North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trust , 294 L. Ed. 2d 621 ( 2019 )

(Slip Opinion) OCTOBER TERM, 2018 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
NORTH CAROLINA DEPARTMENT OF REVENUE v.
KIMBERLEY RICE KAESTNER 1992 FAMILY TRUST
CERTIORARI TO THE SUPREME COURT OF NORTH CAROLINA
No. 18–457. Argued April 16, 2019—Decided June 21, 2019
Joseph Lee Rice III formed a trust for the benefit of his children in his
home State of New York and appointed a fellow New York resident as
the trustee. The trust agreement granted the trustee “absolute dis-
cretion” to distribute the trust’s assets to the beneficiaries. In 1997,
Rice’s daughter, Kimberley Rice Kaestner, moved to North Carolina.
The trustee later divided Rice’s initial trust into three separate sub-
trusts, and North Carolina sought to tax the Kimberley Rice
Kaestner 1992 Family Trust (Trust)—formed for the benefit of
Kaestner and her three children—under a law authorizing the State
to tax any trust income that “is for the benefit of” a state resident,
N. C. Gen. Stat. Ann. §105–160.2. The State assessed a tax of more
than $1.3 million for tax years 2005 through 2008. During that peri-
od, Kaestner had no right to, and did not receive, any distributions.
Nor did the Trust have a physical presence, make any direct invest-
ments, or hold any real property in the State. The trustee paid the
tax under protest and then sued the taxing authority in state court,
arguing that the tax as applied to the Trust violates the Fourteenth
Amendment’s Due Process Clause. The state courts agreed, holding
that the Kaestners’ in-state residence was too tenuous a link between
the State and the Trust to support the tax.
Held: The presence of in-state beneficiaries alone does not empower a
State to tax trust income that has not been distributed to the benefi-
ciaries where the beneficiaries have no right to demand that income
and are uncertain to receive it. Pp. 5–16.
(a) The Due Process Clause limits States to imposing only taxes
that “bea[r] fiscal relation to protection, opportunities and benefits
given by the state.” Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444.
Compliance with the Clause’s demands “requires some definite link,
2 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Syllabus
some minimum connection, between a state and the person, property
or transaction it seeks to tax,” and that “the ‘income attributed to the
State for tax purposes . . . be rationally related to “values connected
with the taxing State,” ’ ” Quill Corp. v. North Dakota, 504 U.S. 298,
306. That “minimum connection” inquiry is “flexible” and focuses on
the reasonableness of the government’s action. Id., at 307. Pp. 5–6.
(b) In the trust beneficiary context, the Court’s due process analy-
sis of state trust taxes focuses on the extent of the in-state benefi-
ciary’s right to control, possess, enjoy, or receive trust assets. Cases
such as Safe Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S.
83; Brooke v. Norfolk, 277 U.S. 27; and Maguire v. Trefry, 253 U.S.
12, reflect a common principle: When a State seeks to base its tax on
the in-state residence of a trust beneficiary, the Due Process Clause
demands a pragmatic inquiry into what exactly the beneficiary con-
trols or possesses and how that interest relates to the object of the
State’s tax. Safe Deposit, 280 U.S., at 91. Similar analysis also ap-
pears in the context of taxes premised on the in-state residency of
settlors and trustees. See, e.g., Curry v. McCanless, 307 U.S. 357.
Pp. 6–10.
(c) Applying these principles here, the residence of the Trust bene-
ficiaries in North Carolina alone does not supply the minimum con-
nection necessary to sustain the State’s tax. First, the beneficiaries
did not receive any income from the Trust during the years in ques-
tion. Second, they had no right to demand Trust income or otherwise
control, possess, or enjoy the Trust assets in the tax years at issue.
Third, they also could not count on necessarily receiving any specific
amount of income from the Trust in the future. Pp. 10–13.
(d) The State’s counterarguments are unconvincing. First the
State argues that “a trust and its constituents” are always “inextri-
cably intertwined,” and thus, because trustee residence supports
state taxation, so too must beneficiary residence. The State empha-
sizes that beneficiaries are essential to a trust and have an equitable
interest in its assets. Although a beneficiary is central to the trust
relationship, the wide variation in beneficiaries’ interests counsels
against adopting such a categorical rule. Second, the State argues
that ruling in favor of the Trust will undermine numerous state taxa-
tion regimes. But only a small handful of States rely on beneficiary
residency as a sole basis for trust taxation, and an even smaller
number rely on the residency of beneficiaries regardless of whether
the beneficiary is certain to receive trust assets. Finally, the State
urges that adopting the Trust’s position will lead to opportunistic
gaming of state tax systems. There is no certainty, however, that
such behavior will regularly come to pass, and in any event, mere
speculation about negative consequences cannot conjure the “mini-
Cite as: 588 U. S. ____ (2019) 3
Syllabus
mum connection” missing between the State and the object of its tax.
Pp. 13–16.
371 N. C. 133, 814 S.E.2d 43, affirmed.
SOTOMAYOR, J., delivered the opinion for a unanimous Court. ALITO,
J., filed a concurring opinion, in which ROBERTS, C. J., and GORSUCH, J.,
joined.
