Trust in Tennessee: Kaestner Decision Could Create New Opportunities for Tennessee Planning

Yesterday, the United States Supreme Court unanimously ruled in favor of the trust in North Carolina Department of Revenue v. Kimberley Rice Kaestner  1992 Family Trust .  Although limited to the facts presented in the case, the Court held that accumulated income of a trust held for the benefit of a North Carolina beneficiary who had “no right to demand that income and [was] uncertain to ever receive it,” was not subject to North Carolina state income tax.  Note, however, that the Court described three trust tax regimes that do pass Due Process Clause muster: taxation of trust distributions to a state resident, taxation based on the residence of the trustee, and taxation based on the trust’s place of administration.

Out-of-state residents, with advice of their home-state tax counsel as to their home state income tax treatment of trusts, should consider establishing trusts to be located and administered in Tennessee to avoid state income tax on accumulated trust income.  Additionally,  a new Tennessee law, Tenn. Code Ann. § 35-15-1301, allowing for the creation of special purpose entities to serve as Trust Advisors, may help avoid state income tax in states that tax trusts based on the residence of the trust’s fiduciaries or the trust’s place of administration.

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