The US Supreme Court in April agreed to resolve a conflict stemming from a case involving whether a state can constitutionally tax a trust when a trust beneficiary resided within the state, but did not receive any income from the trust. In the case of North Carolina Department of Revenue v. Kimberly Rice Kaestner, the North Carolina Supreme Court ruled for the beneficiary in that case, finding that the North Carolina state-level tax on the New York-based trust was unconstitutional because it violated the due process clause of the U.S. constitution.
Currently, 11 states tax trusts based on the residency of trust beneficiaries—although nearly all states tax trust income once the beneficiary actually receives that income. Courts in various states have disagreed over whether the residency-based tax is constitutional.
We asked Professors Robert Bloink and William Byrnes, who write for ALM’s Tax Facts and hold opposing political views, to share their opinions as to whether the US Supreme Court should affirm the state court decision, and the potential implications of the Court’s final decision.
Below is a summary of the debate that ensued between the two professors:
Byrnes: The North Carolina Supreme Court was absolutely right on this one—the location of a trust is what should determine when a state can tax the trust. It would be an entirely different story if the beneficiary who lived in North Carolina had actually received some trust income from the trust, which was formed in New York. That trust income clearly would have been subject to state-level income taxes, but at the trust level itself? No.
Bloink: Overturning North Carolina’s law would be the right move in this case, and to do otherwise would create yet another option to allow the super-rich to avoid taxes. Trusts serve any number of completely valid purposes, but shouldn’t serve as tax shelters for the wealthy. So long as a trust has strong contacts to the state itself, the state should be able to tax those funds.