Cite as: 588 U. S. ____ (2019) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash-
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
No. 18–457
_________________
NORTH CAROLINA DEPARTMENT OF REVENUE,
PETITIONER v. THE KIMBERLEY RICE
KAESTNER 1992 FAMILY TRUST
ON WRIT OF CERTIORARI TO THE SUPREME COURT OF
NORTH CAROLINA
[June 21, 2019]
JUSTICE SOTOMAYOR delivered the opinion of the Court.
This case is about the limits of a State’s power to tax a
trust. North Carolina imposes a tax on any trust income
that “is for the benefit of ” a North Carolina resident.
N. C. Gen. Stat. Ann. §105–160.2 (2017). The North Caro-
lina courts interpret this law to mean that a trust owes
income tax to North Carolina whenever the trust’s benefi-
ciaries live in the State, even if—as is the case here—those
beneficiaries received no income from the trust in the
relevant tax year, had no right to demand income from the
trust in that year, and could not count on ever receiving
income from the trust. The North Carolina courts held the
tax to be unconstitutional when assessed in such a case
because the State lacks the minimum connection with the
object of its tax that the Constitution requires. We agree
and affirm. As applied in these circumstances, the State’s
tax violates the Due Process Clause of the Fourteenth
Amendment.
2 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
I
A
In its simplest form, a trust is created when one person
(a “settlor” or “grantor”) transfers property to a third party
(a “trustee”) to administer for the benefit of another (a
“beneficiary”). A. Hess, G. Bogert, & G. Bogert, Law of
Trusts and Trustees §1, pp. 8–10 (3d ed. 2007). As tradi-
tionally understood, the arrangement that results is not a
“distinct legal entity, but a ‘fiduciary relationship’ between
multiple people.” Americold Realty Trust v. ConAgra
Foods, Inc., 577 U. S. ___, ___ (2016) (slip op., at 5). The
trust comprises the separate interests of the beneficiary,
who has an “equitable interest” in the trust property, and
the trustee, who has a “legal interest” in that property.
Greenough v. Tax Assessors of Newport, 331 U.S. 486, 494
(1947). In some contexts, however, trusts can be treated
as if the trust itself has “a separate existence” from its
constituent parts. Id., at 493.1
The trust that challenges North Carolina’s tax had its
first incarnation nearly 30 years ago, when New Yorker
Joseph Lee Rice III formed a trust for the benefit of his
children. Rice decided that the trust would be governed by
the law of his home State, New York, and he appointed a
fellow New York resident as the trustee.2 The trust
agreement provided that the trustee would have “absolute
discretion” to distribute the trust’s assets to the beneficiar-
ies “in such amounts and proportions” as the trustee
might “from time to time” decide. Art. I, §1.2(a), App. 46–
47.
When Rice created the trust, no trust beneficiary lived
——————
1 Most notably, trusts are treated as distinct entities for federal taxa-
tion purposes. Greenough, 331 U.S., at 493; see Anderson v. Wilson,
289 U.S. 20, 26–27 (1933).
2 This trustee later was succeeded by a new trustee who was a Con-
necticut resident during the relevant time period.
Cite as: 588 U. S. ____ (2019) 3
Opinion of the Court
in North Carolina. That changed in 1997, when Rice’s
daughter, Kimberley Rice Kaestner, moved to the State.
She and her minor children were residents of North Caro-
lina from 2005 through 2008, the time period relevant for
this case.
A few years after Kaestner moved to North Carolina,
the trustee divided Rice’s initial trust into three subtrusts.
One of these subtrusts—the Kimberley Rice Kaestner
1992 Family Trust (Kaestner Trust or Trust)—was formed
for the benefit of Kaestner and her three children. The
same agreement that controlled the original trust also
governed the Kaestner Trust. Critically, this meant that
the trustee had exclusive control over the allocation and
timing of trust distributions.
North Carolina explained in the state-court proceedings
that the State’s only connection to the Trust in the rele-
vant tax years was the in-state residence of the Trust’s
beneficiaries. App. to Pet. for Cert. 54a. From 2005
through 2008, the trustee chose not to distribute any of
the income that the Trust accumulated to Kaestner or her
children, and the trustee’s contacts with Kaestner were
“infrequent.”3 371 N. C. 133, 143, 814 S.E.2d 43, 50
(2018). The Trust was subject to New York law, Art. X,
App. 69, the grantor was a New York resident, App. 44,
and no trustee lived in North Carolina, 371 N. C., at 134,
814 S.E.2d, at 45. The trustee kept the Trust documents
and records in New York, and the Trust asset custodians
were located in Massachusetts. Ibid. The Trust also
maintained no physical presence in North Carolina, made
no direct investments in the State, and held no real prop-
erty there. App. to Pet. for Cert. 52a–53a.
——————
3 The state court identified only two meetings between Kaestner and
the trustee in those years, both of which took place in New York. 371
N. C. 133, 143, 814 S.E.2d 43, 50 (2018). The trustee also gave
Kaestner accountings of trust assets and legal advice concerning the
Trust. Id., at 135, 814 S. E. 2d, at 45.
4 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
The Trust agreement provided that the Kaestner Trust
would terminate when Kaestner turned 40, after the time
period relevant here. After consulting with Kaestner and
in accordance with her wishes, however, the trustee rolled
over the assets into a new trust instead of distributing
them to her. This transfer took place after the relevant
tax years. See N. Y. Est., Powers & Trusts Law Ann. §10–
6.6(b) (West 2002) (authorizing this action).
