In 1992, Joseph Lee Rice III established a trust, appointing William B. Matteson as trustee and his three children as beneficiaries. In 1997, of the beneficiaries, Matteson’s daughter Kimberly moved to North Carolina, and North Carolina eventually assessed a tax on Kimberly’s portion of the trust of more than $1.3 million for the tax years in which she lived in North Carolina. Under the terms of the trust, however, Kimberly had no right to and did not receive any distributions from the trust during the time she resided in North Carolina, and New York was the situs of the trust at all relevant times. Moreover, all of the activities of administering the assets in the trust occurred outside of North Carolina, and all the assets in the trust were also held outside of North Carolina.

CASE QUESTIONS

1. Is the portion of the trust created for the benefit of the trustor’s daughter Kimberly subject to taxation in North Carolina?

2. Does it matter whether it is a federal judge or a state court judge who gets to decide this issue?