The Due Process Clause of the U.S. Constitution requires a taxpayer have sufficient contacts with a state before the taxpayer can be subject to income taxes in that state. This has led to disparate results on when the income of a trust is subject to the taxing jurisdiction of a state.
One common fact pattern is a trust where a state seeks to tax a trust on its income because a beneficiary of the trust resides in the state, even though the trust was formed out of state, the trustee resides out of state and administers the trust from out of state, and the assets are situated outside of that trust. Under such a facts, the State of North Carolina has asserted it can tax the income of the trust. Eleven states tax trust income when a trust’s beneficiaries are state residents.
The Supreme Court has granted certiorari in that case, so much needed guidance should soon be coming on this important issue!
NORTH CAROLINA DEPT. OF REVENUE V. KAESTNER FAMILY TRUST