U.S. Supreme Court to Weigh N.C. Statute Taxing Trust Income

January 22, 2019

The U.S. Supreme Court will have the final word in the ongoing challenge to North Carolina’s statute taxing trust income, as it agreed on January 11 to hear arguments in North Carolina Dept. of Revenue v. Kaestner Family Trust. As McGuireWoods previously reported, the North Carolina Court of Appeals and North Carolina Supreme Court have ruled in favor of the taxpayer in its challenge to the constitutionality of North Carolina’s statute that subjects trusts with a resident beneficiary to state income tax.

While it is unusual for the Supreme Court to review state income tax cases, with more than $120 billion of taxable income passing through trusts each year, it is due time for the Supreme Court to consider this important issue affecting states and taxpayers. Many view the issue raised in the Kaestner Trust case as one of the most important facing estate planning advisors and their clients. (See “Ron Aucutt’s ‘Top Ten’ Estate Planning and Estate Tax Developments of 2018.”) With states basing taxation of trusts on different principles and varying holdings in the state courts on what nexus is sufficient to support a state’s taxation of a trust’s income, the uncertainty and inconsistency frustrates planning, as well as state budgets and revenue.

Regardless of the outcome of the Supreme Court’s decision  in North Carolina Dept. of Revenue v. Kaestner Family Trust, it is certain to have a ripple effect as states and planners evaluate the implications of the final ruling.