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On June 21, 2019, the Supreme Court decided North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, a case considering the ability of states to tax trust income for in-state beneficiaries even when these beneficiaries do not receive any distributions. 

About thirty years ago, Joseph Lee Rice II formed a trust for the benefit of his children and their families. The trust was formed in New York State and governed by New York law, as well as administered by a trustee who is a New York resident. Kimberley Rice Kaestner moved to North Carolina in 1997 and claimed residency from 2005-2008. After the move, the trustee opted to divide Rice’s initial trust into three separate subtrusts while still maintaining control of all three trusts. The trust at issue in this case is the Kimberley Rice Kaestner 1992 Family Trust (“Kaestner Trust”), which North Carolina sought to tax on the grounds that it “is for the benefit of” North Carolina residents. North Carolina taxed the trust for tax years 2005-2008, levying a bill of more than $1.3 million. The trustee paid the tax under protest and sued North Carolina in state court, arguing that the tax as applied to the Kaestner Trust violates the Due Process Clause of the Fourteenth Amendment.  Kaestner had received no income from the trust during the years in question, the trust was governed by New York law, and the trustee did not live in North Carolina.  The state courts ruled in favor of Kaestner, and the State of North Carolina obtained a grant of certiorari.

In a unanimous decision, the U.S. Supreme Court affirmed the judgment of the Supreme Court of North Carolina. In an opinion delivered by Justice Sotomayor, the Court held that “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.”  Justice Alito filed a concurring opinion, joined by the Chief Justice and Justice Gorsuch.

To discuss the case, we have Jon Urick, Senior Counsel for Litigation at the US Chamber Litigation Center.