In N.C. Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, the U.S. Supreme Court issued a unanimous decision on June 21, 2019 holding the State of North Carolina may not tax a beneficiary on the income of a trust merely because the beneficiary resides within its borders. In Kaestner, an individual domiciled in New York formed a trust for the benefit of his children. The trustee lived in Connecticut. One of the beneficiaries moved to North Carolina and several years later the State assessed a tax of more than $1.3 Million dollars against the beneficiary under a law authorizing the State to tax any trust income that “is for the benefit of” a state resident.
In the victory for the taxpayer, the Court found the beneficiary had no right to, and did not receive, any income distributions from the trust during the years in question. Under the terms of the trust the beneficiary had no right to demand trust income nor could she count on receiving any specific amount of income in the future. The distributions from the trust were in the absolute and sole discretion of the trustee. Further, the trustee maintained no physical presence in North Carolina, made no direct investments in the State, and held no real property there.
While the ruling of Kaestner is very narrow, if you are a trustee or a beneficiary of a trust that has been taxed simply based on residing in a particular state then you should contact your CPA to discuss filing refund claims for any open tax years. This ruling also serves as a reminder to contact your estate planning attorney to review what you might do to improve a trust you have to strengthen a position that tax is not due in a particular state. If you need assistance or have questions about estate planning strategies and trusts, please contact PLDO estate and trust attorney Jason S. Palmisano at 561-362-2030 or email jpalmisano@pldolaw.com.
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Jason S. Palmisano is a Senior Counsel with Pannone Lopes Devereaux & O'Gara LLC and a member of the Estate and Trust Planning, Administration and Litigation Team. He focuses his practice on counseling clients in all areas of trust and estate planning and administration, Elder Law and guardianship law, Medicaid planning, disability planning and probate administration.