U.S. Supreme Court hears arguments in Kaestner trust tax nexus case

Apr 19, 2019
Apr 19, 2019
0 min. read

On April 16, 2019, the U.S. Supreme Court heard oral argument in North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, the challenge to North Carolina’s tax on the undistributed income of a trust earned for the benefit of an in-state resident. The Court, tasked with reviewing a state tax nexus case for the second year in a row, was asked to consider whether the Due Process Clause of the U.S. Constitution prohibited a state from taxing a trust based on a beneficiary’s state of residency.

RSM was onsite early to attend in person. While interest in the argument may not have resulted in long lines like last year’s historic South Dakota v. Wayfair, the courtroom was full of state tax and trust professionals, accountants and attorneys eager to hear the Court explore the multistate taxation of a trust. While fewer attendees were turned away than Wayfair, the impact of Kaestner could have similarly far-reaching implications to all of state tax.

Oral argument highlights

The North Carolina Solicitor General began the arguments. He asserted that the state’s tax on the beneficiary’s pro-rata interest in the trust satisfied due process because of all the benefits and protections that states extend to their residents. Justice Ginsburg quickly posed the first question, leading to a lengthy discussion on whether, and how, the beneficiary is sufficiently connected to the trust to support taxing the accumulating trust income. Recall that in this case, the trust beneficiary was a North Carolina resident who received no trust distributions and exercised no control over the trust assets for the period in question.

Several Justices expressed concern that there was no guarantee that the beneficiaries would receive any distribution from the trust as it was based entirely on the trustee’s discretion. Justice Breyer noted that “there could be something wrong” with a state taxing the accumulated income of the trust based on a resident beneficiary who may not receive any distribution. Justice Breyer continued questioning the imposition of the tax based on the pro-rata share of beneficiaries residing in the state. He noted that the proportion of beneficiaries in the state may not be representative of the value of the eventual distribution, if any, to the beneficiary.

The Solicitor General reiterated that the state’s taxing scheme was fair because trust beneficiaries have true ownership of the accumulating assets, and that the state residents avail themselves of all the services, benefits and protections a state provides to its resident citizens. Later in the argument, Justice Kagan expressed that it did not “make a whole lot of sense” that, between North Carolina and Connecticut (where the trustee resided), the taxing authority for the undistributed growth of the trust should be in a state where no one was benefiting from the income growth, i.e., the trustee was not benefiting from the trust’s growth. The Justice indicated that she thought North Carolina had the greater interest in taxation because the beneficiary, who was accumulating wealth in the trust during the periods in question, resided there.

Throughout the hour-long session, a number of other arguments and issues were raised, including counsel for the taxpayer highlighting that the beneficiary had no control over management of the trust’s assets. The beneficiary did not have the right to demand trust distributions, while the trustee exercised most, if not all of the control over the trust.

The Justices challenged counsel for both the taxpayer and the state, appearing to express uncertainty over the state’s law. However, like most arguments before the Court, there was no clear consensus on how the decision may come down.


Kaestner provides the Court an opportunity to revisit the application of the Due Process Clause in the context of state taxation, the first significant opportunity to do so since Quill Corp. v. North Dakota in 1992. Although the challenge is within the context of a state’s authority to tax the income of a trust, a broad decision by the Court could have significant implications to other state taxes, including corporate and individual income taxes, and sales and use taxes.  

With oral argument complete, a decision is anticipated by the end of June. A transcript of the oral argument is available here.

A similar due process-related trust taxation decision out of Minnesota, Fielding v. Commissioner of Revenue, rejected a rule that taxed the trust based on the location of the grantor. Fielding is currently on petition to the Court.

For more information on Kaestner, please read our article, U.S. Supreme Court to hear Kaestner trust tax nexus case, and reach out to your tax adviser to discuss steps you can take now, before the decision comes down.

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