North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust
The wait is over — the U.S. Supreme Court spoke on state taxation of trust income. In a much buzzed-about decision, the Court held in a unanimous decision that under the Due Process Clause, North Carolina could not tax trust income based solely on a beneficiary’s residence in the state when the beneficiaries had received no distributions from the trust and, further, had no ability to demand distributions. North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, No. 18-457, 2019 WL 2552488 (2019). It is important to delve into the Court’s opinion because it is narrow in focus and provides limited, if not minimal, guidance outside of the specific facts of this case.
The facts in Kaestner are these: The settlor, a New York resident, established a trust for the benefit of his children who, at the time, all lived in New York. Both the underlying trust property and the trustee were located in New York and the trust instrument was governed by New York State law. The trustee had “ ‘absolute discretion’ to distribute the trust’s assets to the beneficiaries ‘in such amounts and proportions’ as the trustee might ‘from time to time’ decide.” 2019 WL 2552488 at *3. About ten years after the trust was created, one of the beneficiaries moved to North Carolina. Thereafter, the trust was divided into three subtrusts, one for the benefit of Kimberley Rice Kaestner and her minor children, titled the Kimberley Rice Kaestner 1992 Family Trust. Id. North Carolina assessed a tax of $1.3 million for the 2005 – 2008 tax years against the trust for the full proceeds that accumulated during that same period. 2019 WL 2552488 at *1. The trustee paid under protest and then sued the taxing authority in state court, arguing that the tax violated the Fourteenth Amendment’s Due Process Clause. Id.
North Carolina acknowledged in the state court proceedings that the sole connection the trust had to North Carolina was the residence of Kaestner and her children. 2019 WL 2552488 at *3. During the relevant time period, the trustee made no income distributions to the beneficiaries. Likewise, the trustee never came to North Carolina; rather, Kaestner met the trustee only twice, and both times were in New York. No trustee lived in North Carolina, the trust records were kept in New York and Massachusetts, and there were no investments or real property located in North Carolina. Id. Additionally, while the trust could terminate when Kaestner turned 40, the trustee had decanted the trust into a new trust under New York law instead of making a distribution to the beneficiaries. Id.
In deciding whether North Carolina’s imposition of the tax violated the Due Process Clause, the Court applied a two-step analysis:
First, and most relevant here, there must be “some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” [Quill Corp. v. North Dakota ex rel. Heitkamp, 504 U.S. 298, 119 L.Ed.2d 91, 112 S.Ct. 1904, 1909 (1992)]. Second, “the ‘income attributed to the State for tax purposes must be rationally related to “values connected with the taxing State.” ’ ” [112 S.Ct. at 1909 – 1910]. 2019 WL 2552488 at *4 no.5.
The Court acknowledged that it has previously held that a tax on income of the trust distributed to a resident beneficiary is constitutional (see Maguire v. Trefry, 253 U.S. 12, 16 – 17, 64 L.Ed. 739, 40 S.Ct. 417 (1920)), as is a tax based on the trustee’s residence (see Greenough v. Tax Assessors of City of Newport, 331 U.S. 486, 91 L.Ed. 1621, 67 S.Ct. 1400, 1406 (1947)), and likely on the situs of the trust administration (see Hanson v. Denckla, 357 U.S. 235, 2 L.Ed.2d 1283, 78 S.Ct. 1228, 1238 (1958); Curry v. McCanless, 307 U.S. 357, 83 L.Ed. 1339, 59 S.Ct. 900, 907 (1939)). However, the Court hones in on the factual differences between the above cases and the case at hand. In Kaestner, supra, North Carolina sought to make a connection for tax purposes based solely on the residence of the beneficiaries and no other factors. Most significantly, the beneficiaries here did not receive a single distribution, nor could they demand a distribution, during the tax years in question.
Past decisions by the Court considering the basis for tax on a state resident have focused on the “beneficiary’s right to control, possess, enjoy, or receive trust assets.” 2019 WL 2552488 at *1, citing Safe Deposit & Trust Co. of Baltimore, MD. v. Commonwealth of Virginia, 280 U.S. 83, 74 L.Ed. 180, 50 S.Ct. 59 (1929) (state tax invalid when tax applied to entire property of trust rather than beneficiary’s share), and Maguire, supra, 40 S.Ct. at 419 (states can tax in-state beneficiary’s actual distribution from trust as interest in trust property). Here, the trust gave the trustee absolute discretion to make distributions and the beneficiaries had no right to demand distributions, a point that weighs heavily in the Court’s decision. Furthermore, Kaestner and her children had no future expectation of any amount of income from the Trust due to the trustee decanting the trust.
