North Carolina Dept. of Rev. v. Kimberly Rice Kaestner 1995 Family Trust, 139 S. Ct. 2213 (2019).




The Supreme Court of the United States decided by a 9-0 margin (6 joining the majority opinion and 3 concurring), that North Carolina cannot tax nonresident trust payments. Here is an excerpt from the opinion:

This case is about the limits of a State’s power to tax a trust. North Carolina imposes a tax on any trust income that “is for the benefit of ” a North Carolina resident. N. C. Gen. Stat. Ann. §105–160.2 (2017). The North Carolina courts interpret this law to mean that a trust owes income tax to North Carolina whenever the trust’s beneficiaries live in the State, even if—as is the case here—those beneficiaries received no income from the trust in the relevant tax year, had no right to demand income from the trust in that year, and could not count on ever receiving income from the trust. The North Carolina courts held the tax to be unconstitutional when assessed in such a case because the State lacks the minimum connection with the object of its tax that the Constitution requires. We agree and affirm. As applied in these circumstances, the State’s tax violates the Due Process Clause of the Fourteenth Amendment.

For an excellent discussion of the ramifications of this case under the laws of other states, see Mark A. Luscombe, A Deep Dive Into Kaestner, Accounting Today (Aug. 1, 2019).

Moral:  Because Texas does not impose an income tax, this very important case is of lesser importance here. Nonetheless, Texas practitioners may have beneficiaries of Texas trusts who reside (or who might reside) outside of Texas. These trusts could have more contacts with the other states than the Kaestner trust and be potentially subject to taxation.