B
North Carolina taxes any trust income that “is for the
benefit of ” a North Carolina resident. N. C. Gen. Stat.
Ann. §105–160.2. The North Carolina Supreme Court
interprets the statute to authorize North Carolina to tax a
trust on the sole basis that the trust beneficiaries reside in
the State. 371 N. C., at 143–144, 814 S.E.2d, at 51.
Applying this statute, the North Carolina Department of
Revenue assessed a tax on the full proceeds that the
Kaestner Trust accumulated for tax years 2005 through
2008 and required the trustee to pay it. See N. C. Gen.
Stat. Ann. §105–160.2. The resulting tax bill amounted to
more than $1.3 million. The trustee paid the tax under
protest and then sued in state court, arguing that the tax
as applied to the Kaestner Trust violates the Due Process
Clause of the Fourteenth Amendment.
The trial court decided that the Kaestners’ residence in
North Carolina was too tenuous a link between the State
and the Trust to support the tax and held that the State’s
taxation of the Trust violated the Due Process Clause.
App. to Pet. for Cert. 62a.4 The North Carolina Court of
Appeals affirmed, as did the North Carolina Supreme
Court. A majority of the State Supreme Court reasoned
that the Kaestner Trust and its beneficiaries “have legally
——————
4 The trial court also held that North Carolina’s tax violates the
dormant Commerce Clause. The state appellate courts did not affirm
on this basis, and we likewise do not address this challenge.
Cite as: 588 U. S. ____ (2019) 5
Opinion of the Court
separate, taxable existences” and thus that the contacts
between the Kaestner family and their home State cannot
establish a connection between the Trust “itself ” and the
State. 371 N. C., at 140–142, 814 S.E.2d, at 49.
We granted certiorari to decide whether the Due Process
Clause prohibits States from taxing trusts based only on
the in-state residency of trust beneficiaries. 586 U. S. ___
(2019).
II
The Due Process Clause provides that “[n]o State shall
. . . deprive any person of life, liberty, or property, without
due process of law.” Amdt. 14, §1. The Clause “centrally
concerns the fundamental fairness of governmental activ-
ity.” Quill Corp. v. North Dakota, 504 U.S. 298, 312
(1992), overruled on other grounds, South Dakota v. Way-
fair, Inc., 585 U. S. ___, ___ (2018) (slip op., at 10).
In the context of state taxation, the Due Process Clause
limits States to imposing only taxes that “bea[r] fiscal
relation to protection, opportunities and benefits given by
the state.” Wisconsin v. J. C. Penney Co., 311 U.S. 435,
444 (1940). The power to tax is, of course, “essential to the
very existence of government,” McCulloch v. Maryland, 4
Wheat. 316, 428 (1819), but the legitimacy of that power
requires drawing a line between taxation and mere unjus-
tified “confiscation.” Miller Brothers Co. v. Maryland, 347
U.S. 340, 342 (1954). That boundary turns on the “[t]he
simple but controlling question . . . whether the state has
given anything for which it can ask return.” Wisconsin,
311 U.S., at 444.
The Court applies a two-step analysis to decide if a state
tax abides by the Due Process Clause. 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, 504 U.S.,
at 306. Second, “the ‘income attributed to the State for tax
6 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
purposes must be rationally related to “values connected
with the taxing State.” ’ ” Ibid.5
To determine whether a State has the requisite “mini-
mum connection” with the object of its tax, this Court
borrows from the familiar test of International Shoe Co. v.
Washington, 326 U.S. 310 (1945). Quill, 504 U.S., at 307.
A State has the power to impose a tax only when the taxed
entity has “certain minimum contacts” with the State such
that the tax “does not offend ‘traditional notions of fair
play and substantial justice.’ ” International Shoe Co., 326
U.S., at 316; see Quill, 504 U.S., at 308. The “minimum
contacts” inquiry is “flexible” and focuses on the reason-
ableness of the government’s action. Quill, 504 U.S., at
307. Ultimately, only those who derive “benefits and
protection” from associating with a State should have
obligations to the State in question. International Shoe,
326 U.S., at 319.
III
One can imagine many contacts with a trust or its con-
stituents that a State might treat, alone or in combination,
as providing a “minimum connection” that justifies a tax
on trust assets. The Court has already held that a tax on
trust income distributed to an in-state resident passes
muster under the Due Process Clause. Maguire v. Trefry,
253 U.S. 12, 16–17 (1920). So does a tax based on a trus-
tee’s in-state residence. Greenough, 331 U.S., at 498. The
Court’s cases also suggest that a tax based on the site of
trust administration is constitutional. See Hanson v.
Denckla, 357 U.S. 235, 251 (1958); Curry v. McCanless,
307 U.S. 357, 370 (1939).
A different permutation is before the Court today. The
Kaestner Trust made no distributions to any North Caro-
——————
5 Because North Carolina’s tax on the Kaestner Trust does not meet
Quill’s first requirement, we do not address the second.
