted US S.C. Heard Oral Arguments on Whether States Can Tax Out-of-State & Foreign Trusts where we discussed that the Supreme Court will hear a case that may clarify how much states are able to tax and that in April, the Supreme Court of the United States will hear an appeal against North Carolina's practice of taxing the undistributed income of an out-of-state trust that has a beneficiary living in the state.
North Carolina is one of 11 states that consider trusts taxable when they hold income for a person who is using the state's services, but US courts have reached different results about whether due process prohibits these taxes.
Today The U.S. Supreme Court ruled that North Carolina violated the due process clause by taxing an out-of-state trust when the only connection between the state and trust was a beneficiary’s residence in North Carolina.
In a unanimous decision authored by Justice Sonia Sotomayor, the court agreed with the North Carolina Supreme Court, which ruled a year ago that the residency of a beneficiary, who did not receive distributions from the Kimberely Rice Kaestner 1992 Family Trust, was insufficient nexus under the due process clause for the state to tax it.
The settlor and initial trustee for trust were in New York, and during the tax years, the trustee was a Connecticut resident. The justices agreed with the trust that the money belonged to him.
The ruling comes exactly one year after the high court’s landmark decision in South Dakota v. Wayfair, in which the justices decided that physical presence was not necessary for a state to require sales and use tax collection and remittance by out-of-state sellers. North Carolina had sought to use that decision to advance an argument that a trust also need not be present in a state for the state to impose taxation, but the justices rejected that on Friday.
This reasoning is the same as The North Carolina Supreme Court’s Finding That Taxation Of The Trust Was Unconstitutional Was That Kaestner, The Beneficiary, Did Not Receive Distributions From The Trust During The Years At Issue. The Revenue Department Collected $1.3 Million In Taxes From The Trust Over Four Years.
This outcome of NC Department of Revenue vThe Kimberley Rice Kaestner1992 Family Trust should d positively impact whether individuals are able to avoid state taxes by placing assets with trustees in states with no income tax liability. More than $120 billion of our nation's income flows through trusts, and this case that may clarify how much states are able to tax.
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Read more at: Tax Times blog
