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Trusts and Estates

North Carolina Department of Revenue v. Kaestner Trust

Cite as 2019 DJDAR 5507
Filed June 24, 2019, United States Supreme Court

By Matthew R. Owens
Withers Bergman LLP
www.withersworldwide.com

Headnote: State Taxation Of Trust Income – Required Minimum Connection – Residence Of Beneficiary As Factor

Summary: The Due Process Clause of the Fourteenth Amendment prohibits states from taxing trusts based solely on the in-state residency of trust beneficiaries.

Rice, a New York resident, formed a trust for the benefit of his children.  The trust was governed by New York law.  The trustee had absolute discretion over distributions to the trust beneficiaries.  The trustee divided the trust into three subtrusts, including one for Rice’s daughter, Kaestner.  Kaestner moved to North Carolina in 2005 and lived there until 2008.  During Kaestner’s time in North Carolina, the trustee, who was not a North Carolina resident, made no distributions to Kaestner or her children.  Nevertheless, the North Carolina Department of Revenue assessed tax on the income attributable to Kaestner’s subtrust and assessed a total tax of approximately $1.3 million for tax years 2005-2008.  The trustee paid the tax and then sued in state court, arguing the tax as applied to Kaestner’s subtrust violated the Due Process Clause of the Fourteenth Amendment.  The trial court agreed and held the law to be unconstitutional as applied to Kaestner’s subtrust because the state lacked the required minimum contacts with the trustee to impose tax.  The appellate court and the North Carolina Supreme Court both affirmed.  The Department of Revenue sought review by the United States Supreme Court.

The United States Supreme Court affirmed.  In the context of state taxation, the Due Process Clause limits states to imposing only those taxes that bear a fiscal relation to protection, opportunities, and benefits given by the state.  The presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it.  By taxing Kaestner’s subtrust under such circumstances, the North Carolina law violated the Due Process Clause of the Fourteenth Amendment. 

https://www.supremecourt.gov/opinions/18pdf/18-457_2034.pdf

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