The Supreme Court recently issued a unanimous decision in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. At the center of the case was a dispute as to whether or not North Carolina had the authority to tax the trust given the specific facts of the case. You see, Kimberly Rice Kaestner’s father, Joseph Lee Rice, created the trust in New York for the benefit of his children. He appointed a New York resident as a trustee. There was a subsequent trustee who ended up dividing the trust into three sub-trusts for each of his children. This is how the Kimberley Rice Kaestner 1992 Family Trust was formed for the benefit of Kimberley Kaestner and her three children.
Kimberley Kaestner moved to North Carolina in 1997. Because she was living in North Carolina and a trust beneficiary, the State tried to tax her pursuant to a law that authorizes the State to tax any trust income intended to benefit a state resident. This is where the point of contention arose. No distributions had been made from the trust to Kaestner and the trustee who resided in Connecticut had full discretion on making any trust distributions. Despite this, North Carolina still pushed to enforce the trust tax.
Taxation of Trusts
North Carolina courts have consistently held that the State tax law allows taxation of any trust income intended to benefit a trust beneficiary. The courts have held this to be true even when a beneficiary has not received any income from the trust for the relevant tax year. They have held this to be true even if the beneficiary did not have the ability or authority to demand a distribution from the trust to be made. They held this to be true even if it was uncertain as to whether a beneficiary would ever receive income from the trust.
This is what happened in Kimberly Kaestner’s case. She was subjected to a tax based solely on the fact that she was a North Carolina resident who was a trust beneficiary. In a narrow ruling, the Supreme Court ruled that North Carolina could not do this. Writing for a unanimous court, Justice Sonia Sotomayor made it clear that the court was only issuing a very narrow ruling pertinent to the very specific facts of this case. The Court said that the fact that a trust beneficiary is a resident of the state, on its own, is not enough to subject the beneficiary to a tax. The Court did not go so far to rule on state laws that may consider state residency of a beneficiary as one of several factors for taxation purposes.
Trusts and Estates Attorney
The law regarding trusts and estates can be complicated and subject to change or interpretation that may affect your estate plans. For all of your estate planning needs or questions, Monk Law is here to help. Contact us today.