One Uniform Law Should Govern State Income Taxation of Trusts

The time has come to develop and adopt a uniform law for administering state income taxation of trusts. State laws should uniformly provide that the undistributed income of a trust can only be taxed by the state where the trust is administered.

When it comes to taxation of the undistributed income of trusts, states are all over the map—some impose a tax on trust income while others don’t. Among those that impose a tax, some base it on the place of administration while others look at the residence of the trustees, the beneficiaries, or both.

This crazy quilt of laws can cause zero, one, two, or potentially three states to claim they’re entitled to tax the undistributed income of a trust.

The US Supreme Court’s decision in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust was supposed to resolve this issue. The justices found that a North Carolina statute subjecting a trust to state income taxation based solely on the beneficiary’s residence in North Carolina violated the Due Process Clause of the Constitution.

While the ruling doesn’t prescribe a basis of taxation that wouldn’t have such a constitutional infirmity, the opinion strongly implies that a taxation statute that turns on the place of a trust’s administration would pass muster. But states haven’t fallen into line.

A uniform law would rationalize the relationship among state tax systems and avoid the inequities of double taxation. “No tax” states such as Delaware and Nevada could continue giving trusts a pass. If a state such as California wanted to impose a throwback tax on resident beneficiaries who receive a distribution not previously taxed, the state would be free to do so.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Beth Shapiro Kaufman is partner at Lowenstein Sandler and national chair of the firm’s private client services group in Washington, D.C.

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