U.S. Supreme Court Looking at Two Cases Relating to State Taxation of Trusts

Minnesota and North Carolina appeal to the Supreme Court in Trust Taxation Cases

The United States Supreme Court will review two petitions for a writ of certiorari from the states of North Carolina and Minnesota. Both states lost cases in their respective State Supreme Courts where the state laws were deemed in violation of the United States Constitution under Due Process Clause. Both states have appealed to the U.S. Supreme court for review.

A Breakdown of the Original Cases

Case 1: North Carolina

The Case: North Carolina Department of Revenue, Petitioner v. The Kimberly Rice Kaestner 1992 Family Trust Current North Carolina Practice: North Carolina taxes trusts based on beneficiary residency. The Original Conclusion: “The North Carolina Supreme Court concluded that a trust and its beneficiaries are legally separate – in other words, that beneficiaries are outsiders to a trust. On that basis, that majority (of the NC Supreme Court) expressly disregarded the trust beneficiaries’ in-state residency and other contacts with North Carolina. That analysis led the majority to conclude that the trust at issue lacked a constitutionally sufficient connection with the state.”

Click here to view the case filings.

Case 2: Minnesota

The Case: Cynthia Bauerly, Commissioner, Minnesota Department of Revenue, Petitioner v. William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. Macdonald, et al. Current Minnesota Practice: Minnesota taxes trusts based on the residency of the grantor when the trust becomes irrevocable. The Original Conclusion: “The grantor’s connections to Minnesota are not relevant to the relationship between the trust’s income that Minnesota seeks to tax and the protection and benefits Minnesota provided to the trusts’ activities that generated that income. The relevant connections are Minnesota’s connection to the trustee, not the connection to the grantor who established the trust years earlier. A trust is its own legal entity, with a legal existence that is separate from the grantor or the beneficiary. Nor did the court find the grantor’s decision to use a Minnesota law firm to draft the trust documents to be relevant. Thus, the grantor Reid MacDonald is not the taxpayer, the trusts are.”

Click here to view the case filings.

What Are the States Asking For?

Both states believe they have the right to tax the trusts under due process clause, given legal abstractions of trusts. The Minnesota Supreme Court concluded that the trust is separate from the Grantor, but the connections between Grantor and the state of Minnesota were not sufficient to tax the trust. Similarly, the North Carolina Supreme Court ruled that a beneficiary and a trust are legally separate and the connection between the beneficiary and the state of North Carolina are not enough to tax the trust.

The question presented by the State of Minnesota: Does the Due Process Clause prohibit states from imposing income taxes on statutory “resident trusts” which have significant additional contacts with the state, but are administered by an out-of-state trustee? The question presented by the State of North Carolina: Does the Due Process Clause prohibit states from taxing trusts based on trust beneficiaries’ in-state residency?

A Constitutional Reminder: The Due Process Clause of the Fourteenth Amendment provides that [n]o state shall…deprive any person of life, liberty, or property, without due process of law.” U.S. Const. Amend. XIV § 1.)

What Lower Courts Had to Say in Regard to Their Decisions

From Minnesota Writ: “This Court has not spoken on the issue in decades, and its precedents point in opposite directions. As a consequence, state appellate courts are deeply divided on the correct answer. Some state appellate courts have held that a state may impose an income tax on a trust even when the trustee resides out-of-state, so long as the grantor resided in-state when the trust became irrevocable. Other courts have required, on top of grantor residence, that the trust have some additional contacts with the state during the tax year. One other state high court has held that a state may tax a trust as a resident if a beneficiary of the trust resided in the state during the tax year.”

From North Carolina Writ:

“This case asks whether the Due Process Clause prohibits states from taxing trusts based on trust beneficiaries’ in-state residency—a question on which nine state courts have split. Because of the Tax Injunction Act, this federal constitutional question is usually litigated in state courts. State courts are divided in their answers to this question, however, because they lack modern guidance from this Court.”

“With that decision, North Carolina joined the ranks of eight other states that have reached conflicting decisions on the question presented here. Five states have concluded that the Due Process Clause forbids states from taxing trusts based on trust beneficiaries’ in-state residency. Four states have concluded the opposite.”

The United States Supreme Court has not ruled on trust taxation since 1947 (Greenough v. Newport 331 U.S. 486 (1947)) and states say that since state courts are split regarding their rulings of trust taxation that a review by the Supreme Court is needed.