Cite as: 588 U. S. ____ (2019) 7
Opinion of the Court
lina resident in the years in question. 371 N. C., at 134–
135, 814 S.E.2d, at 45. The trustee resided out of State,
and Trust administration was split between New York
(where the Trust’s records were kept) and Massachusetts
(where the custodians of its assets were located). Id., at
134, 814 S.E.2d, at 45. The trustee made no direct in-
vestments in North Carolina in the relevant tax years,
App. to Pet. for Cert. 52a, and the settlor did not reside in
North Carolina. 371 N. C., at 134, 814 S.E.2d, at 45. Of
all the potential kinds of connections between a trust and
a State, the State seeks to rest its tax on just one: the in-
state residence of the beneficiaries. Brief for Petitioner
34–36; see App. to Pet. for Cert. 54a.
We hold that the presence of in-state beneficiaries alone
does not empower a State to tax trust income that has not
been distributed to the beneficiaries where the beneficiar-
ies have no right to demand that income and are uncertain
ever to receive it. In limiting our holding to the specific
facts presented, we do not imply approval or disapproval
of trust taxes that are premised on the residence of benefi-
ciaries whose relationship to trust assets differs from that
of the beneficiaries here.
A
In the past, the Court has analyzed state trust taxes for
consistency with the Due Process Clause by looking to the
relationship between the relevant trust constituent (set-
tlor, trustee, or beneficiary) and the trust assets that the
State seeks to tax. In the context of beneficiary contacts
specifically, the Court has focused on the extent of the in-
state beneficiary’s right to control, possess, enjoy, or re-
ceive trust assets.
The Court’s emphasis on these factors emerged in two
early cases, Safe Deposit & Trust Co. of Baltimore v. Vir-
ginia, 280 U.S. 83 (1929), and Brooke v. Norfolk, 277 U.S.
27 (1928), both of which invalidated state taxes premised
8 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
on the in-state residency of beneficiaries. In each case
the challenged tax fell on the entirety of a trust’s property,
rather than on only the share of trust assets to which the
beneficiaries were entitled. Safe Deposit, 280 U.S., at 90,
92; Brooke, 277 U.S., at 28. In Safe Deposit, the Court
rejected Virginia’s attempt to tax a trustee on the “whole
corpus of the trust estate,” 280 U.S., at 90; see id., at 93,
explaining that “nobody within Virginia ha[d] present
right to [the trust property’s] control or possession, or to
receive income therefrom,” id., at 91. In Brooke, the Court
rejected a tax on the entirety of a trust fund assessed
against a resident beneficiary because the trust property
“[wa]s not within the State, d[id] not belong to the [benefi-
ciary] and [wa]s not within her possession or control.” 277
U.S., at 29.6
On the other hand, the same elements of possession,
control, and enjoyment of trust property led the Court to
uphold state taxes based on the in-state residency of bene-
ficiaries who did have close ties to the taxed trust assets.
The Court has decided that States may tax trust income
that is actually distributed to an in-state beneficiary. In
those circumstances, the beneficiary “own[s] and enjoy[s]”
an interest in the trust property, and the State can exact a
tax in exchange for offering the beneficiary protection.
Maguire, 253 U.S., at 17; see also Guaranty Trust Co. v.
Virginia, 305 U.S. 19, 21–23 (1938).
——————
6 TheState contends that Safe Deposit is no longer good law under
the more flexible approach in International Shoe Co. v. Washington,
326 U.S. 310 (1945), and also because it was premised on the view,
later disregarded in Curry v. McCanless, 307 U.S. 357, 363 (1939), that
the Due Process Clause forbids “double taxation.” Brief for Petitioner
27–28, and n. 12. We disagree. The aspects of the case noted here are
consistent with the pragmatic approach reflected in International Shoe,
and Curry distinguished Safe Deposit not because the earlier case
incorrectly relied on concerns of double taxation but because the benefi-
ciaries there had “[n]o comparable right or power” to that of the settlor
in Curry. 307 U.S., at 371, n. 6.
Cite as: 588 U. S. ____ (2019) 9
Opinion of the Court
All of the foregoing cases reflect a common governing
principle: When a State seeks to base its tax on the in-
state residence of a trust beneficiary, the Due Process
Clause demands a pragmatic inquiry into what exactly the
beneficiary controls or possesses and how that interest
relates to the object of the State’s tax. See Safe Deposit,
280 U.S., at 91.
Although the Court’s resident-beneficiary cases are most
relevant here, similar analysis also appears in the context
of taxes premised on the in-state residency of settlors and
trustees. In Curry, for instance, the Court upheld a Ten-
nessee trust tax because the settlor was a Tennessee
resident who retained “power to dispose of ” the property,
which amounted to “a potential source of wealth which
was property in her hands.” 307 U.S., at 370. That prac-
tical control over the trust assets obliged the settlor “to
contribute to the support of the government whose protec-
tion she enjoyed.” Id., at 371; see also Graves v. Elliott,
307 U.S. 383, 387 (1939) (a settlor’s “right to revoke [a]
trust and to demand the transmission to her of the intan-
gibles . . . was a potential source of wealth” subject to tax
by her State of residence).7
A focus on ownership and rights to trust assets also
featured in the Court’s ruling that a trustee’s in-state
residence can provide the basis for a State to tax trust
assets. In Greenough, the Court explained that the rela-
tionship between trust assets and a trustee is akin to the
“close relationship between” other types of intangible
property and the owners of such property. 331 U. S., at
——————
7 Though the Court did not have occasion in Curry or Graves to ex-
plore whether a lesser degree of control by a settlor also could sustain a
tax by the settlor’s domicile (and we do not today address that possibil-
ity), these cases nevertheless reinforce the logic employed by Safe
Deposit, Brooke v. Norfolk, 277 U.S. 27 (1928), Maguire v. Trefry, 253
U.S. 12 (1920), and Guaranty Trust Co. v. Virginia, 305 U.S. 19
(1938), in the beneficiary context.
