Supreme Court undertakes review of trust taxation case

The laws surrounding estate planning can be complex and are ever-changing. One of the ways that the laws that affect California wills and trusts can be affected is through judicial orders. The U.S. Supreme Court is currently hearing arguments on a court case that involves how states may or may not tax trust income based on the connection those trusts have to the states. Our California probate lawyer explains more below.

A trust was created in New York and was then divided into three separate trusts for the creators’ children. One of the children moved to North Carolina and that state began to tax the trust during her period of residency. The situs of the trust was not moved to North Carolina, nor did the woman receive any distributions from it while she lived in North Carolina.

The woman and her family sued to have the state of North Carolina refund what it taxed, which was in excess of $1 million. The state’s high court agreed, but the matter was appealed to the U.S. Supreme Court. Its decision may have far-reaching implications for what the states may do to tax trusts and how much of a connection a trust must have to a state in order for that state to have taxation power over it.

Trusts are often used as testamentary devices to help individuals avoid the probate process and to protect their wealth for future generations. If the Supreme Court holds that North Carolina can tax this woman’s trust based solely on her residency there, trusts throughout the nation may be affected and subject to taxation by the states where beneficiaries live.