Can your trust get a state tax refund?
The US Supreme Court, on June 21, 2019, issued a unanimous decision on state income taxation of trusts that was taxpayer friendly. The Supreme Court held, in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, that the law authorizing the State to tax any trust income that “is for the benefit of” a state resident, N. C. Gen. Stat. Ann. §105–160.2, violated the Fourteenth Amendment’s Due Process Clause.
3. The trustee has exclusive control over the allocation and timing of trust distributions. This was important in Kaestner as a clear theme of the opinion was that the beneficiaries living in North Carolina could not control their benefiting from trust income. 6. The physical location of trust records. In the Kaestner case, the trustee kept the trust documents and records in New York, not in North Carolina. Where are your trust records kept? In a modern digital age how relevant will this be when most if not all records might consist of cloud based digital records? Will moving all records to the cloud solve the issue?
9. The trust should not have any direct investments in the taxing state. Might this suggest that any, even insignificant, investment in the taxing state might taint the entire trust? Might those administering trusts be advised to divide the trust with one component trust holding any investments in the state, and all other investments being bifurcated in a separate trust? Some states take the position that any active business in their state will taint the entire income of the trust as taxable.
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