Challenges to Minnesota’s trust taxation have weaved their way through the court system. Those who incurred tax liability on trusts fought the taxation and won. After appeals affirmed lower court decisions, the issue was finally submitted to the U.S. Supreme Court. The U.S. Supreme Court declined to rule on the issue, which made the Minnesota court rulings on the matter final. The fallout of the trust taxation case rulings has big implications for the Minnesota Revenue Department. The Department is set to lose upwards of $100 million dollars as a result.
When amending its trust taxation laws, Minnesota put provisions in place that put trusts formerly out of reach for taxation purposes, back within the purview of state taxation laws. This was accomplished by making the residency of the person who set up the trust, the trust settlor, relevant for determining whether the trust would be considered a “resident” trust and, thus subject to state trust tax. The new rule caused quite a stir. Trustees and beneficiaries who did not have any strong ties to Minnesota fought the changes all the while millions of dollars were generated for Minnesota through trust taxation.
Several years ago, one lawsuit relating to Minnesota’s trust taxation laws moved through the court system. The trust involved was established by a Minnesota businessman for the benefit of his children. The trust contained shares of stock in a Minnesota corporation. The trustee was based in Texas. Minnesota taxed the trust as a “resident” trust when shares of the stock were sold. The trustee protested, but paid the taxes and then sought a tax refund. The refund was denied and the trustee appealed and won in Minnesota Tax Court. Eventually, the Minnesota Supreme Court upheld the ruling. As previously stated, the U.S. Supreme Court declined taking up the case.
For the Minnesota Department of Revenue, this means that refunds will very likely need to be issued. In fact, the department could lose $100 million dollars in refunds, plus interest. It is estimated that the court ruling will affect between 500 and 1,000 trusts annually.
Court Challenge of Minnesota Trust Taxation Could Mean Loss of Millions for State Revenue Department
The court challenges arose from a long-standing debate as to the way Minnesota determined what trusts were “resident” trusts for taxation purposes. Minnesota changed its trust laws back in the mid-1990s in an attempt to prevent state residents from reducing or avoiding tax liability by going to other states that did not have the same trust taxation laws when setting up trusts.When amending its trust taxation laws, Minnesota put provisions in place that put trusts formerly out of reach for taxation purposes, back within the purview of state taxation laws. This was accomplished by making the residency of the person who set up the trust, the trust settlor, relevant for determining whether the trust would be considered a “resident” trust and, thus subject to state trust tax. The new rule caused quite a stir. Trustees and beneficiaries who did not have any strong ties to Minnesota fought the changes all the while millions of dollars were generated for Minnesota through trust taxation.
Several years ago, one lawsuit relating to Minnesota’s trust taxation laws moved through the court system. The trust involved was established by a Minnesota businessman for the benefit of his children. The trust contained shares of stock in a Minnesota corporation. The trustee was based in Texas. Minnesota taxed the trust as a “resident” trust when shares of the stock were sold. The trustee protested, but paid the taxes and then sought a tax refund. The refund was denied and the trustee appealed and won in Minnesota Tax Court. Eventually, the Minnesota Supreme Court upheld the ruling. As previously stated, the U.S. Supreme Court declined taking up the case.
For the Minnesota Department of Revenue, this means that refunds will very likely need to be issued. In fact, the department could lose $100 million dollars in refunds, plus interest. It is estimated that the court ruling will affect between 500 and 1,000 trusts annually.