North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust

Case Updates

The Supreme Court issued a unanimous decision holding that the Due Process Clause of the Fourteenth Amendment to the Constitution prohibits a state from taxing an out-of-state trust’s income simply because a beneficiary of the trust lives within the state.

Background: North Carolina taxes out-of-state trust income whenever the trust’s beneficiaries live in the State, even if those beneficiaries received no income from the trust, had no right to demand income from it, and could not count on ever receiving such income in the future. The State accordingly assessed taxes on the Kaestner Family trust because one of the trust’s beneficiaries lives in North Carolina—even though the trust is managed out of state, owns no in-state investments, and distributed no income within the State. Indeed, the North Carolina beneficiary did not even have a guarantee of any future trust income because the trustee retained complete discretion over how and when to disburse the trust’s assets among family members. The North Carolina courts held that the Due Process Clause prohibits the State from taxing the Kaestner Family trust because a beneficiary’s residency alone is too tenuous a link between the State and the trust to support the tax. The State sought a writ of certiorari, which the Court granted.

Opinion: In a unanimous opinion, the Court affirmed the judgment of the North Carolina courts, holding that the presence of in-state beneficiaries alone does not empower a state to tax out-of-state trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it. The Court explained that the Due Process Clause requires a state to have a minimum connection with the object of its tax, just as it requires minimum contacts with a defendant for state-court personal jurisdiction. As a result, when a tax is premised on the instate residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the State can tax the asset. Otherwise, the State’s relationship to the trust income is too attenuated to create the required minimum connection. North Carolina lacked that connection to the Kaestner Family trust because the beneficiaries did not receive any income from the trust during the relevant tax years, they had no right to demand such income or otherwise control, possess, or enjoy trust assets, and they also could not count on necessarily receiving any trust income in the future. Justice Alito wrote a concurring opinion, joined by The Chief Justice and Justice Gorsuch. Although all three justices also joined Justice Sotomayor’s majority opinion, they emphasized that the Court’s appropriately narrow opinion merely applies existing precedent and does not reopen them for reconsideration.

Click here to view the Chamber’s amicus brief.

Andrew J. Pincus of Mayer Brown LLP served as co-counsel for the U.S. Chamber of Commerce on behalf of the U.S. Chamber Litigation Center.