United States: Minnesota Tax Court Holds Definition Of 然esident Trust' Unconstitutional As Applied To Inter Vivos Trusts

On May 31, 2017, the Minnesota Tax Court overturned as unconstitutional the taxation of certain trusts as Minnesota "resident trusts" and held that application of the statutory definition of "resident trust" to inter vivos trusts formed after 1995 violated the Due Process Clauses of the Minnesota and U.S. Constitutions as applied to the trusts at issue.1 The Court determined that the Minnesota domicile of the grantor at the time the trust became irrevocable was not constitutionally sufficient to allow Minnesota to permanently classify the trust as a Minnesota resident trust and to tax the inter vivos trusts' investment income as Minnesota source income.


In June 2009, Reid MacDonald (Grantor) created four separate grantor trusts (collectively, "Trusts") for his children through four separate trust agreements (collectively, "Trust Agreements") and funded each trust with shares of nonvoting common stock in Faribault Foods, Inc. ("FFI"), an S corporation headquartered in Minnesota. Grantor was domiciled in Minnesota in 2009 when the Trusts were created, and he remained a Minnesota resident after creation of the Trusts. From their establishment until December 31, 2011, the Trusts' sole trustee was Edmund MacDonald, Jr., who was domiciled in California at all times while serving as trustee. From January 1, 2012 to July 24, 2014, the Trusts' sole trustee was Katherine Boone, who was domiciled in Colorado at all times while serving as trustee. Since July 24, 2014, the Trusts' sole trustee has been William Fielding ("Fielding"), who is domiciled in Texas.

From June 25, 2009 until December 31, 2011, the Trusts were "grantor type trusts" for purposes of Minnesota income tax, as Grantor was considered the Trusts' owner under Internal Revenue Code (IRC) Sections 671 through 678. The Trusts became irrevocable trusts on December 31, 2011 when Grantor signed a release of his power under the Trust Agreements to exchange assets. From then on, each Trust was considered a "resident trust,"2 due to it no longer being considered a "grantor type trust"3 and because Grantor was a Minnesota resident at the moment the Trusts became irrevocable.

In August 2014, Fielding sold the stock in FFI that each Trust owned, to a third-party purchaser as part of a larger transaction where all other shareholders also sold their stock. Fielding entered into separate Asset Management Agreements with Wells Fargo for each Trust. Under these agreements, Wells Fargo managed the assets of each Trust, performing these services in California. The FFI stock sale resulted in a gain and the Wells Fargo investments resulted in income which was reported on the Trusts' 2014 Federal and Minnesota income tax returns.

Fielding filed each Trust's 2014 Minnesota income tax return as a "resident trust," allocating the gain from the sale of the FFI stock and other investment income to Minnesota along with an apportioned share of the business income from FFI. Each return was filed under protest as Fielding asserted that the statutory provision defining a "resident trust" was unconstitutional. Fielding then filed amended 2014 Minnesota income tax returns for the Trusts in which he took the position that each Trust was not a "resident trust." On each amended return, he calculated the Minnesota income tax liability for each Trust by excluding the gain from the 2014 FFI stock sale and the income from the Wells Fargo investments on the basis that each Trust was not a "resident trust" and that since the stock and investments were intangible personal property located outside Minnesota, income from such items was not allocated to Minnesota.

The Minnesota Commissioner of Revenue denied the refund claims. On behalf of the Trusts, Fielding appealed the Commissioner's tax order to the Minnesota Tax Court.

Definition of "Resident Trust" Violates Due Process

The Minnesota Tax Court held that Minnesota lacked authority to tax the Trusts' investment income as Minnesota "residents." The application of the statutory definition of "resident trust" to inter vivos trusts violated the Due Process Clauses of the Minnesota and U.S. Constitutions because Minnesota lacked subject matter jurisdiction over the intangible personal property which was located outside Minnesota.

Definition of "Resident Trust"

Minnesota law provides, in relevant part, that a "[r]esident trust means a trust, except a grantor type trust, which . . . is an irrevocable trust, the grantor of which was domiciled in this state at the time the trust became irrevocable."4

The Commissioner argued that the Trusts met the statutory definition of "resident trusts" because Grantor was domiciled in Minnesota at the time the Trusts became irrevocable on December 31, 2011. The Commissioner also urged the Court to consider additional factors to be used to determine that the Trusts should be taxed as Minnesota residents, including the fact that FFI was incorporated and headquartered in Minnesota, and that the Trust documents were kept in Minnesota.

The Court rejected the Commissioner's claim that additional factors should be considered because the statute only focused on the location of the domicile of the grantor on the date that the Trust became irrevocable. The Court proceeded to address whether considering only the grantor's historical domicile satisfied the Due Process Clause, and provided a sufficient connection with Minnesota to allow it to tax the Trusts as residents with investment income includable on their Minnesota returns.

