Articles

UPDATE U.S. Supreme Court Denies North Carolina Right to Tax Undistributed Trust Income by Jeffrey M. Mutnik, CPA/PFS

Posted on June 04, 2019

On June 21, 2019, the U.S. Supreme Court issued a decision against the North Carolina Department of Revenue in its claim to tax the undistributed income of a New York trust that is “for the benefit of” a North Carolina resident.

In the matter of North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, the Supreme Court held that the state violated the Due Process Clause of the Constitution when it assessed tax on an in-state resident who neither received nor has the right to control or demand distributions from a trust that does not have a physical presence or hold any real property in the state. In doing so, the court rejected the state’s argument that the imposition of a state tax based on the residence of trust beneficiaries provides the reasonable minimum connection, or tax nexus, necessary to sustain that tax.

Currently, only four states use the residency of beneficiaries as a sole basis for trust taxation: North Carolina, California, Georgia and Tennessee. Moreover, North Carolina is unique in that it imposes tax regardless of whether or not in-state beneficiaries control or are certain to ever receive trust assets. With this in mind, the Supreme Court specifically limits its decision in favor of the taxpayer in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust to the specific facts and circumstances of this case. It did not go so far as to “imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here.” As a result, it is critical that taxpayers creating trusts in the future consider how they allocate control over trust assets to named beneficiaries. Limiting control to a trustee with the sole power to make decisions about trust investments and assets distributions can protect beneficiaries from the imposition of state-level taxes on accumulated trust income.

Tax laws are in a constant state of change, based on acts of Congress, guidance issued by the US Treasury (including the IRS), as well as evolving case law. The professional advisors and accountants with Berkowitz Pollack Brant work with families and business owners across the globe to stay up to date on the U.S. tax code and develop strategies for maintaining compliance while minimizing tax liabilities.

About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.