Those who have created, or are considering creating, an irrevocable, non-grantor trust should be aware of a recent U.S. Supreme Court ruling that affects how trust income is taxed. Prior to the ruling, a state may have taxed a trust as a “resident” simply because a beneficiary lived in that state, regardless of whether that beneficiary received any trust distributions.
However, in June of 2019 the Supreme Court ruled (in the case of the North Carolina Department of Revenue versus the Kimberley Rice Kaestner 1992 Family Trust) that there must be a sufficient relationship between the trust and the state, beyond a beneficiary simply living there, for that state to tax the income of the trust.
“This is good news for those who have created or are considering creating an irrevocable trust,” explains Marcia Urban, Wealth Strategist with Cresset’s Minneapolis office. “Now, states must have more justification or more factors by which to demonstrate a meaningful connection with a trust beyond just beneficiary residency.”
What does all this mean for the creators of trusts and trustees?
“The Supreme Court ruling provides an ideal reason to connect with your financial advisors and estate planning professionals to review the terms of any trust you have or are thinking of creating,” Urban says. “Now is the time to explore whether moving a trust to a state like South Dakota makes sense in order to take advantage of other taxpayer-favorable laws.”