Source: https://alliancetrustcompany.com/news/author/admin/
Timestamp: 2019-04-20 10:23:12+00:00

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On July 18, 2018, the Minnesota Supreme Court ruled in Respondents v. Commissioner of Revenue that taxing trusts in perpetuity only based on the test that the grantor was a Minnesota resident while the trust became irrevocable is unconstitutional. This decision supports the ruling decided by the Minnesota Tax Court almost exactly one year ago. Moreover, this decision follows similar logic in cases heard in Pennsylvania, New York, and Illinois.
If you are not familiar with Fielding v. Commissioner of Revenue and Respondents v. Commissioner of Revenue, learn more by clicking here.
Until now, Minnesota had to look back over two decades when designating a trust as a Minnesota resident.
Two common scenarios designate a trust as a Minnesota resident.
A non-grantor trust typically created by a will of a decedent domiciled in Minnesota at the time of death.
An irrevocable trust in which the grantor was a Minnesota resident when the trust became irrevocable.
The Commissioner of Revenue utilized the second scenario when taxing the Fielding gains in 2014. The grantor, Reid MacDonald lived in Minnesota when the four trusts became irrevocable in 2011 as planned when the trusts were established in 2009.
In 2014, one of the four trustees, Fielding, sold stocks from the trust realizing substantial gains. Within the current law, the Minnesota Department of Revenue collected taxes on the gains under protest.
However, on the sole basis that the grantor lived in Minnesota when the trusts became irrevocable, Minnesota collected taxes on the gains of the trusts.
Fielding won his case in the Minnesota Tax Court.
The Minnesota Department of Revenue appealed, and the case landed in the Minnesota Supreme Court, but Fielding wins again.
How will the Minnesota Department of Revenue and the Minnesota Legislature react to losing Respondents v. Commissioner of Revenue?
While the timings of any rulings and enactment of statutes is uncertain, we may speculate on what’s to come.
We reached out to our Minnesota network for insight.
Mr. Lunka also noted that if Minnesota goes down the path of determining a trust’s residency based on the location of the trustees he thinks many trustees will, if possible, make the decision to move the trustees outside Minnesota.
At Alliance Trust Company of Nevada, we will closely monitor how the Fielding case impacts Minnesota resident trusts as new legislation materializes. It will be advantageous for many to evaluate their “Minnesota trusts” ensuring they are in a situs allowing the greatest tax and protection benefits.
Last year (2017), the Minnesota Tax Court ruled that treating irrevocable trusts as residents in Minnesota for income taxes is unconstitutional in Fielding v. Commissioner of Revenue. The state of Minnesota appealed the ruling bringing the case to the Minnesota Supreme Court where a new ruling is expected to be decided this month (June 2018).
In 2009, Reid MacDonald established four irrevocable trusts, one for each of his children, while residing in Minnesota. The trusts were deemed to become irrevocable in 2011, at which time the grantor resided in Minnesota.
No trustees were Minnesota residents. All but one beneficiary resided outside the state of Minnesota. The trusts only held investment accounts administered in the state of California.
However, the trusts owned stocks of a Minnesota company (Faribault Foods) and sold them in 2014 to a third party placing significant proceeds in an investment account.
In 2014, the four trusts filed a Minnesota Fiduciary Income Tax Return as resident trusts. Each trust paid their tax liabilities under protest with the argument that Minnesota’s definition of resident trust was unconstitutional and therefore, each trust filed refund claims.
The U.S. Constitution states that taxes imposed by a state must have a justified and contemporaneous relationship with the benefits and protections offered by the state.
Because the trusts were administered in California, they were receiving no benefits or protections from Minnesota. Thus, the Minnesota Tax Court concluded that denying the trusts’ refunds was an error by the Commissioner. Courts in New York, Pennsylvania, and Illinois reached similar conclusions regarding cases focused on the constitutionality of taxes.
The Minnesota Department of Revenue appealed the Fielding decision, and the case is now being decided in the Minnesota Supreme Court.
Two primary issues are being presented to the Minnesota Supreme Court.
Are the four irrevocable trusts connected to Minnesota sufficiently enough to justify the taxation of the trusts as residents of Minnesota for the 2014 tax year while adhering to the Constitution’s Due Process Clause?
Should the Constitution’s Commerce Clause disallow Minnesota from taxing the trusts as Minnesota residents for 2014?
If the Court decides in favor of Fielding, the impacts are far-reaching.
Should the court decide in favor of Fielding, the precedent set could impact living trusts that were originally established in Minnesota and then amended as irrevocable while residing outside of Minnesota. If a trust paid income tax to Minnesota after being administered in another state while the grantor resided outside of Minnesota, the trust would be entitled to a refund.
At Alliance Trust Company of Nevada, we believe there are opportunities for decanting Minnesota trusts to domiciles with no income tax, such as Nevada, while also gaining asset protection advantages.
We are closely monitoring the Fielding case and will provide an update when a decision is reached.
Learn how the recent Nevada Supreme Court case, Klabacka v. Nelson, set a precedent for asset protection in Nevada.

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