The Minnesota Supreme Court issued a landmark opinion recently that will significantly change the taxation of trusts in Minnesota. This case is garnering national attention as well given the significance. The Court upheld a decision from the Tax Court finding it unconstitutional to continue to tax trusts in Minnesota simply because they were once created in Minnesota or by a Minnesota resident. Until this decision trusts created in Minnesota were subject to state income tax for the life of the trust under Minnesota tax law. Because of this case, trusts can now move residency to another state to take advantage of state income tax laws that may exist in that particular state, just as individuals can. For example, a trust residing in South Dakota would not be subject to state income tax – an amount that could result in a significant tax savings each year.
This case was formed as a challenge involving four trusts that were created by a Minnesota resident in 2009. In 2014, the grantor moved to Texas and became a Texas resident and in that same year sold a company that was owned inside the trust. The trust filed tax returns in Minnesota in 2014 reporting all of the gains, but did so under protest. This Supreme Court case was filed as a result of the audit of that year’s return. The law in Minnesota at the time was that any trust created by a Minnesota resident would be taxed under Minnesota income tax rules, on the entirety of the trust, for as long as the trust existed. The grantor claimed that the trust had moved to Texas and that it was unconstitutional to continue to pay taxes to Minnesota. The Tax Court agreed, and on July 17, 2018 the Minnesota State Supreme Court affirmed the tax court’s decision.
How is a Trust “Moved” for Income Tax Purposes? The process is typically simpler than moving personal residence and does not have requirements around intent or days in or residence in a particular state. Now that the Minnesota law has been deemed unconstitutional, there are no requirements in place that would allow Minnesota to pull a trust back in as a resident trust if it affirmatively moves. The trust would have to meet the requirements of the state it is moving to. For example, in South Dakota that means appointing a South Dakota trustee. That trustee could be the sole trustee, an administrative trustee (leaving others in charge of investments and distributions) or a co-trustee with a family member or other individual. In South Dakota there is not a requirement that you change the terms of the trust or obtain court approval to be considered moved.
The Court outlined how the Minnesota Legislature might revise the law to make it constitutional and enforceable. It is likely that the Legislature will include factors such as residency of any trustee or the location of assets in Minnesota (like real estate). As a result, trusts likely have a short window of time to move if they have other Minnesota connections before the Legislature puts in place another version of the law.
This ruling may also mean that trusts that did move to another state, but continued to file tax returns in Minnesota on all of the income, can apply for Minnesota income tax refunds. Refund requests must be made within three years of the original return so timing could be of the essence to take advantage of this ruling. Please consult with your advisors to see if a particular trust situation would be eligible for refunds.
Meristem Trust Company, a South Dakota trust company, is pleased to assist in the evaluation of any trusts you think may benefit from this ruling.