North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust

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In second case today, #SCOTUS considers whether beneficiary’s residence is sufficient for state to assert tax jurisdiction over trust income; Erin Scharff previews N.C. Dept. of Revenue v. Kaestner Family Trust

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Erin Scharff Guest

Posted Wed, April 10th, 2019 2:41 pm

Argument preview: Justices consider whether beneficiary’s residence is sufficient for state to assert tax jurisdiction over trust income
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This term, the Supreme Court has an opportunity to elaborate on its holding in Wayfair. North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust has received much less media attention than Wayfair. While everyone seems to care whether or not Amazon collects sales taxes, Kaestner involves a less obviously scintillating issue of trust law: Is a beneficiary’s residence in a state sufficient for the state to assert tax jurisdiction over the in-state beneficiary’s share of trust income consistent with due process?

At issue in the case is North Carolina’s attempt to tax millions of dollars of income earned by the Kaestner family’s trust from 2005 to 2008. During the relevant period, the trust’s primary beneficiaries, Kimberley Rice Kaestner and her three children, lived in North Carolina, but none of the beneficiaries received trust distributions in these years. (If they had, North Carolina’s right to tax that income would be unquestioned.)
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The Kaestner Trust maintains, and North Carolina’s courts agreed, that it is has no legally relevant connection to North Carolina. In its view, the trust exists separately from its beneficiaries. As a result, the trust argues, the due process analysis should focus on the trustee’s connection to the taxing state. The trustee, after all, is the legal owner of the trust property and manages the trust income. As it emphasizes, outside of the beneficiary relationship, the Kaestner Trust has no connection to North Carolina. It was created in New York by a settlor who was a New York resident. It is governed by New York law and its records are kept in New York. At no time was a trustee a resident of North Carolina.

Under this view, Kaestner and her children are third-party beneficiaries of the trust, whose income is legally owned by the trustee. Under the terms of the Kaestner Trust, the trustee has complete discretion over both the investment of trust assets and the timing of trust distributions. As a result, Kaestner and her children are merely contingent beneficiaries with no right to trust distributions, and so there is no trust income for North Carolina to tax.

In rejecting this characterization, the North Carolina Department of Revenue argues that the trust exists solely for the benefit of its beneficiaries and that it is this economic reality that should ground the Supreme Court’s minimum-connections analysis. To do otherwise, the state argues, would be to reassert a due process formalism long rejected by the court. After all, though beneficiaries lack legal title to trust property, they are the equitable or legal owners of trust assets. Thus, the presence of Kimberley Kaestner and her children in North Carolina is absolutely sufficient for the state to assert jurisdiction over trust assets held for their benefit.
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Posted in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, Featured, Merits Cases

Recommended Citation: Erin Scharff, Argument preview: Justices consider whether beneficiary’s residence is sufficient for state to assert tax jurisdiction over trust income, SCOTUSblog (Apr. 10, 2019, 2:41 PM), https://www.scotusblog.com/2019/04/argument-preview-justices-consider-whether-beneficiarys-residence-is-sufficient-for-state-to-assert-tax-jurisdiction-over-trust-income/