North Carolina Department of Revenue v. Kimberly Rice Kaestner 1992 Family Trust

New York resident Joseph Rice created a trust to benefit his children. The trust was governed by New York law, and the trustee, another New Yorker, had absolute discretion regarding whether and when to make distributions to the children-beneficiaries. No beneficiary lived in North Carolina at the trust’s creation. However, Rice’s daughter, Kimberly Rice Kaestner, later moved there. Sometime after Kaestner’s move, the trustee divided the original trust into three subtrusts, one of which was the Kimberly Rice Kaestner 1992 Family Trust (Kaestner trust) (plaintiff). That trust, which had Kaestner and her children as beneficiaries, was governed by the original trust agreement. The trust documents were maintained in New York, the custodians of the trust’s assets were in Massachusetts, and the trust made no direct investments in North Carolina. Between 2005 and 2008, the trustee did not make any distributions to the beneficiaries. Nevertheless, the North Carolina Department of Revenue (department) (defendant) assessed tax on the trust’s income for those years, ordering the trustee to pay over $1.3 million to the state. The trustee paid under protest, then sued the department on the trust’s behalf. The trustee argued that taxing the trust’s income violated the Fourteenth Amendment’s Due Process Clause because the state lacked a minimum connection with the object of the tax. The state trial court agreed, finding the tax unconstitutional. The state appellate and supreme courts affirmed, and the United States Supreme Court granted certiorari.