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Supreme Court Limits State Rights to Tax Undistributed Trusts

Attorney Suzanne DeWittAs reported in Forbes, the US Supreme Court recently made a unanimous decision in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. The case involved a trust set up by Joseph Lee Rice, III, in New York for his children’s benefit, with the daughter Kimberley Rice Kaestner subsequently moving to North Carolina and dividing the trust into a trio of separate subtrusts, including the one named in the suit.

Because Kaestner resided in the state and was trust beneficiary, North Carolina sought to tax the trust under a law that authorized such action for trust income that benefits a resident of the state. With the trustee retaining “absolute discretion” on asset distribution, no distributions were made from 2005 through 2008. Despite this, North Carolina assessed a tax exceeding $1.3 million for those years.

The Supreme Court ruling clarifies that trust beneficiary residence alone does not constitute sufficient grounds for the state to assess taxes on undistributed income. This affirms a lower court ruling that the 14th Amendment’s Due Process Clause was violated and provides an important tax safeguard when it comes to beneficiaries of undistributed trusts.

About the Author

Based in Miami, attorney Suzanne DeWitt meets the needs of diverse legal clients, including those from different countries, who are seeking to invest in the United States. Among Suzanne DeWitt’s areas of knowledge are international and national tax and trust law, and she stays informed on the latest developments in the field.

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