Is Tennessee's Income Taxation of Trusts Constitutional?

On Friday, the United States Supreme Court unanimously ruled that North Carolina's tax on trust income attributable to contingent beneficiaries is unconstitutional on due process grounds. The Supreme Court's decision in The Kimberly Rice Kaestner 1992 Family Trust v. The North Carolina Department of Revenue can be found here.

Specifically, the Court found that the presence of in-state trust beneficiaries alone does not empower a state to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain to receive it. 

Like North Carolina, Tennessee imposes income tax (in Tennessee, the Hall Tax) on a trustee if there is a resident beneficiary – even if that beneficiary is merely a contingent beneficiary. Based on the Supreme Court's reasoning, if a non-Tennessee trust paid Tennessee income tax (Hall Tax) on income that was not distributed to a Tennessee beneficiary, that tax is likely unconstitutional and the trust may be entitled to a refund. 

For more information on the impact of this case on the Hall Tax, or estate and trust administration in general, please contact us:

Marshall H. Peterson: mpeterson@kmfpc.com
Michael R. Crowder: mcrowder@kmfpc.com
Alex Taylor: alex@kmfpc.com