10 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
493. The trustee is “the owner of [a] legal interest in” the
trust property, and in that capacity he can incur obliga-
tions, become personally liable for contracts for the trust,
or have specific performance ordered against him. Id., at
494. At the same time, the trustee can turn to his home
State for “benefit and protection through its law,” id., at
496, for instance, by resorting to the State’s courts to
resolve issues related to trust administration or to enforce
trust claims, id., at 495. A State therefore may tax a
resident trustee on his interest in a share of trust assets.
Id., at 498.
In sum, when assessing a state tax premised on the in-
state residency of a constituent of a trust—whether bene-
ficiary, settlor, or trustee—the Due Process Clause de-
mands attention to the particular relationship between
the resident and the trust assets that the State seeks to
tax. Because each individual fulfills different functions in
the creation and continuation of the trust, the specific
features of that relationship sufficient to sustain a tax
may vary depending on whether the resident is a settlor,
beneficiary, or trustee. When a tax is premised on the in-
state residence of a beneficiary, the Constitution requires
that the resident have some degree of possession, control,
or enjoyment of the trust property or a right to receive
that property before the State can tax the asset. Cf. Safe
Deposit, 280 U.S., at 91–92.8 Otherwise, the State’s rela-
tionship to the object of its tax is too attenuated to create
the “minimum connection” that the Constitution requires.
See Quill, 504 U.S., at 306.
B
Applying these principles here, we conclude that the
——————
8 As explained below, we hold that the Kaestner Trust beneficiaries
do not have the requisite relationship with the Trust property to justify
the State’s tax. We do not decide what degree of possession, control, or
enjoyment would be sufficient to support taxation.
Cite as: 588 U. S. ____ (2019) 11
Opinion of the Court
residence of the Kaestner Trust beneficiaries in North
Carolina alone does not supply the minimum connection
necessary to sustain the State’s tax.
First, the beneficiaries did not receive any income from
the trust during the years in question. If they had, such
income would have been taxable. See Maguire, 253 U.S.,
at 17; Guaranty Trust Co., 305 U.S., at 23.
Second, the beneficiaries had no right to demand trust
income or otherwise control, possess, or enjoy the trust
assets in the tax years at issue. The decision of when,
whether, and to whom the trustee would distribute the
trust’s assets was left to the trustee’s “absolute discretion.”
Art. I, §1.2(a), App. 46–47. In fact, the Trust agreement
explicitly authorized the trustee to distribute funds to one
beneficiary to “the exclusion of other[s],” with the effect of
cutting one or more beneficiaries out of the Trust. Art. I,
§1.4, id., at 50. The agreement also authorized the trus-
tee, not the beneficiaries, to make investment decisions
regarding Trust property. Art. V, §5.2, id., at 55–60. The
Trust agreement prohibited the beneficiaries from assign-
ing to another person any right they might have to the
Trust property, Art. XII, id., at 70–71, thus making the
beneficiaries’ interest less like “a potential source of
wealth [that] was property in [their] hands.” Curry, 307
U.S., at 370–371.9
To be sure, the Kaestner Trust agreement also instructed
the trustee to view the trust “as a family asset and to be
liberal in the exercise of the discretion conferred,” suggest-
ing that the trustee was to make distributions generously
with the goal of “meet[ing] the needs of the Beneficiaries”
in various respects. Art. I, §1.4(c), App. 51. And the trus-
——————
9 We do not address whether a beneficiary’s ability to assign a poten-
tial interest in income from a trust would afford that beneficiary
sufficient control or possession over, or enjoyment of, the property to
justify taxation based solely on his or her in-state residence.
12 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
tee of a discretionary trust has a fiduciary duty not to “act
in bad faith or for some purpose or motive other than to
accomplish the purposes of the discretionary power.” 2
Restatement (Third) of Trusts §50, Comment c, p. 262
(2003). But by reserving sole discretion to the trustee, the
Trust agreement still deprived Kaestner and her children
of any entitlement to demand distributions or to direct the
use of the Trust assets in their favor in the years in
question.
