Heidi Schwartz and Joe Bright explain the U.S. Supreme Court’s ruling in N.C. Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, holding that a state cannot tax income from an out-of-state trust based solely on the beneficiaries' residence in the state. The trust was formed under New York State law by a New York State resident for the benefit of his children, including Kimberly Rice Kaestner, who moved to North Carolina after the trust was formed. North Carolina imposed an approximately $1.3 million tax on the trust’s accumulated undistributed income. The court’s holding that the tax was unconstitutional in violation of the due process clause sets a precedent in states with similar statutes as North Carolina. The article draws on prior state cases and discusses other routes to challenge states’ taxation of trust income.
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