Taxing trusts solely based on grantor residence is now unconstitutional in Minnesota
On July 18, 2018, the Minnesota Supreme Court ruled in Respondents v. Commissioner of Revenue that taxing trusts in perpetuity only based on the test that the grantor was a Minnesota resident while the trust became irrevocable is unconstitutional. This decision supports the ruling decided by the Minnesota Tax Court almost exactly one year ago. Moreover, this decision follows similar logic in cases heard in Pennsylvania, New York, and Illinois.
If you are not familiar with Fielding v. Commissioner of Revenue and Respondents v. Commissioner of Revenue, learn more by clicking here.
Current Definition of a Resident Trust In Minnesota
Until now, Minnesota had to look back over two decades when designating a trust as a Minnesota resident.
Two common scenarios designate a trust as a Minnesota resident.
- A non-grantor trust typically created by a will of a decedent domiciled in Minnesota at the time of death.
- An irrevocable trust in which the grantor was a Minnesota resident when the trust became irrevocable.
The Commissioner of Revenue utilized the second scenario when taxing the Fielding gains in 2014. The grantor, Reid MacDonald lived in Minnesota when the four trusts became irrevocable in 2011 as planned when the trusts were established in 2009.
Fielding’s Winning Arguments
In 2014, one of the four trustees, Fielding, sold stocks from the trust realizing substantial gains. Within the current law, the Minnesota Department of Revenue collected taxes on the gains under protest.
Fielding takes his protest to the Minnesota Tax Court. Fielding’s Reasoning For Protest
- Three of four beneficiaries lived outside of Minnesota
- The trust’s investment accounts were administered in California
- None of the trustees lived in Minnesota
- The trust records were not located in Minnesota
However, on the sole basis that the grantor lived in Minnesota when the trusts became irrevocable, Minnesota collected taxes on the gains of the trusts.
Fielding won his case in the Minnesota Tax Court.
The Minnesota Department of Revenue appealed, and the case landed in the Minnesota Supreme Court, but Fielding wins again.
How will the Minnesota Department of Revenue and the Minnesota Legislature react to losing Respondents v. Commissioner of Revenue?
While the timings of any rulings and enactment of statutes is uncertain, we may speculate on what’s to come.
We reached out to our Minnesota network for insight.
Bill Lunka, with SALT Partners, a state and local tax consulting firm in Minnesota. Mr. Lunka told us that, “It is likely that the Department would respond to the Fielding decision by proposing legislation to overcome the constitutional defects in the current law. He said that “The Minnesota Legislature could change the definition of resident trust that would look to the location of the trustees and/or beneficiaries as a basis for determining whether a trust’s income is taxable in Minnesota during any given year.”
Mr. Lunka also noted that if Minnesota goes down the path of determining a trust’s residency based on the location of the trustees he thinks many trustees will, if possible, make the decision to move the trustees outside Minnesota.
At Alliance Trust Company of Nevada, we will closely monitor how the Fielding case impacts Minnesota resident trusts as new legislation materializes. It will be advantageous for many to evaluate their “Minnesota trusts” ensuring they are in a situs allowing the greatest tax and protection benefits.