ATTORNEY ADVERTISING
Client Alert / June 2015
TRUSTS & ESTATES
VICTORY FOR TAXPAYERS: COURT RESTRICTS NEW JERSEY’S
ABILITY TO TAX TRUST INCOME
By: John L. Berger, Esq., Warren K. Racusin, Esq., and Bridget Harris, Esq.
In a case just decided by the New
Jersey Appellate Division, Lowenstein
Sandler helped a client successfully
defeat New Jersey’s aggressive attempt
to tax income that a trust earned in
other states. The Court ruled that New
Jersey could not tax a trust’s out-ofstate income even though the trust was
created by a New Jersey resident.
and because New Jersey had notified
taxpayers in 2011 that a resident
trust that earns even a dollar of New
Jersey source income is taxable on all
of its income. One slight problem: New
Jersey’s notification was issued five
years after the tax year in question,
and after Lowenstein Sandler had filed
its Tax Court complaint challenging the
tax assessment.
A Little Background
The Tax Court Opinion
Lowenstein Sandler represented the
trustee of a trust created under the will
of Fred Kassner, a co-founder of Liberty
Travel. Because Mr. Kassner resided in
New Jersey when he died, the trust is a
“resident trust” under New Jersey tax
law. The bad news is that New Jersey’s
tax law states that a resident trust is
taxable on all of its income, regardless of
where that income is earned, for as long
as the trust exists. The good news is that
New Jersey courts long ago held it was
unconstitutional to tax a trust’s income
merely because a New Jersey resident
created the trust, and the Division of
Taxation informed taxpayers years ago
in an official publication that it would
not tax a resident trust’s income as long
as the trust had no New Jersey trustee
and no New Jersey property.
Lowenstein Sandler was victorious in
the New Jersey Tax Court, which found
that it remains unconstitutional to tax
a resident trust on out-of-state income
if the trust has no New Jersey trustee
and no New Jersey property. New
Jersey appealed.
New Jersey said the current case was
different, however, and that it could tax
the trust on all of the trust’s income,
because the trust earned some income
in New Jersey (the trust paid tax on its
New Jersey source income). New Jersey
argued that prior law and its previous
guidance did not shield the trust from
tax on its out-of-state income, both
because of changes in constitutional law
The Appellate Division Opinion
The Appellate Division also ruled in
favor of our client, but found it was
not even necessary to decide the
constitutional question. Rather, the
Appellate Division concluded that “it is
fundamentally unfair for the Division
[of Taxation] to announce in its official
publication that, under a certain set of
facts, a trust’s income will not be taxed,
and then retroactively apply a different
standard years later.” The Appellate
Division left open the question of
whether New Jersey’s new position
(that it may tax a resident trust on all
of its income if it earns any New Jersey
source income, even if the trust has no
New Jersey trustee and no New Jersey
property) is constitutional and, if it
is, whether New Jersey may enforce
its new position only after issuing
regulations (which it has not yet done).
What This Case May Mean
To You
This case adds to the body of New
Jersey law holding that New Jersey
may not tax all of a trust’s income
merely because the trust is created
by a New Jersey resident (indeed, in
certain situations New Jersey may not
be able to tax any of a resident trust’s
income).
This case has important implications
for trusts created by New Jersey
residents. Some of those trusts
may be paying tax to New Jersey
unnecessarily. With an income tax rate
that can reach almost 9%, that can
take a big bite out of a trust’s earnings.
To discuss how this case affects any
trust you created (or of which you are
a beneficiary or trustee), and what you
can do to minimize a trust’s income
tax, please call us.
TRUSTS & ESTATES
contacts
Please contact any of the
attorneys named below for more
information on this matter.
John L. Berger
973.597.2314
[email protected]
Michael N. Gooen
973.597.2366
[email protected]
Bridget Harris
973.597.2324
[email protected]
Benedict M. Kohl
973.597.2394
[email protected]
Warren K. Racusin
646.414.6848
[email protected]
Kenneth J. Slutsky
973.597.2510
[email protected]
Tracy A. Snow
973.422.6774
[email protected]
Ashley Steinhart
973.597.2520
[email protected]
Abigail Levine Stiefel
973.597.6132
[email protected]
Michael P. Vito
646.414.6944
[email protected]
Eric D. Weinstock
973.597.6184
[email protected]
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This Alert has been prepared by Lowenstein Sandler LLP to provide information on
recent legal developments of interest to our readers. It is not intended to provide
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subsequent to the date of its publication, such as new legislation, regulations and
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