Trust administration and relevant income taxes will be heard by the U.S. Supreme Court in 2019. Since residents of Florida generally pay no personal income taxes, the outcome of this case is of great importance to our state. The Florida personal income taxation policy applies not only to earnings from wages, salaries or tips, it also applies to income received from a Trust. The State of Florida does not generally tax a Trust’s income.
This does not mean that a Florida-based Trust can be certain of avoiding all income tax implications. Many other states seek to collect taxes from Trusts based on the residency of its beneficiaries. In fact, some states seek to collect taxes on a Trust’s earnings even if no distributions are made to beneficiaries.
Is Trust taxation based on the residency of a beneficiary constitutional?
The question of whether this taxation should be allowed under the Constitution is the subject of great legal debate. The issue will be heard by the U.S. Supreme Court during its current session in the case North Carolina Department of Revenue v. the Kimberley Rice Kaestner 1992 Family Trust.
At the heart of this dispute is an effort by a Boston-based Trust to recover $1.3 million in taxes collected by the State of North Carolina. The state imposed the tax on the Trust because its beneficiary lives in North Carolina. The beneficiary hasn’t received any distribution from the Trust, but that didn’t stop the state from collecting the tax and then denying a refund request by administrators of the Trust.
The argument by the State of North Carolina is that the beneficiary receives government services by living in that state, so the state has a right to collect taxes on the Trust’s income. The argument from attorneys for the Trust is that the tax amounts to a violation of due process which is guaranteed by the Constitution.
This issue is currently before the U.S. Supreme Court because courts in four states have ruled it is legal to tax Trusts in the state where a beneficiary resides, and courts in five other states have ruled it is not. The U.S. Supreme Court has decided to hear the case to determine the constitutionality of the taxation issue for all states, and is expected to make its ruling very soon.
How the high court will ultimately rule is anyone’s guess, but what we do know is that a great deal is riding on the outcome. Estate and Trust matters are complex and ever-changing. To keep up with the shifts in laws regarding comprehensive Estate Planning, Wills and Trusts, and Estate and Trust Administration in Florida, consult with our experienced attorneys to best protect your interests and those of your beneficiaries.