Case Summaries Kaestner Trust — Supreme Court Guidance for State Trust Income Taxation

Steve R. Akers

Jul 02, 2019

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.

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Steve Akers
Senior Fiduciary Counsel
Steve serves as Chair of the firm’s Estate Planning Committee and works closely with clients in the Southwest Region regarding their estate and trust planning issues.
Ron Aucutt
Senior Fiduciary Counsel
Ron is responsible for working with clients and their advisors to develop practical and efficient wealth transfer plans, and for guiding the firm on fiduciary issues.