The U.S. Supreme Court has announced it will hear a trust tax case that has significant implications for states and trust beneficiaries: Hundreds of millions of dollars of annual tax revenue hang in the balance. “It’s a big development,” says Carol Harrington, an estate lawyer with McDermott Will & Emery.
The question posed in North Carolina Department of Revenue v. the Kimberley Rice Kaestner 1992 Family Trust is: Does the due process clause prohibit states from taxing trusts based on trust beneficiaries’ in-state residency?
McGuireWoods partner Ronald Aucutt, editor of the recent developments materials for the Heckerling Institute of Estate Planning, called out the ongoing controversy regarding limits on the state income taxation of trusts as the No. 1 Estate Planning Development of 2018. Speaking at the Heckerling conference this week, estate lawyer Steve Akers of Bessemer Trust posed the vexing question this way: “Can a state tax a trust located in another state? What are minimum contacts?”
The split spans nine states—four state courts have said “Yes” and five state courts have said “No.” Among the no’s as the debate heated up last year are the North Carolina Supreme Court’s decision in Kaestner and the Minnesota’s Supreme Court’s decision in Fielding v. Commission of Revenue. Nearly every state taxes trust income, and 11 states, including North Carolina and Minnesota, tax trusts based on trust beneficiaries in-state residency. Wealthy families can keep their money growing in trusts sometimes for more than 100 years, so the income-tax consequences are important.
The case before the high court has practical implications across the country: North Carolina alone has already received more than 450 contingent income-tax returns from trusts awaiting the outcome of the case.