Minnesota Trust Taxation

On June 28th, the Supreme Court denied review of a Minnesota case regarding the state’s taxation of trust income. The 2014 case was about Minnesota’s taxation of the income generated by four trusts. While the trustee, William Fielding, paid the tax bill, he filed suit after he was denied a $1 million refund, which represented the difference between taxes owed as a resident trust and taxes owed as a non-resident trust. The creator of the trust, or “grantor,” was a Minnesota resident and so was one of the trust beneficiaries during the tax year at issue.

Additionally, the trusts were created in Minnesota and the trust held investment stock in a Minnesota corporation. However, the trustees were not residents of Minnesota, the trusts were not administered in Minnesota, three of the four beneficiaries were not residents of Minnesota, and not all of the trust income was generated by Minnesota investments. The Minnesota Supreme Court ruled in July of 2018 that these connections were not enough for the State to tax the trust. The Minnesota Department of Revenue petitioned the U.S. Supreme Court to hear the case in order to overturn the decision of the Minnesota Supreme Court. 

Supreme Court Denies Reviewing Minnesota Trust Taxation Case

In the Minnesota Supreme Court’s decision in this trust taxation case, Fielding v. MacDonaald et. al, it essentially deemed the Minnesota statute governing when a trust is taxed as a resident unconstitutional as it applies to several different trusts. Under this statute, Minnesota taxed trusts as residents if the trust grantor was a resident of the state at the time the trust became irrevocable, among other times. The Minnesota Supreme Court expressed concerns for reasons of due process.

To satisfy due process, the person, property, or transaction subject to a tax must have a “minimum connection” to the state. The income that is being taxed must be rationally related to the benefits enjoyed by the taxpayer under the statute. For the purpose of analyzing whether due process is satisfied when taxing a trust, the court found the following factors irrelevant:

  • Choice of Minnesota Law
  • The residence of the grantor for years outside the tax year in question
  • The residence of the beneficiary

Instead of the above factors, the court made it clear that the relevant factors should really focus solely on the trustee. This includes where the trustee resides, where the trust is administered, the location of the trust records, and other factors that would be controlled by the trustee.

Because the U.S. Supreme Court denied review of this decision, it is controlling law in Minnesota right now. The U.S. Supreme Court did give some guidance, however, on this type of case as they heard a case very similar to it in N.C. Dep’t of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. In the opinion that was released in June, the Court stated that minimum connections to the state of North Carolina were needed before the state could tax trust and that the residence of the beneficiary being in North Carolina was not enough. The Court, however, also made it clear that the ruling was limited to the specific facts of the case before it. They were not ruling on another case where there may have been more connections to the state. So, the ruling should be taken with a grain of salt when trying to apply it to other trust taxation cases.

Estate Planning Considers Your Unique Needs

Part of responsible estate planning is taking into consideration things such as tax consequences of your plans. At Unique Estate Law, we not only work to develop a comprehensive estate plan that meets your unique needs, but we also take into consideration what is best for you and your loved ones while looking to potential tax consequences. Contact us today.