United States Supreme Court Case Involves North Carolina Trust Beneficiaries

North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust.

This month the United States Supreme Court decided a case that involved North Carolina trust beneficiaries. The question asked was whether the Due Process Clause of the Fourteenth Amendment permitted North Carolina to tax the income of a trust just because the beneficiaries live in North Carolina. The Supreme Court answered no.

Theodora Vaporis

Under the Due Process Clause of the Fourteenth Amendment, North Carolina (or any state) has the authority to tax a trust if the trust has “minimum contacts” with the state. North Carolina DOR took the position that a beneficiary’s residence in a state provides sufficient minimum contacts between a trust and a state to authorize the state to tax the trust’s income. This is based on a North Carolina law, N.C. Gen. Stat. § 105-160.2, which imposes a tax on the taxable income of trusts. The tax is computed on the amount of the taxable income of the trust that is for the benefit of a resident of North Carolina. The Plaintiff/Trustee in this case took the position that North Carolina did not have the authority to tax a New York trust’s income based solely on the fact that the beneficiaries resided in North Carolina. The Trustee sought refunds for taxes paid.

The Supreme Court agreed and ruled that the North Carolina law which taxed the income of a trust whose only connection to the state was the residence of the beneficiary violated both the Due Process Clause of the U.S. Constitution, as well as the North Carolina Constitution. The Court held that the Trust did not have sufficient minimum contacts with North Carolina. To be constitutionally subject to tax in a state, a taxpayer must “purposefully avail itself of the benefits of an economic market in the taxing state.” In this case the New York Trust did not have any connection to the North Carolina other than the fact that the primary beneficiary was a North Carolina resident. The beneficiary’s contacts with the state could not be attributed to the Trust, as the Trust was a separate legal and taxable entity.

Trusts that have as their only connection to North Carolina the residence of the beneficiary, and that paid income tax to the state, may want to evaluate whether they should apply for refunds on any open years, and cease paying taxes to the state in future years. If you have trust related questions, call the attorneys at Black, Slaughter & Black for assistance.