Debevoise & Plimpton LLP prevailed today in a U.S. Supreme Court decision addressing the constitutional limits of state taxation. The case, North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, involves an attempt by North Carolina to tax the undistributed income of a nonresident trustee based solely on the fact that a beneficiary of the trust moved to that state. The decision provides a measure of certainty for the $120 billion in yearly income reported by trusts in the U.S., and for trustees who otherwise might have faced taxes in any state in which a beneficiary or their descendants were residents, regardless of whether anyone in that state ever received any distributions from the trust. The case has been described by outlets from the UCLA Law Review to Forbes as one of the most consequential in decades regarding state taxation and trusts.
In arguments presented to the Supreme Court in April, David A. O’Neil, the partner leading the Debevoise team, argued that the trustee had no ties to North Carolina and therefore that, under bedrock principles of due process, the trust income was not within the State’s taxing power. Mr. O’Neil explained that the tax was “premised on the prediction” that the beneficiary would receive the trust fund, “but, in fact, at the time the State imposed the tax,” that was “unknown and unknowable.” Mr. O’Neil concluded by arguing that the case presents a “textbook application of the settled rule that the unilateral activity of a third party does not create jurisdiction.” The decision reinforces the opinion of the North Carolina Supreme Court, which had ruled last year that North Carolina’s taxation of the trust based only on the beneficiary’s residence was unconstitutional.
The Debevoise team representing the Kaestner Family Trust is led by partner David A. O’Neil and counsel Anna A. Moody. It also includes associates Laura E. O’Neill, Katherine L. Nelson and Joshua B. Pickar. Debevoise partner David H. Bernstein has been trustee of the Kaestner Family Trust since 2005.
The Supreme Court’s decision is available here.
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