Where Concluding States Land

Four state courts have concluded that the Due Process Clause allows states to tax trusts based on trust beneficiaries’ in-state residency:

  • California in McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964)
  • Missouri in Westfall v. Director of Revenue, 812 S.W.2d 513 (Mo. 1991)
  • Connecticut in Chase Manhattan Bank v. Gavin, 733 A.2d 782, 802 (Conn. 1999)
  • Illinois in Linn v. Department of Revenue, 2 N.E. 3d 1203, 1209 (Ill. App. Ct. 2013) – but note that Linn ultimately held that the state could not tax a trust merely because the trust’s settlor had been an Illinois resident.

 

Five states ruled against taxation of trusts:

  • New York in Mercantile-Safe Deposit & Trust Co. v. Murphy, 203 N.E.2d 490, 491 (N.Y. 1964)
  • New Jersey in Potter v. Taxation Division Director, 5 N.J. Tax 399, 405 (N.J. Tax Ct. 1983)
  • Michigan in Blue v. Department of Treasury, 462 N.W.2d 762, 764 (Mich. Ct. App. 1990)
  • North Carolina in this current case: North Carolina Department of Revenue, Petitioner v. The Kimberly Rice Kaestner 1992 Family Trust
  • Minnesota in this current case: Cynthia Bauerly, Commissioner, Minnesota Department of Revenue, Petitioner v. William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. Macdonald, et al. Note that Minnesota rejected both the residency of Grantor and Beneficiary.)

What is the Impact of the Recent Wayfair Case?

In South Dakota v. Wayfair the United States Supreme Court ruled that states may impose sales tax even if the seller does not have a physical presence in the state.

This case could have an impact on future Supreme Court decisions regarding taxation. Although South Dakota’s decision is not an exact template for other states, it could influence how they craft their laws.

Timing

In the North Carolina case, the writ was filed on October 9th, 2018. The taxpayer filed their brief in opposition on November 30th.

The Minnesota case writ was filed on November 15th and docketed on November 21st. The taxpayers have until December 21st to file their response.

Will the Supreme Court Take Both Cases, or One?

Some Potential Outcomes: Ruling for the states – A ruling for the states would have a significant negative impact on out-of-state trust planning and could potentially send grantors to offshore jurisdictions.

Ruling for taxpayers – This will have a significant impact on the 22 states that still impose taxes on trusts and could potentially be a clear law-of-the-land in which all states would need to amend their tax code to comply.

Both cases declined – This is an implicit win for the taxpayers, and would lead to further haggling at the state level, both in courts as well as legislation.

Because Minnesota’s Fielding case includes both grantor and beneficiary issues, the Supreme Court hearing this case would set more comprehensive precedents regarding the taxation of trusts. With the North Carolina Kaestner case, the only issue at hand is the beneficiary’s residence.

There are still a lot of questions and unknowns about the impact of the court’s decisions and a lot of speculation. Either way, there are sure to be some interesting changes ahead.

Who said trust laws had to be boring?

Using NING Trusts to Significantly Reduce State Income Tax Liabilities

Why Wealthy Families are Choosing to Shift Their Wealth to the Tax Favored State of Nevada

The state of Nevada is considered a tax-favored environment, allowing maximum tax protection over trusts and estates. That’s just one of the reasons why more and more people are choosing Nevada as to establish their trusts.

The “NING” trust or Nevada Incomplete-gift Non-Grantor trust reduces state income tax liabilities and simultaneously provides asset protection benefits.

For people with substantial income, assets or large capital gains who could generate significant Federal and state income tax shifting a trust from its current state to a state with more favorable tax laws, such as Nevada, could create significant income tax savings.

While moving to Nevada would allow someone to take advantage of these benefits, relocating family is often not an option. However, by establishing a NING and transferring assets from the existing trust into the NING, the trust will only face Federal capital gains taxes.

Non-Grantor vs. Grantor Trusts

Trusts are set up as either grantor or non-grantor, and it’s important to understand the difference.

Grantor trusts expose the creator of the trust to the taxes incurred by the trust. Non-grantor trusts are set up as their own entities incurring all taxes at the trust level instead of passing them on to the owner of the trust.

Things get murky because every state has its own taxation rules and definitions about which trusts should be considered a resident.

For example, to take advantage of a NING or Nevada’s favorable tax laws in general, a non-grantor trust with a Nevada trustee should be established. By establishing a non-grantor trust in Nevada and appointing a Nevada trustee you can be sure that you’ll minimize or completely eliminate taxes from your state of residence.

A New Aggressive Strategy for Substantial Gains

If a substantial gain is on the horizon, wealthy families can take advantage of ING trusts to adopt a more aggressive tax strategy. ING’s help reduce state income tax at the trust level by establishing it one or more years before a large gain becomes available.

