Building Legacies that Last Estate Planning and Elder Law

Tax Court Rules against Minnesota

The tax court has ruled against the state of Minnesota and declared its income tax statute unconstitutional, as it applies to some trusts created in that state.

Minnesota has an unusual way of taxing trusts. The state's income tax statute makes 100% of a trust's assets taxable in that state, if the trust became irrevocable when the settlor was a resident of Minnesota.

This rule applies regardless where the trust beneficiaries reside or where any trustees reside.

Fortunately, the tax court has decided this method of trust taxation is unconstitutional, according to the Wills, Trusts & Estates Prof Blog in "Tax Refunds for Trusts With Minnesota Grantors? Minnesota Income Tax Statute Ruled Unconstitutional."

The court looked at trusts that had an out-of-state trustee, beneficiaries who lived in Minnesota and beneficiaries who lived in other states.

It determined that these trusts could not be considered resident trusts of Minnesota and, therefore, the state could not tax intangible assets. Presumably, the same logic could be applied to some other trust situations.

This ruling could lead to refunds for some trusts.

However, those refunds may not come in the near future, since it is expected that the state will appeal this ruling to the Supreme Court, which could render a different decision.

Reference: Wills, Trusts & Estates Prof Blog (June 7, 2017) "Tax Refunds for Trusts With Minnesota Grantors? Minnesota Income Tax Statute Ruled Unconstitutional

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