Please enable JavaScript, then refresh this page. JavaScript is required on this site.

Publications

United States Supreme Court Rules State Cannot Tax Trust’s Income

July 2019

Kaestner ruled that a state's taxation of a trust's income, where the only connection to the state was an in-state beneficiary, violates the Due Process Clause.

On June 21, 2019, the United States Supreme Court unanimously ruled unconstitutional a state's taxation of a trust's income where the only connection to the state was an in-state beneficiary. In North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, North Carolina sought to tax the income of a trust that was settled in New York, managed by a trustee in New York under New York law, and had no assets or direct investments in North Carolina.

The Due Process Clause requires, for "adjudicative jurisdiction," both (i) a minimum connection between the state and the person, property, or transaction it seeks to tax and (ii) a rational relationship between the tax and activities occurring within the state. In previous decisions, the Court ruled states may tax trust distributions to an in-state beneficiary and a trust's income if the trustee administers the trust in that state.

In Kaestner, North Carolina argued that the presence of trust beneficiaries in the state created sufficient nexus for North Carolina to tax the trust's income. The Supreme Court, however, held that mere presence—with no control over the trust's assets or distributions—does not create the minimum connection required by the Due Process Clause.

Cases regarding state courts' ability to exercise personal jurisdiction over out-of-state litigants have historically informed the Court's state tax Due Process Clause jurisprudence. In 1992, relying on such cases, the Court announced in Quill Corp. v. North Dakota a relatively lax standard for state tax Due Process. Since then, many adjudicative-jurisdiction cases have implied that a more robust connection between the taxpayer, its activity, and the taxing state is required. But to reach its narrow holding in Kaestner, the Court did not need to engage with these cases. The Court thus left open the possibility that a tax on out-of-state trusts could pass muster if an in-state beneficiary exercised any possession, control, or enjoyment of the trust's assets or income.

Lawyer Contacts

For further information, please contact your principal Firm representative or one of the lawyers listed below. General email messages may be sent using our "Contact Us" form, which can be found at www.jonesday.com/contactus.

John M. Allan
Atlanta
+1.404.581.8012
jmallan@jonesday.com

Angela M. Doyle
Silicon Valley
+1.650.687.4163
adoyle@jonesday.com

Douglas A. Wick
Chicago
+1.312.269.4393
dwick@jonesday.com

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.