Grantor's Historical Domicile Is Insufficient Connection with State

Following relevant decisions from several other states,5 the Court held that considering a grantor's historical domicile, as the sole factor to determine if a trust is a "resident trust," does not satisfy subject matter jurisdiction under the Due Process Clause over the investment activity. As a result, there was no sufficient connection with Minnesota to allow the state to tax investment activities that do not occur within the state. In this case, Minnesota could not tax the Trusts as "residents." The Trusts' intangible personal property was located outside Minnesota because the FFI stock was possessed by a trustee that was located outside Minnesota, and the Wells Fargo investments were administered in California. As a result, the gain from the sale of the FFI stock and the income from the Wells Fargo investments was required to be allocated outside Minnesota.6

The Court provided two reasons for determining that it was unconstitutional to tax these Trusts as "resident trusts" based only on Grantor's historical domicile. "First, it reaches back through time to a discrete historical moment, and purports to rely on state protections extended (to the grantor) at that moment."7 As explained by the Court, the other states' decisions indicate that "due process does not permit this resort to protections provided exclusively in previous tax years: the protections provided 'must generally span the time period during which the income was earned . . ..'"8 "Second, the grantor-domicile method of asserting taxing jurisdiction over a trust reaches across persons. Rather than relying on connections with the trust itself, it relies instead on connections with the trust's grantor."9


The Department presumably will appeal this decision to the Minnesota Supreme Court because the Tax Court declared that, as applied to the trusts in this case, the portion of the statute which defines a "resident trust" as a trust for which the grantor was domiciled in Minnesota at the time the trust became irrevocable is unconstitutional. Similarly situated trusts, where the trustee is domiciled outside Minnesota and which earned a significant amount of investment income that was not distributed, may want to consider filing protective refund claims while the matter is being considered by the Minnesota Supreme Court. Similar to individuals, under the decision by the Tax Court, a residency determination must be made each year for a trust, and a trust can change its state of residency.

In light of this decision, the Department is expected to request the Minnesota legislature, when it returns on February 20, 2018, to consider amending the statutory definition of a "resident trust." The provision of the statute that was declared unconstitutional only applies to trusts that became irrevocable after December 31, 1995 or were first administered in Minnesota after December 31, 1995. The definition of a "resident trust" for a trust that became irrevocable prior to 1996 is determined where two or more of the following conditions are satisfied:

  • The location where the majority of the discretionary investment decisions of the trustees are made;
  • The location where the majority of the discretionary distribution decisions of the trustees are made; and
  • The location where the official books and records of the trust are held.10

The statutory definition of a "resident trust" that became irrevocable after 1995 and which was created by the will of a decedent was not at issue in this litigation. Under the statute, these testamentary trusts are considered to be "resident trusts" if the decedent who created them was domiciled in Minnesota when that person died.11


1 Fielding v. Commissioner of Revenue, Minnesota Tax Court, Dkt. Nos. 8911-R to 8914-R, May 31, 2017.

2 MINN. STAT. ァ 290.01, subd. 7b(a).

3 A grantor trust is not considered a separate taxable entity. Rather, the grantor must report income earned by the trust.

4 MINN. STAT. ァ 290.01, subd. 7b(a).

5 See Mercantile-Safe Deposit & Trust Co. v. Murphy, 242 N.Y.S.2d 26 (N.Y. App. Div. 1963), aff'd 203 N.E.2d 490 (N.Y. 1964) (a New York domiciled grantor transferred cash and securities to a trust which was administered by a Maryland domiciled trustee); Potter v. Taxation Division Director, 5 N.J. Tax 399 (1983) (a New Jersey domiciled grantor created an irrevocable inter vivos trust which was located and managed by a trustee outside New Jersey); Blue v. Department of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990) (a Michigan domiciled grantor created a trust that became irrevocable upon the grantor's death; the trust's sole beneficiary, sole trustee, and administration was located in Florida); Linn v. Department of Revenue, 2 N.E.3d 1203 (Ill. App. Ct. 2013) (an Illinois domiciled grantor created an irrevocable trust; the trust's beneficiaries were located outside Illinois, and the trustee administered the trust in Texas).

6 See MINN. STAT. ァ 290.17, subd. 2(c).

7 Emphasis in original.

8 Quoting Chase Manhattan Bank v. Gavin, 733 A.2d 782, 801 (Conn. 1999).

9 Emphasis in original.

10 MINN. STAT. ァ 290.01, subd. 7b(b).

11 MINN. STAT. ァ 290.01, subd. 7b(a).

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