Trusts and Situs After Kaestner: Establishing Domicile, Relocating a Trust, and Taxing Beneficiaries

As we slowly come through the uncertainty created by the pandemic and brace for changes in the federal tax code, proper trust jurisdiction selection is more important now than ever. Some states tax a trust based on the location of its administrator, others based on the residence of beneficiaries, and still others may use the state of formation as a basis for taxation. Knowing where a trust is domiciled impacts the taxes paid by the trust and its beneficiaries. Avoiding and deferring these taxes enables significant growth of trust assets, making trust situs a costly or cost-saving determination.

The U.S. Supreme Court in N.C. Dep't of Rev. v. Kimberly Rice Kaestner 1992 Family Trust ruled that a state cannot tax a trust-based solely on the residency of a beneficiary when the beneficiary has no guarantee or right to the income taxed. The Court found that under the Due Process Clause of the U.S. Constitution, a state cannot tax a taxpayer when the taxpayer does not have a minimal connection to the state. Post-Kaestner, advisers and trust administrators need to review past and current residences of beneficiaries, grantors, trustees, and the trust itself. North Carolina had received over 450 refund claims.

Practitioners recognize the benefits of a trust being taxed in one of eight no income tax states (AK, FL, NV, NH, SD, TX, WA, and WY), or the tax-savings of a trust paying tax in a state with a low-income tax rate (i.e., not California). However, other state issues, including privacy, creditor protection, and the availability of powerful trust law concepts such directed trust and trust protectors influence a decision on where to situs a trust.

Listen as our panel of experts explains how to determine a trust's domicile, the methods currently used by states to tax trusts, how to change where a trust is taxed, and the impact of the Kaestner case.

1. Impact of domicile on trusts
   • When and where to set up an out-of-state trust
   • Strategically locating trusts to minimize state taxes
2. Determining situs and state taxation of trust
   • Analyzing the trust document
   • State methods used to determine domicile and trust taxation
3. Trust residency considerations other than tax
4. Changing situs: decanting, modifications, and relocation
5. Impact of N.C. Dep't of Revenue v. Kaestner 1992 Family Trust
   • Which states and methods are impacted
   • When to file a claim for a refund

The panel will review these important issues:

• State methods for taxing trusts
• Situs considerations when forming a trust
• Objective comparison of "top tier" trust jurisdictions
• When and how to relocate a trust
• Impact of Kaestner on trust taxation
• Amending returns in light of Kaestner

Learning Objectives

After completing this course, you will be able to:

• Recognize trusts affected by the Kaestner decision
• Ascertain the best location for a trust
• Determine when it is beneficial to move a trust
• Identify various state methods for taxing trusts

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).