One word of caution, there are specific steps you should follow to ensure that your strategy is not viewed as tax evasion, it’s always best to employ professional guidance to understand how to establish your ING ethically.

Structuring a NING for Maximum Benefit

Since the purpose of establishing a NING trust is to avoid additional taxing, it’s important to properly structure the trust to avoid gift tax. Proper structuring also ensures that the trust really is taxed in Nevada instead of the settlor’s home state.

Remember that NING stands for Nevada Incomplete-Gift Non-Grantor Trust, so when assets are transferred to the trust, it must be in the form of an “incomplete gift.”

Transferring assets as an “incomplete gift” allows the owner of the trust to include your investments in your estate without needing to file a Form 709 gift tax return.

NING Trusts vs. DING Trusts

The DING Trust did come before the NING trust, so one may wonder which is the better situs for a trust, Nevada or Delaware?

While both states allow settlors to appoint a grantor for their trust and take advantage of favorable tax laws, several Delaware rulings have allowed divorcing spouses and creditors to gain access to an asset protection trust. Nevada has never allowed such access in rulings and therefore has more iron clad protection than any other state.

How the Other States Feel About ING Trusts

It’s no surprise that other states aren’t happy about non-grantor trusts and their tax-avoidance benefits, some have even gone as far as banning such trusts.

While both Delaware and Nevada have successfully deflected attempts by other states to tax grantors, that likely won’t stop states from attempting to gain access whenever they can.

However, several statutes in the state of Nevada prove that the state values and protects trusts and estates which are established there and is the safest bet when choosing where to create an ING trust.

To learn more about establishing a NING, please contact Alliance Trust Company.

Alliance Trust Company of Nevada in The Economist

The Economist

Typically well-reasoned and published since 1843, many believe that the Economist is the finest English-print magazine in the world.  The magazine tackles complex global issues with a balance and perspective that only a 170+ year history can provide.  That is why, in the context of the media fury surrounding the “Panama Papers,” that the Economist’s suggestion to publish individual global tax returns (April 9th edition) deserved to be publically questioned.  To the credit of the publication, Gregory Crawford’s letter to the Editor is published in the April 30th print edition.  In the letter, the President of Alliance Trust argues that no benefit will come from such a disclosure plan or the OCED’s related “Common Reporting Standards.”  The impact of sharing detailed personal financial information with rogue governments around the world will not increase U.S. tax revenues by a cent.  In fact, the only meaningful outcome of the proposals is to violate basic personal privacy significantly increase the physical and financial risk to law-abiding citizens and their families around the world.

The Government of Kazakhstan knows my retirement account balance?

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The New York Times “Room for Debate” opinion pages recently asked Gregory Crawford, The President of Alliance Trust Company in Reno to comment on the Panama Papers and the advantages of and lawful usages of shell companies.  In this piece, Greg notes that the vast majority of these companies are used legally, providing a layer of security and privacy for international families in an increasingly dangerous world.

The interest of non-US citizens using foreign grantor trusts in Nevada is increasing dramatically.  Many countries are now recklessly sharing highly-sensitive and otherwise confidential individual financial information with rogue governments around the world under the OCED’s “Common Reporting Standards.” This program, which thankfully the United States is not participating in, gathers and automatically exchanges individual  names, addresses, tax identification numbers, and financial account balances with the governments of Azerbaijan, Cameroon, China, Georgia, Indonesia, Kazakhstan, the Philippines, Russia, Senegal, Tunisia, and Uganda, to name a few.  Where the information might go from there, no one knows.   Many of these countries have Horrific human rights records and serious corruption issues.  Automatically sharing this data will undoubtedly expose law-abiding individuals to the risk of extortion, kidnapping or worse.  The United States should remain proudly “non-compliant” with the CRS and its efforts to violate personal privacy.

it is worth noting that the State of Nevada offers excellent privacy provisions when establishing business entities such as LLCs, and there are options for the US and non-US citizens to keep their financial affairs private in trust.  Please contact Alliance Trust for more information at 775-297-4000.

 

Alliance Presentations in San Diego – Recap of the Gathering

Gathering 5

Last month Alliance Trust presented at the Southern California Institute’s annual “Gathering” of elite advisors from around the country in San Diego.  The topics of the two-day seminar included a panel debating the best family trust jurisdictions, and various methods and strategies to minimize and reduce estate, state and federal income taxes.  Advisors discussed asset protection trusts and other Nevada trust options, with case studies on how they work in practice.  As a Nevada Trust Company, Alliance Trust added insight and expertise on these topics from the perspective of a trustee.  Nevada is considered to have the best trust laws in the country, providing families valuable asset protection, flexibility for planning options and tax minimization for generations.  for more information on Nevada Trusts, please call Greg Crawford at Alliance Trust in Reno at 775-297-4684.

