On June 21, 2019, the U.S. Supreme Court addressed the case of
North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust. The Court, in a unanimous decision, found that the State of North Carolina may not tax trust income that (i) has not been distributed to the beneficiaries, for which the beneficiaries lack the right to demand the income, and (ii) for which the receipt of that income is uncertain simply because those beneficiaries reside in the state.
North Carolina taxed the Kaestner trust based on N.C.G.S. §105-160.2, which provides that the state can tax any trust “that is for the benefit of a resident of this State” regardless of whether the beneficiary actually receives distributions from the trust, has the right to demand income from the trust in a given year or could ever count on receiving income from the trust.The Supreme Court found that state residency of a beneficiary alone is not enough for North Carolina’s statute to satisfy the first criteria of the Court’s Due Process analysis and that the North Carolina statute, as applied, violated the Due Process Clause of the United States Constitution.
When creating a Trust it is important to consider the fact that several states, including Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, have no state-level taxation of trusts. Others, including the District of Columbia, tax trustees of what they classify as “resident” trusts.
