Income and Principal Interest Open QTIP Trust to TaxationIncome and Principal Interest Open QTIP Trust to Taxation

In Estate of Evans v. Dept. of Rev. (368 OR 430, July 29, 2021), the estate of Helene Evans appealed from the Oregon Tax Court’s determination that a qualified terminable interest property (QTIP) trust established by her late husband in Montana was taxable in her estate.

Helene had moved to Oregon one month before her husband, Gillam, passed away 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. Originally, the will provided that the trust was for the benefit of multiple beneficiaries. However, the executor petitioned a Montana court to modify the trust to allow for a QTIP election. The court approved, and the trust was reformed so that Helene was entitled to the trust income during her life and principal could be distributed to her in the trustee’s discretion for her health, education, maintenance or support in her accustomed manner of living. She didn’t have a power of appointment (POA).

Gillam’s estate filed a federal estate tax return and made a QTIP election for the trust. Montana didn’t have an estate tax. The trust was administered for Helene’s benefit, but in 2014, she sought additional distributions and, under Montana law, settled with the trustee for one lump sum 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 on the return, as required by Oregon law. However, later, the estate sought to exclude the value of the trust asset and filed for a refund. The estate claimed that Oregon’s tax on the trust assets violated the due process clause.

The Tax Court disagreed, and the estate appealed to the Oregon Supreme Court. For estate tax purposes, the due process clause requires that a state have a minimum connection to the person or property it’s taxing. Helene’s estate argued that the due process clause doesn’t permit a state to impose estate tax on a trust holding intangible assets solely because the resident of the state was an income beneficiary during her life, without any practical control of 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 of North Carolina Dept. of Revenue v. Kimberley Rice Kaestner 1992 Family Trusts, 139 S. Ct. 2213 (2019), in which the U.S. Supreme Court held that North Carolina couldn’t, under the due process clause, tax trust income over a four-year period when: (1) the trust was administered under New York law by a New York trustee; and (2) all beneficiaries lived in North Carolina but no distributions were actually made to any beneficiaries. Other cases the court reviewed involved trusts in which the beneficiaries had some form of POA—which was determined to be sufficient control to allow the beneficiary’s state of residence to tax the trust.

Ultimately, the Oregon Supreme Court held that while a POA may be sufficient to establish a connection that permits taxation, it’s not a prerequisite. 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 principal, qualified as a substantial measure of enjoyment that allowed Oregon to tax the trust as part of her estate.