Supreme Court Rules That Residence Alone Does Not Confer Taxing Authority on Trusts

Chris Gaetano
Published Date:
Jun 24, 2019
iStock-922171778 SCOTUS United States US Supreme Court

The U.S. Supreme Court ruled unanimously that just because the beneficiary of a trust lives in a state, this does not give the state government unilateral authority to tax that trust, according to Accounting Today

The case concerned a trust that was originally set up in New York to benefit the original settlor's descendants, one of whom moved to North Carolina in 1997. Some time after this, the trust was divided into three sub-trusts, one for each descendant, including the one who moved to North Carolina. The state government imposed a $1.3 million tax on the trust for 2005 to 2008, during which time the beneficiary had no right to, and did not receive, any distributions, nor did the trust have a physical presence, make any direct investments, or hold any real property in the state. The trustee paid the tax under protest then sued, arguing that her due process rights had been violated. While North Carolina argued that its law allow for the taxation of any income that benefits a residence, the Supreme Court said that there just wasn't enough of a connection between the state and the trust to be able to satisfy due process requirements. It said the presence of in-state beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it.

The ruling was narrowly applied to contingent trust beneficiaries; while a concurrent opinion would have encompassed noncontingent beneficiaries as well, the majority backed the more restrictive interpretation. 

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