Affirmation of Powerful State Tax Planning Using Trusts

In a unanimous decision, the Supreme Court in the Kaestner case struck down North Carolina’s attempt to tax undistributed income of a resident trust properly sitused and administered in a no income tax state like South Dakota. In the same session, the Supreme Court denied cert in Fielding, upholding the Minnesota Supreme Court’s decision also striking down that state’s attempt to tax undistributed trust income within a resident trust. The Court, in both cases, indicated that taxation of undistributed income within a resident trust is a violation of the United States constitution, affirming and validating powerful state tax planning tools available in non-income tax jurisdictions like South Dakota. The decisions underscore the vital importance of selecting the proper trust jurisdiction, and again accentuates that the choice of a state in which to establish a trust is as critical as the decision to create one in the planning process.

The two cases addressed and confirmed that it is violation of both the Due Process and Commerce Clauses for states to tax undistributed income in a trust where the only contact with the state is the domicile of the beneficiary (Kaestner) or the settlor (Fielding). The holdings in both cases provide great clarity and guidance for planners and practitioners, and affirms the power of modern trust law and trust jurisdiction selection. If you missed it, click here for a webinar discussing practical implications of the ruling. In addition, click here for information about compelling state tax planning opportunities using trusts properly sitused in top tier, no-income tax jurisdictions like South Dakota. You can also view an objective and well-researched chart comparing top tier U.S. jurisdictions by clicking here.

For more information on these cases and state tax planning tools, please contact Bridgeford Trust via our contact page.