Trustees of irrevocable trusts created by Minnesota residents may be impacted by a recent decision of the Minnesota Supreme Court. On July 18, 2018, in Fielding v. Commissioner of Revenue, the court determined that the domicile of the grantor at the time of a trust's creation alone was not a sufficient basis to permit Minnesota to tax all of the income of the trust for the year at issue. The holding is consistent with recent court decisions in other states finding trust income tax statutes unconstitutional.
Under Minnesota law, an irrevocable trust not taxable to the grantor under federal law is a "Resident Trust" if the grantor of the trust was domiciled in Minnesota when the trust became irrevocable and is therefore subject to Minnesota fiduciary income tax on all of its income for the duration of the trust's existence. In the Fielding case, a Minnesotan established four trusts and funded them primarily with shares of a Minnesota S Corporation. The trusts became Resident Trusts under Minnesota's income tax definition in 2011, and thereafter filed Minnesota income tax returns reporting all of the trusts' income.
The trustee sold the shares of the Minnesota S Corporation in 2014, the tax year at issue, and held the sale proceeds in investment accounts outside Minnesota. At no time was the trustee a Minnesota resident, and only one beneficiary of one trust was a Minnesota resident. The trusts filed Minnesota income tax returns for 2014 under protest and sought refunds for the taxes paid. The Commissioner of Revenue denied the trustee's requests for refunds based on the Minnesota Resident Trust definition. The trustee prevailed in Minnesota Tax Court and the Commissioner then appealed to the Minnesota Supreme Court.
Minnesota Supreme Court's Analysis
On appeal, the Minnesota Supreme Court considered the scope of Minnesota's power to tax the income of a trust created by a Minnesota resident. The court held that the statute, as applied, was unconstitutional because the trustee did not have sufficient contact with the state of Minnesota to satisfy due process requirements. Specifically, Minnesota could not tax the trusts on all of their income based solely on the grantor's domicile when the trusts were created.
What does the Fielding case mean for a trustee of an irrevocable trust created by a Minnesota resident?
You should consult with your Ballard Spahr attorney to determine whether, in light of Fielding and based upon your trust's specific contacts with Minnesota, you should file amended income tax return(s) to claim any refund(s) and/or change your trust’s filing status going forward.
You should also determine, with your attorney's guidance, whether your trust could shed its Minnesota Resident Trust status by naming an out-of-state trustee.
Ballard Spahr's Private Client Services Group monitors and responds promptly to changing tax laws and regulations, and advises individuals and groups on sophisticated tax, gift, and estate planning matters. Please contact a member of the Group if you wish to discuss potential opportunities and/or to update your current planning documents.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.