Third, not only were Kaestner and her children unable
to demand distributions in the tax years at issue, but they
also could not count on necessarily receiving any specific
amount of income from the Trust in the future. Although
the Trust agreement provided for the Trust to terminate
in 2009 (on Kaestner’s 40th birthday) and to distribute
assets to Kaestner, Art. I, §1.2(c)(1), App. 47, New York
law allowed the trustee to roll over the trust assets into a
new trust rather than terminating it. N. Y. Est., Powers
& Trusts §10–6.6(b). Here, the trustee did just that. 371
N. C., at 135, 814 S.E.2d, at 45.10
——————
10 In light of these features, one might characterize the interests of
the beneficiaries as “contingent” on the exercise of the trustee’s discre-
tion. See Fondren v. Commissioner, 324 U.S. 18, 21 (1945) (describing
“the exercise of the trustee’s discretion” as an example of a contin-
gency); see also United States v. O’Malley, 383 U.S. 627, 631 (1966) (de-
scribing a grantor’s power to add income to the trust principal instead
of distributing it and “thereby den[y] to the beneficiaries the privilege
of immediate enjoyment and conditio[n] their eventual enjoyment upon
surviving the termination of the trust”); Commissioner v. Estate of
Holmes, 326 U.S. 480, 487 (1946) (the termination of a contingency
changes “the mere prospect or possibility, even the probability, that one
may have [enjoyment of property] at some uncertain future time or
perhaps not at all” into a “present substantial benefit”). We have no
occasion to address, and thus reserve for another day, whether a
different result would follow if the beneficiaries were certain to receive
funds in the future. See, e.g., Cal. Rev. & Tax. Code Ann. §17742(a)
(West 2019); Commonwealth v. Stewart, 338 Pa. 9, 16–19, 12 A.2d 444,
448–449 (1940) (upholding a tax on the equitable interest of a benefi-
Cite as: 588 U. S. ____ (2019) 13
Opinion of the Court
Like the beneficiaries in Safe Deposit, then, Kaestner
and her children had no right to “control or posses[s]” the
trust assets “or to receive income therefrom.” 280 U.S., at
91. The beneficiaries received no income from the Trust,
had no right to demand income from the Trust, and had no
assurance that they would eventually receive a specific
share of Trust income. Given these features of the Trust,
the beneficiaries’ residence cannot, consistent with due
process, serve as the sole basis for North Carolina’s tax on
trust income.11
IV
The State’s counterarguments do not save its tax.
First, the State interprets Greenough as standing for the
——————
ciary who had “a right to the income from [a] trust for life”), aff’d, 312
U.S. 649 (1941).
11 Because the reasoning above resolves this case in the Trust’s favor,
it is unnecessary to reach the Trust’s broader argument that the
trustee’s contacts alone determine the State’s power over the Trust.
Brief for Respondent 23–30. The Trust relies for this proposition on
Hanson v. Denckla, 357 U.S. 235 (1958), which held that a Florida
court lacked jurisdiction to adjudicate the validity of a trust agreement
even though the trust settlor and most of the trust beneficiaries were
domiciled in Florida. Id., at 254. The problem was that Florida law
made the trustee “an indispensable party over whom the court [had to]
acquire jurisdiction” before resolving a trust’s validity, and the trustee
was a nonresident. Ibid. In deciding that the Florida courts lacked
jurisdiction over the proceeding, the Court rejected the relevance of the
trust beneficiaries’ residence and focused instead on the “acts of the
trustee” himself, which the Court found insufficient to support jurisdic-
tion. Ibid.
The State counters that Hanson is inapposite because the State’s tax
applies to the trust rather than to the trustee and because Hanson
arose in the context of adjudicative jurisdiction rather than tax jurisdic-
tion. Brief for Petitioner 21, n. 9; Reply Brief 16–17.
There is no need to resolve the parties’ dueling interpretations of
Hanson. Even if beneficiary contacts—such as residence—could be
sufficient in some circumstances to support North Carolina’s power to
impose this tax, the residence alone of the Kaestner Trust beneficiaries
cannot do so for the reasons given above.
14 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
broad proposition that “a trust and its constituents” are
always “inextricably intertwined.” Brief for Petitioner 26.
Because trustee residence supports state taxation, the
State contends, so too must beneficiary residence. The
State emphasizes that beneficiaries are essential to a trust
and have an “equitable interest” in its assets. Greenough,
331 U.S., at 494. In Stone v. White, 301 U.S. 532 (1937),
the State notes, the Court refused to “shut its eyes to the
fact” that a suit to recover taxes from a trust was in reality
a suit regarding “the beneficiary’s money.” Id., at 535.
The State also argues that its tax is at least as fair as the
tax in Greenough because the Trust benefits from North
Carolina law by way of the beneficiaries, who enjoy secure
banks to facilitate asset transfers and also partake of
services (such as subsidized public education) that obviate
the need to make distributions (for example, to fund bene-
ficiaries’ educations). Brief for Petitioner 30–33.
The State’s argument fails to grapple with the wide
variation in beneficiaries’ interests. There is no doubt
that a beneficiary is central to the trust relationship, and
beneficiaries are commonly understood to hold “beneficial
interests (or ‘equitable title’) in the trust property,” 2
Restatement (Third) of Trusts §42, Comment a, at 186. In
some cases the relationship between beneficiaries and
trust assets is so close as to be beyond separation. In
Stone, for instance, the beneficiary had already received
the trust income on which the government sought to re-
cover tax. See 301 U.S., at 533. But, depending on the
trust agreement, a beneficiary may have only a “future
interest,” an interest that is “subject to conditions,” or an
interest that is controlled by a trustee’s discretionary
decisions. 2 Restatement (Third) of Trusts §49, Comment
b, at 243. By contrast, in Greenough, the requisite connec-
tion with the State arose from a legal interest that neces-
sarily carried with it predictable responsibilities and
liabilities. See 331 U.S., at 494. The different forms of
Cite as: 588 U. S. ____ (2019) 15
Opinion of the Court
beneficiary interests counsels against adopting the cate-
gorical rule that the State urges.
Second, the State argues that ruling in favor of the
Trust will undermine numerous state taxation regimes.
Tr. of Oral Arg. 8, 68; Brief for Petitioner 6, and n. 1.
