Supreme Court Rules in Favor of Trusts Over States in Trust Nexus Case

A recent Supreme Court case (North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust) unanimously ruled that a state does not have the constitutional ability to tax a trust if the sole basis of the tax is the presence of in-state beneficiaries. The Supreme Court ruled this violated the constitution’s due process clause in the 14th amendment. The case involved a narrow fact pattern and was limited in scope, but did address that if a beneficiary had no right to demand distributions from a trust and the beneficiary had not taken distributions from the trust, the state could not tax the income of the non-resident trust on non-resident income.

This decision should have some impact for certain trusts that may now be filing a Georgia income tax return because of a similar law in Georgia. Under current Georgia law, trusts are subject to Georgia tax when managing the funds or property for the benefit of a resident of the state.

Georgia applies other factors when deciding if a trust is subject to tax in Georgia; however, when certain provisions in the Georgia Code are applied alone, the scenario could be very similar to the North Carolina case. A state cannot tax out of state trusts, based solely on the presence of in-state beneficiaries.

Although the ruling is narrow in scope and doesn’t completely create the road map to minimize state taxes, it is another case in favor of trusts cutting down state filing requirements and another sign of where the courts are leaning on the matter. Each trust and fact pattern should be looked at independently incorporating this new information into any current and future action plans.

Please contact your Windham Brannon tax advisor for more information.

Doug Neal
Principal, Tax Services
678.510.2753
dneal@windhambrannon.com

Herb Barnes
Director, Tax Services
678.510.2840
hbarnes@windhambrannon.com