Steve R. Akers and Ronald D. Aucutt, senior fiduciary counsel for Bessemer Trust have published their thoughts on the Kaestner Trust decision. The summary of their publication is as follows:
North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. __ (June 21, 2019) is the U.S. Supreme Court’s first opinion addressing the constitutionality of state taxation of the undistributed income of trusts in almost a century. In a 9-0 opinion, the Court upheld lower court findings that North Carolina’s income tax imposed on the Kaestner Trust over a specific 4-year period violated the Due Process Clause where the beneficiaries received no income in those tax years, had no right to demand income in those years, and could not count on ever receiving income from the trust.
States employ a variety of factors (or combination of factors) in determining whether the state can tax the undistributed income of trusts, such as the residency of the settlors, trustees, beneficiaries, or where the trust administration occurs. The opinion provides minimal guidance as to the constitutionality of those various systems (or the North Carolina beneficiary-based system under other facts), but reiterates and applies traditional concepts that due process concerns the “fundamental fairness” of government activity and requires “minimum contacts” under a flexible inquiry focusing on the reasonableness of the government’s action.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal..