Respondents v. Commissioner of Revenue to set precedent for trusts administered in Minnesota
Last year (2017), the Minnesota Tax Court ruled that treating irrevocable trusts as residents in Minnesota for income taxes is unconstitutional in Fielding v. Commissioner of Revenue. The state of Minnesota appealed the ruling bringing the case to the Minnesota Supreme Court where a new ruling is expected to be decided this month (June 2018).
In 2009, Reid MacDonald established four irrevocable trusts, one for each of his children, while residing in Minnesota. The trusts were deemed to become irrevocable in 2011, at which time the grantor resided in Minnesota.
No trustees were Minnesota residents. All but one beneficiary resided outside the state of Minnesota. The trusts only held investment accounts administered in the state of California.
However, the trusts owned stocks of a Minnesota company (Faribault Foods) and sold them in 2014 to a third party placing significant proceeds in an investment account.
In 2014, the four trusts filed a Minnesota Fiduciary Income Tax Return as resident trusts. Each trust paid their tax liabilities under protest with the argument that Minnesota’s definition of resident trust was unconstitutional and therefore, each trust filed refund claims.
The U.S. Constitution states that taxes imposed by a state must have a justified and contemporaneous relationship with the benefits and protections offered by the state.
Because the trusts were administered in California, they were receiving no benefits or protections from Minnesota. Thus, the Minnesota Tax Court concluded that denying the trusts’ refunds was an error by the Commissioner. Courts in New York, Pennsylvania, and Illinois reached similar conclusions regarding cases focused on the constitutionality of taxes.
The Minnesota Department of Revenue appealed the Fielding decision, and the case is now being decided in the Minnesota Supreme Court.
Constitutional Basis of Appeal
Two primary issues are being presented to the Minnesota Supreme Court.
- Are the four irrevocable trusts connected to Minnesota sufficiently enough to justify the taxation of the trusts as residents of Minnesota for the 2014 tax year while adhering to the Constitution’s Due Process Clause?
- Should the Constitution’s Commerce Clause disallow Minnesota from taxing the trusts as Minnesota residents for 2014?
If the Court decides in favor of Fielding, the impacts are far-reaching.
Location, Location, Location
Should the court decide in favor of Fielding, the precedent set could impact living trusts that were originally established in Minnesota and then amended as irrevocable while residing outside of Minnesota. If a trust paid income tax to Minnesota after being administered in another state while the grantor resided outside of Minnesota, the trust would be entitled to a refund.
At Alliance Trust Company of Nevada, we believe there are opportunities for decanting Minnesota trusts to domiciles with no income tax, such as Nevada, while also gaining asset protection advantages.
We are closely monitoring the Fielding case and will provide an update when a decision is reached.