SCOTUS Case Preview: Due Process and Trusts

April 12, 2019 by Dan McCue

This is one of five noteworthy Supreme Court cases that will be heard between April 16 and April 23. You can read the other previews here:

The second case the justices will hear on the 16th, North Carolina Department of Revenue v. the Kimberley Rice Kaestner 1992 Family Trust, also has big money implications.

The question before the high court will be whether the Due Process Clause of the 14th Amendment prohibits states from taxing trusts based on the in-state residency of trust beneficiaries.

The rights and responsibilities related to hundreds of millions of dollars of annual tax revenue hang on the justices’ decision.

In 1992, Joseph L. Rice III, co-founder of Clayton, Dubilier & Rice, one of the oldest private equity investment firms in the world, established a trust in New York, naming William Matteson as trustee and Rice’s descendants as the primary beneficiaries.

Ten years later, the original Trust was divided into three separate trusts, one for each of Rice’s children.

One of those children, a daughter, Kimberley Rice Kaestner, lived in North Carolina at the time.

In 2005, Matteson stepped down as trustee for the three trusts and Rice appointed a successor trustee, who resided in Connecticut. Over the next four years, the Kimberley Rice Kaestner 1992 Family Trust, paid state income taxes in North Carolina, despite the fact no funds were distributed,

In 2009, representatives of the trust sought a refund of those income taxes. When the state Department of Revenue rejected that claim, the trust sued, asking the court to declare a state statute enabling the North Carolina to collect taxes from the family insisted was a “foreign trust,” created and domiciled in another state.

The court granted the states motion to dismiss the trust’s claim for a refund of the taxes paid, but allowed the litigation over the constitutional claim to continue, and ultimately found for the trust. The department promptly appealed.

A state appeals court later found that the mere fact that a beneficiary of the trust lives in North Carolina was not sufficient enough to establish that state’s right to tax proceeds for it.

In coming to that decision, the state appeals court noted the trust location, its assets, and its trustee are all outside of the state. The North Carolina Supreme Court later affirmed the decision, prompting the appeal to the U.S. Supreme Court.

The case is 18-457 North Carolina Dept. of Revenue v. Kaestner Family Trust.

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