Today’s ruling will have no such sweeping effect. North
Carolina is one of a small handful of States that rely on
beneficiary residency as a sole basis for trust taxation, and
one of an even smaller number that will rely on the resi-
dency of beneficiaries regardless of whether the benefi-
ciary is certain to receive trust assets.12 Today’s decision
does not address state laws that consider the in-state
residency of a beneficiary as one of a combination of fac-
tors, that turn on the residency of a settlor, or that rely
only on the residency of noncontingent beneficiaries, see,
e.g., Cal. Rev. & Tax. Code Ann. §17742(a).13 We express
——————
12 The State directs the Court’s attention to 10 other state trust taxa-
tion statutes that also look to trust beneficiaries’ in-state residency, see
Brief for Petitioner 6, and n. 1, but 5 are unlike North Carolina’s
because they consider beneficiary residence only in combination with
other factors, see Ala. Code §40–18–1(33) (2011); Conn. Gen. Stat. §12–
701(a)(4) (2019 Cum. Supp.); Mo. Rev. Stat. §§143.331(2), (3) (2016);
Ohio Rev. Code Ann. §5747.01(I)(3) (Lexis Supp. 2019); R. I. Gen. Laws
§44–30–5(c) (2010). Of the remaining five statutes, it is not clear that
the flexible tests employed in Montana and North Dakota permit
reliance on beneficiary residence alone. See Mont. Admin. Rule
42.30.101(16) (2016); N. D. Admin. Code §81–03–02.1–04(2) (2018).
Similarly, Georgia’s imposition of a tax on the sole basis of beneficiary
residency is disputed. See Ga. Code Ann. §48–7–22(a)(1)(C) (2017);
Brief for Respondent 52, n. 20. Tennessee will be phasing out its
income tax entirely by 2021. H. B. 534, 110th Gen. Assem., Reg. Sess.
(2017) (enacted); see Tenn. Code Ann. §67–2–110(a) (2013). That leaves
California, which (unlike North Carolina) applies its tax on the basis of
beneficiary residency only where the beneficiary is not contingent. Cal.
Rev. & Tax. Code Ann. §17742(a); see also n. 10, supra.
13 The Trust also raises no challenge to the practice known as throw-
back taxation, by which a State taxes accumulated income at the time
it is actually distributed. See, e.g., Cal. Rev. & Tax. Code Ann.
§17745(b).
16 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
Opinion of the Court
no opinion on the validity of such taxes.
Finally, North Carolina urges that adopting the Trust’s
position will lead to opportunistic gaming of state tax
systems, noting that trust income nationally exceeded
$120 billion in 2014. See Brief for Petitioner 39, and n. 13.
The State is concerned that a beneficiary in Kaestner’s
position will delay taking distributions until she moves to
a State with a lower level of taxation, thereby paying less
tax on the funds she ultimately receives. See id., at 40.
Though this possibility is understandably troubling to
the State, it is by no means certain that it will regularly
come to pass. First, the power to make distributions to
Kaestner or her children resides with the trustee. When
and whether to make distributions is not for Kaestner to
decide, and in fact the trustee may distribute funds to
Kaestner while she resides in North Carolina (or deny her
distributions entirely). Second, we address only the cir-
cumstances in which a beneficiary receives no trust in-
come, has no right to demand that income, and is uncer-
tain necessarily to receive a specific share of that income.
Settlors who create trusts in the future will have to weigh
the potential tax benefits of such an arrangement against
the costs to the trust beneficiaries of lesser control over
trust assets. In any event, mere speculation about nega-
tive consequences cannot conjure the “minimum connec-
tion” missing between North Carolina and the object of
its tax.
* * *
For the foregoing reasons, we affirm the judgment of the
Supreme Court of North Carolina.
It is so ordered.
Cite as: 588 U. S. ____ (2019) 1
ALITO, J., concurring
SUPREME COURT OF THE UNITED STATES
_________________
No. 18–457
_________________
NORTH CAROLINA DEPARTMENT OF REVENUE,
PETITIONER v. THE KIMBERLEY RICE
KAESTNER 1992 FAMILY TRUST
ON WRIT OF CERTIORARI TO THE SUPREME COURT OF
NORTH CAROLINA
[June 21, 2019]
JUSTICE ALITO, with whom THE CHIEF JUSTICE and
JUSTICE GORSUCH join, concurring.
I join the opinion of the Court because it properly con-
cludes that North Carolina’s tenuous connection to the
income earned by the trust is insufficient to permit the
State to tax the trust’s income. Because this connection is
unusually tenuous, the opinion of the Court is circum-
scribed. I write separately to make clear that the opinion
of the Court merely applies our existing precedent and
that its decision not to answer questions not presented by
the facts of this case does not open for reconsideration any
points resolved by our prior decisions.
* * *
Kimberley Rice Kaestner is the beneficiary of a trust
established by her father. She is also a resident of North
Carolina. Between 2005 and 2008, North Carolina re-
quired the trustee, who is a resident of Connecticut, to pay
more than $1.3 million in taxes on income earned by the
assets in the trust. North Carolina levied this tax because
of Kaestner’s residence within the State.
States have broad discretion to structure their tax sys-
tems. But, in a few narrow areas, the Federal Constitu-
tion imposes limits on that power. See, e.g., McCulloch v.
