Recent Favorable Rulings for Taxpayers

Understanding tax laws, as they apply to trusts, can be very confusing. You may not know what states can lay claim to your trust’s income and how much you have to pay every year.

Some recent court rulings may help you better understand how your trust could be taxed and what impact the taxes have on your overall wealth management. These court judgments better define how much reach a state has when it comes to taxing your trust or the beneficiaries of it.

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

This court ruling clarified whether or not a state can tax a trust just because the beneficiaries live in that particular state. The trustee argued that the trust should not have to pay taxes on trust income because the trust investments were based in Boston and had no contact with North Carolina other than the fact that the beneficiary lived there.

The court agreed that the lack of physical presence or voluntary activity of the taxpayer in North Carolina meant the state had no right to tax the income from it. It found in favor of the trust and stated that applying the North Carolina statute imposing tax on this trust was unconstitutional.

Residuary Trust Under the Will of Fred E. Kassner v. Division of Taxation, State of New Jersey

Another court ruling recently handed down by the court clarified what trust income can be taxed by a state. The case brought attention to New Jersey trying to tax income generated from funds that were based in New York.

In Kassner, a trust was created by a New Jersey decedent that held, among its assets, stock in four S-corporations that did business in New Jersey and elsewhere. The trust made no distributions to beneficiaries for the year in question. The trust paid tax to New Jersey for the New Jersey-based income from the S Corporations but New Jersey wanted to collect tax on the remaining income as well.

The court held that although S-Corporations pass-through income to their shareholders they do not pass-through ownership of the underlying corporate assets. Therefore, the trust does not own New Jersey assets and the only connection the trust has to New Jersey is that the trust was created there. That was not enough to give New Jersey jurisdiction to tax the non-New Jersey trust income.

Rather than leave your trust and its income vulnerable, you would do well to rely on professional financial management and guidance. Protect your assets and pursue your current and future financial goals – please contact Cohen and Burnett P.C. for a consultation.

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