On June 18th the Minnesota Supreme Court issued its long-awaited opinion in the case of William Fielding, et al. v. Commissioner of Revenue affecting income taxation of irrevocable trusts with a Minnesota “contact.” The Fielding case addressed a statute authorizing Minnesota to collect income taxes on an irrevocable trust’s worldwide assets based on one tenuous connection—the grantor’s status as a Minnesota domiciliary at the time the trust was established.
The Court’s narrow ruling holds that the statute in question is unconstitutional as it applied to the specific trusts involved in the Fielding case, but it left many questions unanswered and uncertainties for practitioners, trustees, beneficiaries and clients.
Applying Relevant Factors
The Fielding case involved four separate irrevocable trusts established in 2011 by the MacDonald family, who were Minnesota residents, and funded with stock in a Minnesota corporation. All of the trustees of the trusts lived outside of Minnesota, and all aspects of the trust administration took place outside of Minnesota. The case began when the trusts sold their shares in the stock and were required to report and pay significant Minnesota capital gains taxes. The trusts’ challenge to payment of those taxes eventually landed them at the doors of the Minnesota Supreme Court.
Ultimately, the Court looked at all “relevant contacts” between the trusts and Minnesota, and determined that there was not a significant nexus between the trusts and Minnesota to justify the trusts paying Minnesota income taxes on their worldwide income. The Court held that Minnesota’s taxation of the trusts based solely on the grantor’s Minnesota domicile at the time the irrevocable trusts were established is an unconstitutional violation of trusts’ due process rights under the United States and Minnesota Constitutions. The focus of the Court’s analysis appeared to be the extent to which the trusts (or any taxpayer) availed themselves to the “services, benefits, and protections” of the State of Minnesota, and found such analysis wanting with respect to the Fielding trusts.
Given the narrow scope of the ruling, we still have the questions regarding the application of the statute to trusts. Advisors, clients, and trustees must be aware of this fact, and must pay close attention to the level of connection between their trusts and Minnesota. Notably, the Court looked closely at the trustee’s domicile, where decisions regarding the trust administration occurred, the physical location of the trust assets, the physical location of trust records, and whether the trust avails itself of the “services, benefits, and protections” of the State. However, the Court certainly did not limit the analysis to these factors alone.
Importantly, although the Court based its decision on “all relevant contacts” with the State, the statute in question still only concerns itself with one factor—the grantor’s domicile when the trust is established. Presumably, the Minnesota Revenue Department will continue to assess taxes based on this statute, and it is incumbent upon the trustee of each trust to analyze whether a challenge is prudent.