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Elder Planning Isn't Just For The Elderly

Changes may be coming to how trusts are taxed

A legal case regarding a New York trust has made its way to the United States Supreme Court. The outcome of its legal dilemma may have far-reaching effects on how trusts across the nation are taxed, and because this is a significant legal topic, this post will discuss the case’s facts, arguments and possible legal ramifications once it is decided.

A family trust was created in New York and then was split into three separate trusts, one for each of the children of the family. The situs of the trust remained in New York, but from 2005 to 2008 the state of North Carolina taxed the trust in excess of $1 million. This was done because one of the children moved to North Carolina and resided there during the period of taxation.

The child beneficiary of the trust did not take payments or distributions from the trust, nor did any structure of the trust change to cause it to be administered in North Carolina. Rather, the state of North Carolina decided that simply having the child live within its borders was enough to allow it to tax their trust. States can only tax trusts when they have a minimal connection to each other.

While the highest court in North Carolina declared that the child’s residence in the state was not enough to allow the state to impose taxes on the trust, the US Supreme Court will have the final say on how this matter should be resolved. If the court holds that North Carolina can tax the out-of-state trust, beneficiaries across the nation may see their trusts taxed by their states of residence even if those trusts are administered elsewhere. Those dealing with issues concerning a trust should take the time to understand the matter. This can help resolve any problems that may arise.

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