April 16, 2019
WRIT OF CERTIORARI TO THE SUPREME COURT OF NORTH CAROLINA
Lee Rice III formed a trust for the benefit of his children
home State of New York and appointed a fellow New York
resident as the trustee. The trust agreement granted the
trustee "absolute discretion" to distribute the
trust's assets to the beneficiaries. In 1997, Rice's
daughter, Kimberley Rice Kaestner, moved to North Carolina.
The trustee later divided Rice's initial trust into three
separate sub-trusts, and North Carolina sought to tax the
Kimberley Rice Kaestner 1992 Family Trust (Trust)-formed for
the benefit of Kaestner and her three children-under a law
authorizing the State to tax any trust income that "is
for the benefit of a state resident, N. C. Gen. Stat. Ann.
§105-160.2. The State assessed a tax of more than $1.3
million for tax years 2005 through 2008. During that period,
Kaestner had no right to, and did not receive, any
distributions. Nor did the Trust have a physical presence,
make any direct investments, or hold any real property in the
State. The trustee paid the tax under protest and then sued
the taxing authority in state court, arguing that the tax as
applied to the Trust violates the Fourteenth Amendment's
Due Process Clause. The state courts agreed, holding that the
Kaestners' in-state residence was too tenuous a link
between the State and the Trust to support the tax.
The presence of in-state beneficiaries alone does not empower
a State to tax trust income that has not been distributed to
the beneficiaries where the beneficiaries have no right to
demand that income and are uncertain to receive it. Pp. 5-16.
(a) The Due Process Clause limits States to imposing only
taxes that "bea[r] fiscal relation to protection,
opportunities and benefits given by the state."
Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444.
Compliance with the Clause's demands "requires some
definite link, some minimum connection, between a state and
the person, property or transaction it seeks to tax,"
and that "the 'income attributed to the State for
tax purposes ... be rationally related to "values
connected with the taxing State, "'" Quill
Corp. v. North Dakota, 504 U.S. 298, 306. That
"minimum connection" inquiry is
"flexible" and focuses on the reasonableness of the
government's action. Id., at 307. Pp. 5-6.
(b) In the trust beneficiary context, the Court's due
process analysis of state trust taxes focuses on the extent
of the in-state beneficiary's right to control, possess,
enjoy, or receive trust assets. Cases such as Safe
Deposit & Trust Co. of Baltimore v. Virginia, 280
U.S. 83; Brooke v. Norfolk, 277 U.S. 27; and
Maguire v. Trefry, 253 U.S. 12, reflect a common
principle: When a State seeks to base its tax on the in-state
residence of a trust beneficiary, the Due Process Clause
demands a pragmatic inquiry into what exactly the beneficiary
controls or possesses and how that interest relates to the
object of the State's tax. Safe Deposit, 280
U.S., at 91. Similar analysis also appears in the context of
taxes premised on the in-state residency of settlors and
trustees. See, e.g., Curry v. McCanless, 307 U.S.
357. Pp. 6-10.
(c) Applying these principles here, the residence of the
Trust beneficiaries in North Carolina alone does not supply
the minimum connection necessary to sustain the State's
tax. First, the beneficiaries did not receive any income from
the Trust during the years in question. Second, they had no
right to demand Trust income or otherwise control, possess,
or enjoy the Trust assets in the tax years at issue. Third,
they also could not count on necessarily receiving any
specific amount of income from the Trust in the future. Pp.
(d) The State's counterarguments are unconvincing. First
the State argues that "a trust and its
constituents" are always "inextricably
intertwined," and thus, because trustee residence
supports state taxation, so too must beneficiary residence.
The State emphasizes that beneficiaries are essential to a
trust and have an equitable interest in its assets. Although
a beneficiary is central to the trust relationship, the wide
variation in beneficiaries' interests counsels against
adopting such a categorical rule. Second, the State argues
that ruling in favor of the Trust will undermine numerous
state taxation regimes. But only a small handful of States
rely on beneficiary residency as a sole basis for trust
taxation, and an even smaller number rely on the residency of
beneficiaries regardless of whether the beneficiary is
certain to receive trust assets. Finally, the State urges
that adopting the Trust's position will lead to
opportunistic gaming of state tax systems. There is no
certainty, however, that such behavior will regularly come to
pass, and in any event, mere speculation about negative
consequences cannot conjure the "mini- mum
connection" missing between the State and the object of
its tax. Pp. 13-16.
371 N. C. 133, 814 S.E.2d 43, affirmed.
SOTOMAYOR, J., delivered the opinion for a unanimous Court.
ALITO, J., filed a concurring opinion, in which ROBERTS, C.
J., and GORSUCH, J., joined.
case is about the limits of a State's power to tax a
trust. North Carolina imposes a tax on any trust income that
"is for the benefit of" a North Carolina resident.
