Herzig: Supreme Court To Consider Proper State To Tax Trusts

David Herzig (Ernst & Young), U.S. Supreme Court Considers Proper State To Tax Trusts:

I love tax nexus cases! When the U.S. Supreme Court granted certiorari in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, No. 18-457 (Kaestner Trust) in January, I expected a flood of commentary. But, to date, very little attention has been paid to what is perhaps the most important state tax taxation and trust case in decades.

The problem in Kaestner Trust seems simple: In which state is a trust subject to taxation?

Of course, the question presented is more difficult, e.g., does the Due Process clause of the U.S. Constitution prohibit North Carolina from taxing the undistributed income of a New York trust based on a beneficiary’s residency in North Carolina? But the basic question is important and certain to force trustees to focus on state tax consequences. ...

By granting certiorari in Kaestner Trust, the Court will effectively revisit Quill, this time addressing the state nexus standard under the Due Process clause. It is interesting that the Court decided to hear a state tax nexus case so soon after Wayfair, especially given that the Court has not heard a state “due process” tax nexus case since deciding Quill nearly 30 years ago (and over 60 years have passed since the Court considered Due Process matters relating to non-resident trusts generally (Hanson v. Denckla, 357 U.S. 235 (1958) (addresses Due Process issues in the context of general state probate jurisdiction over a non-resident trust with an in-state decedent)).