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SCOTUS Focuses on Income Distributions in Trust Tax Debate (1)

April 16, 2019, 5:27 PMUpdated: April 16, 2019, 7:36 PM

The scope of state authority in taxing trusts was at the center of April 16 Supreme Court oral arguments.

Several justices questioned whether states should be able to tax trusts if the trust beneficiary hasn’t yet received the money and isn’t guaranteed to do so. The issue at the center of the case, N.C. Dep’t of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, is whether a trust beneficiary living in a state establishes enough of a connection for the state to tax it.

Regardless of how the high court rules, it will continue to be a challenge for trustees to keep track of beneficiaries who may move to or live in states other than where the trust is located, said Michael H. Barker, a partner at McGuireWoods LLP.

“Trustees are going to continue to have a big job on their hands in watching where all of the beneficiaries go and what each of those jurisdictions have to say,” Barker said.

No Guarantee

North Carolina taxed the Kimberley Rice Kaestner 1992 Family Trust on income the trust earned from 2005 to 2008, even though the income wasn’t generated in North Carolina or distributed to Kaestner’s children. Kaestner’s father had originally created a family trust in New York in 1992.

The trust paid more than $1.3 million in taxes to North Carolina, but sued for a refund.

The trust argued that it isn’t guaranteed Kaestner will receive the funds. It also argued that her residency in North Carolina isn’t sufficient to establish a minimum connection, which is necessary under the due process clause.

Matthew W. Sawchak represented the North Carolina Department of Revenue. He said at oral arguments that the beneficiary “is the key part of the trust,” thereby meeting the minimal connection needed to tax the trust. He didn’t immediately return a request for additional comment.

Justice Stephen Breyer focused on the fact that Kaestner is the only connection between the trust and North Carolina.

Andrea C. Chomakos, a partner at McGuireWoods LLP who attended oral arguments, said she was surprised that a lot of the questioning seemed tangential and not focused on the main question of the case—where is the fair place to tax the trust.

‘Something Wrong’

Breyer and Justice Ruth Bader Ginsburg also said that because it isn’t certain Kaestner will receive the funds, taxing the full amount prior to the distribution seems problematic.

“There’s something wrong with that,” Breyer said, pointing out that Kaestner could die before distribution of the trust.

Or, as Justice Samuel Alito noted, the beneficiary’s children could end up receiving the money from the trust.

Chomakos said Breyer seemed to favor the trust, while Justice Elena Kagan seemed in favor of the state’s argument.

David A. O’Neil, a partner at Debevoise & Plimpton LLP in Washington, represented the trust. O’Neil didn’t immediately return a request for comment.

The case is N.C. Dep’t of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, U.S., No. 18-457, oral arguments 4/16/19.

(Adds Chomakos comments in paragraphs 10 and 14.)

To contact the reporter on this story: Carolina Vargas in Washington at

To contact the editors responsible for this story: Patrick Ambrosio at; Colleen Murphy at