Awareness of NING Trusts Growing Nationally

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Nevada Incomplete Non-Grantor Trusts (or, “NINGs”) are growing in popularity and usage across the country.  NINGs provide the grantor of the trust asset protection and the potential to minimize local and state income taxes on investable/intangible assets.  As this NASDAQ.com Article on NINGS, these types of trusts are not for everyone.

However, a family living in a high-income tax state with significant taxable income and appreciated investments (or investments expected to appreciate) can benefit from a NING. This is just one of many Nevada trust planning strategies that makes Nevada the Asset Protection Trust Rankings   If you are interested in learning more about NINGs, please read this Article by attorney Gordon Schaller and call Greg Crawford at Alliance Trust Company in Reno at 775-297-4684.

Why Sand Hill Road Uses Nevada Trust Strategies

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Alliance Trust Company of Nevada spends significant time in Silicon Valley.  Our clients range from early stage Angel investors, the founders of many fast-growing technology firms, and the partners of some of the most prestigious venture capital firms in the world.  Why are so many people connected with Sand Hill Road using Nevada Trust strategies?  In a word: Flexibility.

Nevada offers exclusive options within its trust and estate laws, and you don’t have to be a Nevada resident to establish and benefit from a Nevada Trust for generations to come.

Simply put, Nevada offers flexibility around common asset protection, tax-minimization, and dynasty provisions that have many around the country recommending Nevada as the best state in the country for trusts.  Even Business Week magazine recently took notice, putting Reno on the cover for its trust and estates activity.

Interested in learning more?  Call Greg Crawford, President of Alliance Trust in Reno at 775-297-4684.

Alliance Trust Proud to Participate in Prestigious UCLA Law Panel

UCLA STEP Asset Protection

Gregory E. Crawford, TEP, President of Alliance Trust Company of Nevada recently participated in a 90-minute discussion panel covering the topics of asset protection planning and the impact of the Uniform Voidable Transfer Act (UVTA).  The panel was moderated by Professor Jerry Hesch (ACTEC Fellow), and included nationally-recognized attorneys Jeffery M. Verdon and John R. Garland, as well as Neal Rubin, Managing Director, International Custody & Asset Protection Solutions of City National Rochdale.  Nevada was highlighted by the panel as one of the best jurisdictions in the United States and world for estate planning.  The UCLA Law School STEP Conference is in its fifth year and attracts hundreds of trust and estate professionals from around the world to Newport Beach, CA each January.  For more information, please review the conference details or call Greg Crawford in Reno at 775-297-4684.

Children Facing Challenges and Your Estate Plan – You Have Options

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For a family dealing with children with handicaps or other challenges, the journey does end when the child turns age 18.  Many parents and families worry about how their adult children will fare after the parents pass away.  Fortunately,  a well crafted family estate plan can provide solutions to these problems.  Children with medical difficulties and handicaps may need a special needs trust to preserve eligibility for government aid and other programs that could be jeopardized by a sudden influx of wealth. For children dealing with substance abuse, a special purpose trust could be the answer.  In some cases, a family may consider disinheriting a child to prevent an inheritance from furthering a destructive lifestyle.  While this is an option, special legal care is needed to ensure that money does not fall into the wrong hands and situation.  Nevada is considered the best state in the country for estate planning, and may offer options and flexibility for your family’s estate plan that your home state does not.  And you do not need to be a resident of Nevada to establish and benefit from a Nevada trust.  Contact Philip Brown at Alliance Trust in Reno at 775-297-4277 to learn more about the advantages of a Nevada Trust.

Nevada Asset Protection Trusts – The Best of the Best

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Why is Nevada considered the best state to establish your family trust?  Nevada trust laws offer a lot of benefits that most other states do not offer.  For many families it comes down to a few factors, including protecting their assets for their beneficiaries, reducing taxes and flexibility in planning strategies.  Two recent articles expand on the issue, including “A Guide to Asset Protection in Nevada” and “Nevada Asset Protection considered the Best of the Best.”  Both articles are worth reading and can help you determine if Nevada is a good option for your family’s trust planning.  For more information, call Greg Crawford, TEP, in Reno at 775-297-4684.

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