Supreme Court Holds States May Not Tax Non-Resident Trusts Based Solely On A Resident Beneficiary

In North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust, the Supreme Court of the United States unanimously held that the mere residency of a trust beneficiary in a state does not create sufficient nexus for that state to impose income taxation on that beneficiary’s pro rata share of undistributed income from a non-resident trust.

The Court ruled that the Due Process Clause requires “some definite link, or some minimum connection” in order for a state to assert tax jurisdiction over a non-resident trust, which is not satisfied solely by the physical presence of a beneficiary. Following its ruling in Kaestner, the Court declined to hear a related case, Comm. of Rev. v William Fielding, et al., upholding the ruling of the Minnesota Supreme Court that a trust formed by a Minnesota resident does not remain subject to taxation in perpetuity should a “rational relationship” cease to exist between the trust and the State of Minnesota.

While both decisions are limited in scope and application, the Wyoming Trust Association welcomes the Court’s ruling in Kaestner as upholding basic principles of fairness in taxation as well as reinforcing the benefits of wealth transfer planning via Wyoming trusts.