Law Firm & Professional Services

Tax Partner, CPA

Private Wealth

Private Client

Partner, CPA

Director, CFP®

Wealth Management

Personal Wealth Services

Business Wealth Services

Director, QPA, QKA, AIF®

Partner, CPA, CFP

The U.S. Supreme Court ruled that a North Carolina statute imposing income tax on a trust based solely on the residency status of the trust’s beneficiaries violated the due process clause of the 14th Amendment to the U.S. Constitution as applied to the “specific facts presented.”  In North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, U.S., No. 18-457, 6/21/19, the geographic footprint of the Kaestner trust spanned four states. The beneficiaries were residents of North Carolina; the trustee was located in Connecticut; the assets (all intangibles) were located in Boston; the settlor was a New York resident at the time the trust was created; the books and records, tax returns, legal documents were kept in New York; and the trust itself was governed under New York law. The trustee filed a $1.3 million refund on behalf of the trust for tax years 2005 through 2008, asserting that North Carolina could not impose income tax based solely on the beneficiaries’ residency status. North Carolina Code section 105-160.2 states in relevant part: “The tax is computed on the amount of the taxable income of the estate or trust that is for the benefit of a resident of this State … ”  The court noted that “when a State seeks to base its tax on the in-state residence of a trust beneficiary, the Due Process Clause demands a pragmatic inquiry into what exactly the beneficiary controls or possesses and how that interest relates to the object of the State’s tax.”  The court emphasized the following key factors in rendering its opinion: the beneficiaries did not receive any income from the trust during the years at issue the beneficiaries had no right to demand trust income or otherwise control, possess or enjoy the trust assets in the tax years at issue the decision of when, whether and to whom the trustee would distribute the trust’s assets was left to the trustee’s absolute discretion the trust agreement explicitly authorized the trustee to distribute funds to one beneficiary to the exclusion of others with the effect of cutting one or more beneficiaries out of the trust the agreement authorized the trustee, not the beneficiaries, to make investment decisions regarding trust property the trust agreement prohibited the beneficiaries from assigning to another person any right they might have to the trust property The court noted that its decision only addressed “the circumstances in which a beneficiary receives no trust income, has no right to demand that income, and is uncertain necessarily to receive a specific share of that income.” While limited in scope, the Kaestner ruling may present refund opportunities in North Carolina or other states with similar imposition statutes for similarly drafted trusts. We advise reviewing any trust agreement with your advisor to see if the decision affects your trust. The case also provides some planning opportunities in North Carolina particularly as concerns the beneficiaries’ rights to income and trustee powers as granted by the trust documents. For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.

A June 2019 Supreme Court ruling said a state can’t impose an income tax on a trust just because a beneficiary lives there. So how does the decision affect you?

Federal Tax

State & Local Tax

Supreme Court issues trust-friendly state income tax nexus decision

Authored by Paul Dillon and Mike Schiavo Last week, the IRS released final section 199A regulations for the 20 percent pass-through deduction enacted under the Tax Cuts and Jobs Act (TCJA). For taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026, noncorporate taxpayers (individuals, trusts and estates) may take a deduction of up to 20 percent of qualified business income (QBI) from partnerships, S corporations and sole proprietorships, plus 20 percent of qualified REIT dividends and publicly traded partnership (PTP) income. There are a number of important changes and clarifications compared to the proposed regulations, which we will address in future alerts. As part of the regulations package, the IRS also provided a safe harbor in Notice 2019-07 for rental real estate to be treated as a trade or business solely for purposes of section 199A. Key takeaways Under the safe harbor, a rental real estate enterprise will be treated as a trade or business for section 199A purposes if 250 hours per year of rental services are performed with respect to the rental enterprise. Triple net leases are specifically prohibited from using the safe harbor. Triple net leases will need to be analyzed outside of the safe harbor to determine if they are eligible for the section 199A deduction. Taxpayers can rely on the safe harbor until a final revenue procedure is issued. The safe harbor is strictly limited to the application of section 199A. Taxpayers can treat each rental real estate property as a stand-alone enterprise or group together similar properties and treat each group as an enterprise. Although the safe harbor applies solely for purposes of section 199A, clients should be reminded that treating rental properties as a trade or business may require filing Form 1099 to report rental expenses and treating mortgage interest as business interest expense subject to the new limitations on the business interest expense deduction. Safe harbor for rental real estate                                             Under the safe harbor, a “rental real estate enterprise” (defined below) will be treated as a trade or business for section 199A purposes if it meets the following requirements: separate books and records are maintained to reflect income and expenses for each rental real estate enterprise; 250 or more hours of rental services (examples below) are performed per year for tax years beginning before Jan. 1, 2023, and the taxpayer maintains contemporaneous records, including time reports, logs or similar documents regarding hours of all services performed, a description of all services performed, dates on which the services were performed and who performed the services. A rental real estate enterprise is defined as an interest in real property held to produce rents and may consist of an interest in multiple properties. The individual or relevant pass-through entity must hold the interest directly or through a disregarded entity. Taxpayers can treat each rental real estate property as a stand-alone enterprise or group together similar properties and treat each group as an enterprise. Commercial and residential real estate may not be a part of the same rental real estate enterprise. Taxpayers must be consistent with this treatment unless there is a significant change in facts and circumstances. Rental services may be performed by owners, employees, agents or independent contractors. Rental services include: advertising to rent or lease the real estate; negotiating and executing leases; verifying information contained in prospective tenant applications; collecting rent; daily operation, maintenance and repair of the property; managing the real estate; purchasing materials; and supervising employees and independent contractors. Qualifying rental services do not include financial or investment management activities such as arranging financing, procuring property, reviewing financial statements or operations reports, planning, managing or constructing long-term capital improvements or travel to and from the real estate properties. Real estate rented or leased under a triple net lease is not eligible for the safe harbor. Further, real estate used by the taxpayer as a residence for any part of the year is not eligible for the safe harbor. Disclosure requirement. In order to apply the safe harbor, a taxpayer attaches a signed statement, invoking perjury penalties, to the tax return reporting the section 199A deduction. As part of the regulations package, the IRS also provided a safe harbor in Notice 2019-07 for rental real estate to be treated as a trade or business solely for purposes of section 199A. This safe harbor requires rental real estate professionals to contemporaneously track the time spent by rental real estate professionals on rental real estate activities. Baker Tilly’s sample log can be used to identify activities that qualify for the TCJA section 199A safe harbor for rental real estate activities. Please consult your Baker Tilly tax advisor to determine how best to take advantage of this new guidance. For related insights and in-depth analysis, see our Tax Reform Resource Center. For more information on these topics, or to learn how Baker Tilly tax specialists can help, contact our team.

