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SCOTUS to Hear Important Case Affecting the Income Taxation of Trusts

SCOTUS to Hear Important Case Affecting the Income Taxation of Trusts

By Elizabeth P. Hunt, Esq.

Maine currently taxes (at a top rate of 7.15%) the income of trusts set up by persons who were Maine residents when they died. This is true even if the trust is administered in another state, there are no Maine trustees, no Maine beneficiaries, no trust income or property in Maine and no other connection to Maine.

So, for example, under Maine’s taxing statute, for decades after the original grantor’s death, a trust with a New York trustee, administered in New York, having only New York sourced income, owning nothing but New York property and benefiting only the grantor’s grandchildren who all live in New York may have to file Maine income tax returns (and possibly pay Maine tax) even though the trust has no ongoing connection with Maine and is not benefiting from Maine’s laws.

How are things changing?

Over the past 5 or 6 years, we have seen a trend of state courts holding their own state taxing statutes unconstitutional when it comes to the income taxation of trusts not having what the courts deem a sufficient nexus to the state. One of these cases involved a statute quite similar to Maine’s.

The Supreme Court of the United States recently granted certiorari in the case of North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, in which North Carolina’s highest court ruled that North Carolina’s taxation of a trust based on a beneficiary’s in-state residency violated both the Commerce Clause and the Due Process Clause of the Constitution.

What happens next?

Affecting hundreds of millions of dollars in annual tax revenues, the Court’s decision will have a serious impact on states as well as on trusts and their beneficiaries.

Depending on the upcoming SCOTUS decision, trustees – in Maine and elsewhere – may decide to challenge a state’s taxation of trust income and seek refunds of taxes previously paid. Stay tuned!