By: Jacqueline M. Schuh
On July 18, 2018, the Minnesota Supreme Court issued a long awaited decision in Fielding v. Commissioner. This case involved trusts created by a grantor, who at the time of creation, resided in Minnesota. The trusts were for each of his four children and were funded with stock of a Minnesota business where the grantor had been employed. Although the grantor initially controlled all four trusts, total control was later turned over to a series of neutral Successor Trustees.
In 2014, the acting Trustee-a resident of Texas, sold the shares of the Minnesota business. Upon sale, each Trust was assessed and paid substantial Minnesota income taxes. The Trustee, however, filed Protests on behalf of each trust challenging the Minnesota Department of Revenue’s basis for imposing the tax. The Department. asserted its claim under a single statute that allowed for taxation based upon the domicile of the grantor. The Supreme Court declined to uphold the Department’s position that the trusts should be taxed as “resident trusts” based solely on the single statutory factor that the grantor was domiciled in Minnesota when the trusts became irrevocable. The Court declared it was unconstitutional on due process grounds; the Court instead evaluating all connections of the trusts to Minnesota, and weighing the benefits to the trusts as taxpayers, in its analysis. As a result, each of the Trusts were entitled to significant refunds of taxes paid.
This ruling affects only certain irrevocable trusts that paid or will be assessed Minnesota income taxes as “resident trusts”. If you have such a trust and desire to amend past filings or argue in future filings, review this case carefully for an opportunity to seek relief. Although there is no guarantee that the Department will apply the holding or analysis to past or future trust taxpayers, it’s worth a try. Also, to bolster the argument, the determination in this case is consistent with rulings in other states across the country.
If you need additional information about this issue or any trust, probate or estate planning issue, please feel free to contact us.
Sheila Engelmeier