Income and prime interest open QTIP Trust for taxation

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    In Estate of Evans v. Dept. of Rev. (368 OR 430, July 29, 2021) the estate of Helene Evans appealed against the Oregon Tax Court’s finding that a QTIP (Qualified Terminable Interest Property) trust established by her late husband in Montana was subject to tax on her estate.

    Helene had moved to Oregon a month before her husband Gillam died in 2012. Gillam’s will provided for a testamentary trust for Helene and other beneficiaries. The trust was governed by Montana law and administered by his son, a Montana resident. The will originally provided that the trust would benefit multiple beneficiaries. However, the executor petitioned a court in Montana to change the trust to allow for a QTIP election. The court agreed, and the trust was reformed so that Helene was entitled to the trust income while she was alive and the capital could be distributed to her at the trustee’s discretion for her health, education, maintenance, or support in her usual way of life. She did not have a power of attorney (POA).

    Gillam’s estate filed a state estate tax return and made a QTIP election for the trust. Montana had no inheritance tax. The trust was administered on behalf of Helene, but in 2014 she requested additional distributions and agreed with the trustee under Montana law for a one-time payment and then a fixed monthly annuity.

    When Helene died in 2015, her estate filed an Oregon estate tax return and included the value of the QTIP trust as required by Oregon law. However, the estate later attempted to foreclose the trust property’s value and requested a refund. The estate alleged that the Oregon trust tax was in breach of the due process clause.

    The tax court disagreed, and the estate appealed to the Oregon Supreme Court. For inheritance tax purposes, the due process clause requires that a state have minimal connection with the person or property it is taxing. Helene’s estate argued that the due process clause does not allow a state to impose inheritance tax on a trust that holds intangible assets simply because the state’s resident was an income beneficiary during her lifetime, with no practical control over the trust assets.

    The court confirmed that the question of whether a state has necessary connections depends on the nature of the resident’s interest in the intangible property. The court distinguished the recent case from North Carolina Dept. of Revenue against Kimberley Rice Kaestner 1992 Family Trusts, 139 S.Ct. 2213 (2019) in which the US Supreme Court ruled that due process clause North Carolina cannot tax trust income for a period of four years if: (1) the trust fund is administered by a New Yorker under New York law became a trustee; and (2) all beneficiaries resided in North Carolina but no distributions were made to beneficiaries. Other cases the court reviewed involved trusts where the beneficiaries had some form of POA – which was considered sufficient control to allow the beneficiary’s state of residence to tax the trust.

    Ultimately, the Oregon Supreme Court ruled that while a POA may be sufficient to create a link that allows taxation, it is not a requirement. Other forms of “possession, control or enjoyment” may also satisfy the due process clause. It found that Helene’s beneficial interest in the trust, both income and capital, qualified as an essential measure of enjoyment that enabled Oregon to tax the trust as part of her property.

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