When it comes to the everyday life of an individual who has a developmental disability, life can present unexpected obstacles not only for the individual, but for family and friends, as well. The challenges are made easier through well-planned trusts which protect important government benefits, such as Medicaid and Supplemental Security Income (SSI), and ensure that when the parent passes away, the child is taken care of financially. However, certain laws create the threat of taking away these important assets.
In the case of North Carolina Department of Revenue v. Kimberly Kaestner in 1992, we see an example of a beneficiary (the person who the trust protects) being taxed very high amounts of money with the only connection between North Carolina and her trust being that she moved to the state. Kaestner’s father set up a trust for his children in his home state of New York, where the Trustee resided and continued to administer it. Kaestner herself had no right to demand income from the trust. During a four year time period, North Carolina charged Ms. Kaestner a tax of one million dollars, plus tax.
Ultimately, in a win for beneficiaries, the U.S. Supreme Court said no, this is too tenuous of a connection between a trust and a state for North Carolina to have the power to tax. Because there is no correlation between the state of North Carolina and Kimberly Kaestner, besides her living there, this tax violates Due Process. Her trust simply doesn’t have enough financial connection with the state to justify the power to tax. From a family with disabilities’ perspective, thankfully, there are an isolated small handful of states which even make it possible to tax based only on the fact the beneficiary resides there. However, the Court’s ruling is limited and the states have different taxation for trusts.
Tax planning for the administration of special needs trusts is still important. The Kaestner Court’s ruling is limited, and the states have different taxation for trusts. The state in which the trust is created or administered, the state where the Trustee resides, and any state where a beneficiary receives income, all may make the trust subject to state taxation. Of course, there are many reasons to plan for the care and protection of a loved one with a disability, not all of which involve taxation.