The IRS issued final section 199A regulations with a number of changes and clarifications, including for the rental real estate safe harbor.

Real Estate

Manufacturing & Distribution

Healthcare & Life Sciences

Dental Practices

Dealerships

Retail

New regulations provide rental real estate safe harbor for 20 percent pass-through deduction

At Baker Tilly, our private wealth professionals understand the challenges facing individuals and family offices. Our team serves as a holistic and proactive group of advisors developing comprehensive plans to leverage the power of our collective, specialized knowledge. Our services include:

Helping family businesses achieve their full potential through growth strategies, succession planning and next generation leadership development, including: 

Our team of dedicated professionals works closely with families and family offices to navigate the complexity of wealth preservation objectives. We provide an array of customized solutions including: 

Baker Tilly’s private client group works with individuals, business owners, executives, and family offices to develop and implement strategies to help them achieve goals and minimize current and future liabilities. Services include:

Baker Tilly helps owners and leaders of organizations across a broad range of industries strategically plan for and achieve their individual and business goals through comprehensive succession planning and exit strategies. Our industry specialized professionals can help you with:

Generational ownership transition planning

Whether you are planning for your own retirement or ensuring a solid financial future for your employees, Baker Tilly can help you take the next step. Our services include:

Baker Tilly professionals provide a comprehensive range of wealth management and succession services to private clients and family offices.

Family business, wealth planning, wealth management, private client, investment planning, succession planning, financial planning, exit strategy, ownership transition

Helping family businesses achieve their full potential through growth strategies, succession planning and next generation leadership development.

In order to achieve your personal and financial objectives, you need a coordinated approach to your tax, estate, and financial planning needs.

Baker Tilly’s private client group works with individuals, business owners, executives, and family offices to understand their goals. We then develop and implement strategies to help them achieve those goals and minimize current and future liabilities.

Building a legacy takes years of savvy business decisions, calculated risks in growth, a commitment to integrity and the right business advisor. Our extensive knowledge of family offices can help you protect and grow your family’s wealth.

Baker Tilly has expertise in working with families and family offices to navigate the complexity of wealth preservation objectives. We provide an array of customizing solutions that integrate our core tax, assurance and business advisory services to a particular family’s unique needs. 

Baker Tilly works with clients to define long-term ownership transition goals and prepare for transition and the future. Succession planning, exit planning, exit strategy, mergers and acquisitions, ownership transition

We know your wealth is measured in much more than numbers. That’s why our strategic wealth management advisors take the time to get to know you and your goals first so we can see the full picture of your life, and help you live yours to the fullest.

Baker Tilly’s wealth management advisors can help you plan for your retirement or ensure a financial future for your employees.

Private Wealth

Supreme Court issues trust-friendly state income tax nexus decision

New regulations provide rental real estate safe harbor for 20 percent pass-through deduction

Family Business

Private Client

Family Office

Ownership Transition & Exit Strategies

Wealth Management

Our solutions

Family Business

Family Office

Private Client

Ownership Transition and Exit Strategies

Wealth Management