The United States Supreme Court recently decided a case about the limits of a State’s power to tax a trust. In North Carolina v. Kaestner, Justice Sotomayor and a majority of the Court affirmed the decision of the North Carolina Supreme Court that it’s unconstitutional to tax trust income when the trust has nearly no connection with the state. The Court held that imposing a tax in these circumstances was a violation of the 14th Amendment’s Due Process Clause.
North Carolina had imposed a tax on any trust income that “is for the benefit of” a North Carolina resident pursuant to N.C. Gen. Stat §105-160.2. North Carolina courts have interpreted the statute to mean that a trust owes income tax to the state whenever the trust’s beneficiaries live in the state– even if those beneficiaries received no income from the trust in the relevant tax year, had no right to demand income from the trust in that year, and couldn’t count on ever receiving income from the trust. State courts held the tax to be unconstitutional when assessed in such instances because the state lacks the minimum connection with the object of its tax that the Constitution requires.
Read more about the decision at Attorney at Law Magazine.