State Tax on Trust Income

The U.S. Supreme Court recently handed down an important decision declaring North Carolina’s taxation of certain trusts unconstitutional. The name of the case is: NC Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust. If you are a beneficiary of an out-of-state trust that was subject to taxation merely because a portion of the trust income was “for the benefit of” a North Carolina resident, then this decision likely impacts you, or at least the trust of which you are a beneficiary. In essence, the U.S. Supreme Court said that merely having a beneficiary in this state does not constitute a sufficient connection with North Carolina to justify it taxing the trust’s income.

If you have an interest in a trust like this, you’ll want to talk with the trust’s CPA about amending prior-year tax returns and seeking refunds. In addition, the case presents opportunities to increase family wealth going forward. For new trusts, and in some cases for existing trusts with North Carolina beneficiaries, you may be able to reduce or eliminate state income taxation with proper planning.

If you would like to discuss the impact Kaestner may have on your existing trusts or estate plan, please contact us.

*Intended as general guidance only and not as legal advice.