Great news for Trusts and Trustees! The Supreme Court in North Carolina ruled today that the state violated the due process clause by taxing an out-of-state trust whose beneficiary was a NC resident— making that the only connection between the state and the trust.
In a ruling by the North Carolina Supreme Court over a year ago, it was determined that the residency of a beneficiary, who did not receive distributions from the Kimberley Rice Kaestner 1992 Family Trust, was not sufficient nexus under the due process clause in order for it to be taxed by the state. The decision by the Supreme Court was unanimous and was authored by Justice Sonia Sotomayor.
In this case, the trustee was a Connecticut resident and the settlor and trustee for the trust were in New York during the implied tax years. The precedence for such arguments may have been set by the high court’s decision last year in South Dakota v. Wayfair in which the justices ruled that physical presence was not necessary for state sales tax to be collected by out-of-state sellers. In this case, North Carolina sought to use that decision to win their argument that a trust should also not need to be present in a state in order for it to be taxed, but it was obviously rejected today by the justices.