N. C. Gen. Stat. Ann. §105-160.2 (2017). The North
Carolina courts interpret this law to mean that a trust owes
income tax to North Carolina whenever the trust's
beneficiaries live in the State, even if-as is the case
here-those beneficiaries received no income from the trust in
the relevant tax year, had no right to demand income from the
trust in that year, and could not count on ever receiving
income from the trust. The North Carolina courts held the tax
to be unconstitutional when assessed in such a case because
the State lacks the minimum connection with the object of its
tax that the Constitution requires. We agree and affirm. As
applied in these circumstances, the State's tax violates
the Due Process Clause of the Fourteenth Amendment.
simplest form, a trust is created when one person (a
"settlor" or "grantor") transfers
property to a third party (a "trustee") to
administer for the benefit of another (a
"beneficiary"). A. Hess, G. Bogert, & G.
Bogert, Law of Trusts and Trustees §1, pp. 8-10 (3d ed.
2007). As traditionally understood, the arrangement that
results is not a "distinct legal entity, but a
'fiduciary relationship' between multiple
people." Americold Realty Trust v. ConAgra Foods,
Inc., 577 U.S.__, __(2016) (slip op., at 5). The trust
comprises the separate interests of the beneficiary, who has
an "equitable interest" in the trust property, and
the trustee, who has a "legal interest" in that
property. Greenough v. Tax Assessors of Newport, 331
U.S. 486, 494 (1947). In some contexts, however, trusts can
be treated as if the trust itself has "a separate
existence" from its constituent parts. Id., at
trust that challenges North Carolina's tax had its first
incarnation nearly 30 years ago, when New Yorker Joseph Lee
Rice III formed a trust for the benefit of his children. Rice
decided that the trust would be governed by the law of his
home State, New York, and he appointed a fellow New York
resident as the trustee. The trust agreement provided that the
trustee would have "absolute discretion" to
distribute the trust's assets to the beneficiaries
"in such amounts and proportions" as the trustee
might "from time to time" decide. Art. I,
§1.2(a), App. 46-47.
Rice created the trust, no trust beneficiary lived in North
Carolina. That changed in 1997, when Rice's daughter,
Kimberley Rice Kaestner, moved to the State. She and her
minor children were residents of North Carolina from 2005
through 2008, the time period relevant for this case.
years after Kaestner moved to North Carolina, the trustee
divided Rice's initial trust into three subtrusts. One of
these subtrusts-the Kimberley Rice Kaestner 1992 Family Trust
(Kaestner Trust or Trust)-was formed for the benefit of
Kaestner and her three children. The same agreement that
controlled the original trust also governed the Kaestner
Trust. Critically, this meant that the trustee had exclusive
control over the allocation and timing of trust
Carolina explained in the state-court proceedings that the
State's only connection to the Trust in the relevant tax
years was the in-state residence of the Trust's
beneficiaries. App. to Pet. for Cert. 54a. From 2005 through
2008, the trustee chose not to distribute any of the income
that the Trust accumulated to Kaestner or her children, and
the trustee's contacts with Kaestner were
"infrequent." 371 N. C. 133, 143, 814 S.E.2d 43, 50
(2018). The Trust was subject to New York law, Art. X, App.
69, the grantor was a New York resident, App. 44, and no
trustee lived in North Carolina, 371 N. C, at 134, 814
S.E.2d, at 45. The trustee kept the Trust documents and
records in New York, and the Trust asset custodians were
located in Massachusetts. Ibid. The Trust also
maintained no physical presence in North Carolina, made no
direct investments in the State, and held no real property
there. App. to Pet. for Cert. 52a-53a.
Trust agreement provided that the Kaestner Trust would
terminate when Kaestner turned 40, after the time period
relevant here. After consulting with Kaestner and in
accordance with her wishes, however, the trustee rolled over
the assets into a new trust instead of distributing them to
her. This transfer took place after the relevant tax years.
See N.Y.Est., Powers & Trusts Law Ann. §10- 6.6(b)
(West 2002) (authorizing this action).
Carolina taxes any trust income that "is for the benefit
of" a North Carolina resident. N. C. Gen. Stat. Ann.
§105-160.2. The North Carolina Supreme Court interprets
the statute to authorize North Carolina to tax a trust on the
sole basis that the trust beneficiaries reside in the State.
371 N. C, at 143-144, 814 S.E.2d, at 51.
this statute, the North Carolina Department of Revenue
assessed a tax on the full proceeds that the Kaestner Trust
accumulated for tax years 2005 through 2008 and required the
trustee to pay it. See N. C. Gen. Stat. Ann. §105-160.2.
The resulting tax bill amounted to more than $1.3 million.
The trustee paid the tax under protest and then sued in state
court, arguing that the tax as applied to the Kaestner Trust
violates the Due Process Clause of the Fourteenth Amendment.
trial court decided that the Kaestners' residence in
North Carolina was too tenuous a link between the State and
the Trust to support the tax and held that the State's
taxation of the Trust violated the Due Process Clause. App.
to Pet. for Cert. 62a. The North Carolina Court of Appeals
affirmed, as did the North Carolina Supreme Court. A majority
of the State Supreme Court reasoned that the Kaestner Trust
and its beneficiaries "have legally separate, taxable
existences" and thus that the contacts between the
Kaestner family ...