The case of North Carolina Dept of Revenue v Kimberley Rice Kaestner 1992 Family Trust No. 18-457 hinged around North Carolina’s attempt to tax that trust.

“The  presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it,” the court said in a statement on its website.

“Although the Supreme Court attempted to keep the scope of the ruling narrow, Kaestner could pave the way for future attempts to challenge the taxation of trusts by states. In fact, many states tax trust income based on the grantor’s residence when creating the trust, the location of the beneficiaries and/or the location of the trustees,” according to a commentary in the US Jdspura website that tracks legal cases.

Such cases shed light on the extent to which US citizens can use trusts set up elsewhere to shelter income, enforce privacy and give them a degree of control that might not exist in other states. The Trump administration’s cap on what income tax payers can deduct from state and local tax for federal filing purposes has, practitioners say, increased demand for certain types of trust vehicle. States such as Delaware, New Hampshire, Wyoming, Nevada and South Dakota are known for their tax regimes.

The Jdspura report noted that the US Supreme Court’s decision held that North Carolina’s attempt to tax the trust’s income violated the due process clause of the 14th Amendment to the US Constitution because North Carolina lacked the minimum connection between the taxpayer and the state, and there was no rational relationship between the income and North Carolina.

The article said a crucial point is whether a beneficiary’s presence in a state was sufficient to meet the minimum standard to show a connection.

“The court determined that since no trust income was distributed to the in-state beneficiaries, and such beneficiaries had no right to demand any income, such beneficiaries lacked the requisite control or possession of the trust’s assets to establish a connection to North Carolina,” the article said.

The court statement
The court, in its statement written by Justice Sotomayor, said: “This case is about the limits of a State’s power to tax trust. North Carolina imposes a tax on any trust income that “is for the benefit of ” a North Carolina resident…The North Carolina courts interpret this law to mean that a trust owes income tax to North Carolina whenever the trust’s beneficiaries live in the State, even if - as is the case here - 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 could not count on ever receiving income from the trust. The North Carolina courts held the tax to be unconstitutional when assessed in such a case because the State lacks the minimum connection with the object of its tax that the Constitution requires. We agree and affirm. As applied in these circumstances, the State’s tax violates the Due Process Clause of the  Fourteenth Amendment.”