The US Supreme Court unanimously held on Friday that North Carolina cannot tax a trust based only on a trust beneficiary’s residence in the state.
The question at issue in NC Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, was whether a trust beneficiary resident in the state of North Carolina established sufficient connections with the state to make the out-of-state trust’s income taxable. The trust was originally established in New York and later transferred to Connecticut, Throughout its existence, however, the trust beneficiary, Kimberly Rice Kaestner, lived in North Carolina.
The trust paid state income taxes to North Carolina on the income the trust earned from 2005-2008. Representatives of the trust subsequently requested a refund from the North Carolina Department of Revenue because no income from the trust was released to Kaestner during this time. The department denied the request and the trust brought suit.
Writing the opinion of the court, Justice Sotomayor explained that the North Carolina Department of Revenue violated the Due Process Clause of the Fourteenth Amendment, which limits states “to imposing only taxes that bear fiscal relation to protection, opportunities and benefits given by the state.” Meaning that just because a trust beneficiary resides in a state it does not mean that sufficient contact with the state is established to justify taxation of the trust’s income. Although the Trust earned income during the years in question, the beneficiary did not personally receive it, nor could payment of the income be demanded.
The court’s decision affirms those of the North Carolina Court of Appeals and the North Carolina Supreme Court.