Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Tuesday, June 25, 2019

Was the unanimous SCOTUS wrong in deciding North Carolina Department of Revenue v. Kaestner Family Trust?

On June 21, 2019, the Supreme Court of the United States decided North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. By a 9-0 margin (7 joining the majority and 2 strong concurring opinions), the court decided that North Carolina cannot tax nonresident trust payments.

In Due Process, State Taxation of Trusts and the Myth of the Powerless Beneficiary: A Response to Bridget Crawford and Michelle Simon, 67 UCLA L. Rev. Disc. (2019), Prof. Carla Spivack (Oxford Research Professor of Law and Director, Certificate in Estate Planning, Oklahoma City University School of Law), takes issue with Bridget Crawford and Michelle Simon’s arguments (the ones that prevailed in the case) in their article The Supreme Court, Due Process and State Income Taxation of Trusts, 67 UCLA L. Rev. Disc. 2 (2019).

Here is a brief excerpt from Prof. Spivack's article:

Taxing the beneficiary in this case is entirely consistent with the basic principle of tax law that a person who controls and receives benefit from income should pay taxes on it. The real question here is whether the beneficiary controlled, and received enough benefits from, her trust income while she lived in North Carolina to pay state income taxes on it. The trustee by definition is barred from enjoying any beneficial interest in the trust property—the only person who may receive beneficial interest is the beneficiary. If and when the beneficiary receives the benefits of trust income, she should pay the corresponding tax in her state of domicile. This is uncontroversially consistent with due process. The trustee here makes ample use of the myth of the powerless beneficiary by trying to direct all eyes to the trust in the question of tax jurisdiction. But the Court need not fall for this sleight of hand.

This brings me to Crawford and Simon’s second major point. They assert that the fact that the beneficiary did not receive distributions from the trust while in North Carolina means the state cannot tax her proportionate share of trust income. I argue that the mere fact that the trustee did not literally write checks to the beneficiary does not mean she failed to benefit from her share of trust income or control it for tax purposes. First, as discussed below, the record shows that her interest in the trust alone, even without distributions, allowed her to benefit from her share of trust income, in ways that should subject her to taxation in the state. Second, the beneficiary requested that the trustee not make distributions to her during the relevant period. Under tax law, her power to decline distributions showed she had control over them, and thus was required to pay income taxes.


Articles, Income Tax, New Cases, Trusts | Permalink


Excellent, excellent article, thanks for the link. My writeup of the decision is here
Tl;dr, the Court has rested its decision on such a narrow subset of the established facts that the decision has almost no precedential value.

Posted by: Russ Willis | Jun 25, 2019 7:22:22 PM

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