The Court is careful to point out that their holding is limited to the specific facts in this case and not to “imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here.” [Emphasis added.] 2019 WL 2552488 at *5. For that reason, the Kaestner opinion provides little guidance as to what degree of control, possession, or enjoyment by beneficiaries would support taxation of a trust.
Brenner v. Evelyn Statsinger Trust
Possession is nine tenths of the law . . . but you better be able to prove it was a gift.
In Brenner v. Evelyn Statsinger Trust, 2018 IL App (1st) 180131, the plaintiffs-appellees, Ariel and Terry Brenner were determined to be the rightful owners of certain pieces of art (one appropriately titled “Final Burial of a Very Young Dead One”) created by Evelyn Statsinger. The Evelyn Statsinger Trust and Richard Gray Gallery were the defendants-appellants. 2018 IL App (1st) 180131 at ¶1. On appeal, the defendants argued that Statsinger’s possession of the artwork for approximately 20 years created a legal presumption of ownership and the plaintiffs did not rebut the presumption at trial. Id.
The Brenners came to own the four pieces of art at issue through inheritance. The parents of Ariel and her deceased brother, Jonathan, purchased the artwork in the 1950s or 1960s from Evelyn and upon the second of them to die in 1990, Ariel and Jonathan inherited the artworks. 2018 IL App (1st) 180131 at ¶4. Jonathan died in 2010 and his spouse, Terry, was his sole heir. Id.
In or around 1996, the art was transferred to Statsinger in Door County with Terry Brenner and her late husband, Jonathan, present. 2018 IL App (1st) 180131 at ¶5. Ariel Brenner was aware the transfer was occurring, but she did not agree to gift her interest, and Terry Brenner believed the artworks were being loaned to Statsinger for a retrospective. Id. In 2015, the retrospective was put on by Richard Gray Gallery on consignment with Statsinger, and the pieces at issue were listed for sale. 2018 IL App (1st) 180131 at ¶6. Statsinger died in 2016. 2018 IL App (1st) 180131 at ¶5.
At trial, only Ariel and Terry Brenner testified, and they were not cross-examined by the defendants. 2018 IL App (1st) 180131 at ¶3. The Court agreed that, in general, whoever possesses the property is presumed to be the owner. 2018 IL App (1st) 180131 at ¶9, citing Gilbert v. National Cash-Register Co., 176 Ill. 288, 52 N.E. 22, 26 (1898). However, once evidence is presented to rebut the presumption, the presumption no longer exists and the party claiming the property as a gift must establish donative intent by clear and convincing evidence. 2018 IL App (1st) 180131 at ¶¶10, 12, citing Schramm v. Schramm, 13 Ill.2d 281, 148 N.E.2d 799, 803 (1958). Here, neither Ariel nor Jonathan Brenner intended to gift the artworks to Statsinger at the time of the transfer, and it is their intent that is relevant. 2018 IL App (1st) 180131 at ¶14.
In the end, both parties were limited in the evidence they could present by the Dead Man’s Act (735 ILCS 5/8-201), and the appellate court opined that there was more to the story. 2018 IL App (1st) 180131 at ¶15. Nonetheless, the trial court was in the best position to rule on the evidence and that the Brenners were competent to testify about donative intent at the time of the transfer to Statsinger. 2018 IL App (1st) 180131 at ¶16. Once the plaintiffs rebutted the presumption that Statsinger owned the property, the defendants did not meet their burden in proving that Ariel and Jonathan Brenner intended to gift Statsinger with the artworks.
In re Will of Bradway
For those who miss “Game of Thrones,” read this case out of New Jersey in which a codicil written in the decedent’s blood was admitted to probate. In re Will of Bradway, DocketNo. A-4535-16T3, 2018 WL 3097069 (N.J.Super. June 25, 2018).
Warren Bradway died in 2016. He left behind a will dated in 2001, along with a codicil to the will dated in 2006. He wrote the codicil in his own blood. The two documents were competing because they named different individuals as executors and primary beneficiaries. DNA and handwriting experts got involved, but ultimately the words in blood were upheld and the individual named in the 2006 bloody codicil prevailed. And to think we have been worried about electronic wills . . .
Stay tuned: The proposed Illinois Trust Code is currently on Governor Pritzker’s desk for signature. Once it is signed into law, the authors will cover some of the key differences between the current Trusts and Trustees Act and the new Trust Code. While designed to model the Uniform Trust Code, the Illinois Trust Code is decidedly more favorable to the rights of beneficiaries.
For more information about estate planning and probate, see ASSET PROTECTION PLANNING — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.