2 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
ALITO, J., concurring
Maryland, 4 Wheat. 316 (1819); Comptroller of Treasury of
Md. v. Wynne, 575 U. S. ___ (2015). The Due Process
Clause creates one such limit. It imposes restrictions on
the persons and property that a State can subject to its
taxation authority. “The Due Process Clause ‘requires
some definite link, some minimum connection, between a
state and the person, property or transaction it seeks to
tax.’ ” Quill Corp. v. North Dakota, 504 U.S. 298, 306
(1992) (quoting Miller Brothers Co. v. Maryland, 347 U.S.
340, 344–345 (1954)), overruled in part on other grounds
by South Dakota v. Wayfair, Inc., 585 U. S. ___ (2018).
North Carolina assesses this tax against the trustee and
calculates the tax based on the income earned by the trust.
N. C. Gen. Stat. Ann. §105–160.2 (2017). Therefore we
must look at the connections between the assets held in
trust and the State.
It is easy to identify a State’s connection with tangible
assets. A tangible asset has a connection with the State in
which it is located, and generally speaking, only that State
has power to tax the asset. Curry v. McCanless, 307 U.S.
357, 364–365 (1939). Intangible assets—stocks, bonds, or
other securities, for example—present a more difficult
question.
In the case of intangible assets held in trust, we have
previously asked whether a resident of the State imposing
the tax has control, possession, or the enjoyment of the
asset. See Greenough v. Tax Assessors of Newport, 331
U.S. 486, 493–495 (1947); Curry, supra, at 370–371; Safe
Deposit & Trust Co. of Baltimore v. Virginia, 280 U.S. 83,
93–94 (1929); Brooke v. Norfolk, 277 U.S. 27, 28–29
(1928). Because a trustee is the legal owner of the trust
assets and possesses the powers that accompany that
status—power to manage the investments, to make and
enforce contracts respecting the assets, to litigate on be-
half of the trust, etc.—the trustee’s State of residence can
tax the trust’s intangible assets. Greenough, supra, at
Cite as: 588 U. S. ____ (2019) 3
ALITO, J., concurring
494, 498. Here, we are asked whether the connection
between a beneficiary and a trust is sufficient to allow the
beneficiary’s State of residence to tax the trust assets and
the income they earn while the assets and income remain
in the trust in another State. Two cases provide a clear
answer.
In Brooke, Virginia assessed a tax on the assets of a
trust whose beneficiary was a resident of Virginia. The
trustee was not a resident of Virginia and administered
the trust outside the Commonwealth. Under the terms of
the trust, the beneficiary was entitled to all the income of
the trust and had paid income taxes for the money that
had been transferred to her. But the Court held that,
despite the beneficiary’s present and ongoing right to
receive income from the trust, Virginia could not impose
taxes on the undistributed assets that remained within
the trust because “the property is not within the State,
does not belong to the petitioner and is not within her
possession or control.” 277 U.S., at 29. Even though the
beneficiary was entitled to and received income from the
trust, we observed that “she [wa]s a stranger” to the assets
within the trust because she lacked control, possession, or
enjoyment of them. Ibid.
In Safe Deposit, Virginia again attempted to assess
taxes on the intangible assets held in a trust whose trus-
tee resided in Maryland. The beneficiaries were children
who lived in Virginia. Under the terms of the trust, each
child was entitled to one half of the trust’s assets (both the
original principal and the income earned over time) when
the child reached the age of 25. Despite their entitlement
to the entire corpus of the trust, the Court held that the
beneficiaries’ residence did not allow Virginia to tax the
assets while they remained in trust. “[N]obody within
Virginia has present right to [the assets’] control or pos-
session, or to receive income therefrom, or to cause them
to be brought physically within her borders.” 280 U.S., at
4 NORTH CAROLINA DEPT. OF REVENUE v. KIMBERLEY
RICE KAESTNER 1992 FAMILY TRUST
ALITO, J., concurring
91.* The beneficiaries’ equitable ownership of the trust
did not sufficiently connect the undistributed assets to
Virginia as to allow taxation of the trust. The beneficiar-
ies’ equitable ownership yielded to the “established fact of
legal ownership, actual presence and control elsewhere.”
Id., at 92.
Here, as in Brooke and Safe Deposit, the resident benefi-
ciary has neither control nor possession of the intangible
assets in the trust. She does not enjoy the use of the trust
assets. The trustee administers the trust and holds the
trust assets outside the State of North Carolina. Under
Safe Deposit and Brooke, that is sufficient to establish that
North Carolina cannot tax the trust or the trustee on the
intangible assets held by the trust.
* * *
The Due Process Clause requires a sufficient connection
between an asset and a State before the State can tax the
asset. For intangible assets held in trust, our precedents
dictate that a resident beneficiary’s control, possession,
and ability to use or enjoy the asset are the core of the
inquiry. The opinion of the Court rightly concludes that
the assets in this trust and the trust’s undistributed in-
come cannot be taxed by North Carolina because the
resident beneficiary lacks control, possession, or enjoy-
ment of the trust assets. The Court’s discussion of the
peculiarities of this trust does not change the governing
standard, nor does it alter the reasoning applied in our
earlier cases. On that basis, I concur.
——————
* Although the Court noted that no Virginian had a present right “to
receive income therefrom,” Brooke—where the beneficiary was entitled
to and received income from the trust—suggests that even if the chil-
dren had such a right, it would not, alone, justify taxing the trust
corpus.