Dick Nenno, Senior Trust Counsel and Managing Director, Wilmington Trust, has made available for download his article, Opportunities for Saving State Income Taxes on Trusts Expanded with Kaestner Trust Decision. Mr. Nenno’s article begins as follows:
U.S. Supreme Court holds presence of resident discretionary beneficiaries does not justify North Carolina income taxation of nonresident trustee in Kaestner Trust.
When determining whether a trustee of a nongrantor trust must pay a particular state’s income tax on retained ordinary income and capital gains, practitioners should resist the impulse to consult the governing-law clause in the Will or trust instrument.
Instead, he or she should analyze how that state defines “resident trust” for income-tax purposes in its statutes, regulations, and/or tax-return instructions.
Although North Carolina does not formally define “resident trust,” the state provides a functional definition of the term by taxing trustees—resident and nonresident—“on the amount of the taxable income of the . . . trust that is for the benefit of a resident of this state . . .”
In North Carolina Department of Revenue v. The Kimberly Rice Kaestner 1992 Family Trust, the U.S. Supreme Court held unanimously on June 21, 2019, that the Due Process Clause of the U.S. Constitution prohibited North Carolina from taxing a nonresident trustee on the accumulated ordinary income and capital gains of a nongrantor trust based exclusively on the existence of resident discretionary beneficiaries, saving the trustee over $1.3 million. The decision enhances tax-saving opportunities in North Carolina, Georgia, Maryland, and elsewhere, and highlights the importance of continuing to take advantage of planning opportunities in California, New Jersey, New York, Oregon, Pennsylvania, and other states.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal..