Tuesday, April 16, 2019
The United States Supreme Court heard oral arguments in North Carolina Dept of Revenue v. Kimberley Rice Kaestner 1992 Family Trust posing the question of whether a state's taxation of a trust based solely on the residence of a beneficiary violates due process.
Professors Bridget Crawford (pictured left) and Michelle Simon (pictured below) in their article in UCLA Law Review Discourse compellingly argue that the Court should hold that a state has no constitutional authority to impose a tax on trust income where the trust’s only connection with the forum state is the residence of a contingent beneficiary. In The Supreme Court, Due Process and State Income Taxation of Trusts they contend that "Kaestner Trust is the most important due process case involving trusts that the Court has decided in over sixty years; it bears directly on the fundamental meaning of due process."
Crawford and Simon also provide a useful primer on the law and facts relevant to the issues of due process. They state that for some "lawyers and lucky individuals," a "list of common verbal triads includes the words 'grantor, trustee, and beneficiary,'" which will be just as familiar as other words that "seem to roll off the tongue naturally in threes" such as tic-tac-toe, snap, crackle, pop; Larry, Curly, and Moe; and peas porridge hot. However, if one is not one of those "lucky individuals" and perhaps is even a bit shy of trusts and taxation, the article proves itself a patient and trustworthy guide.
The article's well-earned conclusion states:
Justice Harry Blackmun famously said that he knew he was “in the doghouse” with the Chief Justice if he received an assignment to write the opinion in a tax case. But Kaestner Trust is no dog of a case. It broadly implicates basic principles of due process. There are many reasons to allow each state to implement its own tax (and strong arguments in favor of a more uniform approach), but it would be fundamentally unfair to require a trust to pay income tax to a jurisdiction solely on the basis of the residence of a discretionary trust beneficiary who does not actually receive any trust distributions. Once the beneficiary receives trust income, it is reasonable in all respects to subject that income to taxation. The Court’s decision in Kaestner Trust will have lasting impact on the future of due process jurisprudence.
Ultimately, trusts are creatures of legal fiction. They exist because the law tolerates the idea that it is possible to split legal and equitable title to property. Trusts are not the inevitable consequence of some right to control property; their existence reflects the acceptance of the story of split ownership. In the case of trust law, fiction is already strange enough. State income taxation should hew close enough to material reality that a trust is taxed only when the trust has some meaningful connection with the jurisdiction. An accident of fate—such as where a wholly discretionary beneficiary decides to live—should not trigger income taxation.
A must-read for ConLawProfs seeking to understand Kaestner Trust and for whichever Justice (and clerks) assigned to write the opinion.