Due Process Clause

The Supreme Court’s holding in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust is narrow, precise, and unanimous. The presence of in-state beneficiaries alone does not allow a state to tax undistributed trust income where the beneficiaries have no right to demand that income and may never receive it.

The Kimberley Rice Kaestner trust is governed by New York law and its trustee is a New York resident who has “absolute discretion” to distribute the trust. When the trustees, Kimberley Rice Kaestner and her children, lived in North Carolina the state taxed the income of the trust even though no funds were distributed during the time period. The trust sued North Carolina seeking the $1.3 million it paid in taxes. The trust argued that the tax violated the Due Process Clause of the Fourteenth Amendment.  

In The Law of Trusts and Trustees, George Gleason Bogert describes trusts as a “legal abstraction: a fiction created to represent the tripartite relationship among a settlor, a trustee, and a beneficiary.” The debatable location of a trust makes it difficult for courts to agree which jurisdictions may tax a trust’s income. For example, what if only a trust beneficiary is located in the state, may the state tax the trust’s income? 

In North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust the Supreme Court will decide whether the Due Process Clause prohibits states from taxing trusts based on trust beneficiaries’ in-state residency.