U.S. Supreme Court upholds NC court ruling on 1992 family trust tax issue

The U.S Supreme Court did not issue its opinion this week on North Carolina’s partisan gerrymandering case, but it did uphold a state Supreme Court ruling Friday about the Kimberley Rice Kaestner 1992 Family Trust.

At issue in the case is whether states can tax a trust based on where the beneficiaries reside. The Kaestner Trust was established in New York to benefit Joseph Lee Rice III’s children. One of his daughters subsequently moved to North Carolina, and the state sought to tax the trust under a law that allowed it to tax any trust income that is for the benefit of a state resident.

North Carolina assessed a tax of more than $1.3 million for tax years 2005 through 2008 — during which time Kaestner had no right to, and did not receive, any distributions. Nor did the Trust have a physical presence, make any direct investments, or hold any real property in the state.

The trustee, a New York resident, paid the tax in protest and then sued the tax authority in North Carolina, the Department of Revenue. The state Supreme Court ruled in favor of the trust and the U.S. Supreme Court held “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.”

Former North Carolina Supreme Court Justice Barbara Jackson authored the state opinion, and the high court decision case was unanimous, authored by Sonia Sotomayor. Read the U.S. Supreme Court opinion below.



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