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Minnesota resident trust law update

Legislative reaction to Fielding v. Commissioner failed to be included in 2021 omnibus tax bill

Paul Dinzeo, CPA, JD, CFP, MBT | September 2021 Footnote

Editor's note: Updated August 30, 2021

The Minnesota Legislature and Gov. Tim Walz went to the wire in passing the 2021 omnibus tax bill into law this past session — well, special session, as lawmakers needed extra time this year to complete their work just ahead of a mandated partial state shutdown.  

Many Minnesota business owners and tax professionals were patiently waiting until the final hours of June to find out whether Minnesota was going to conform to the taxpayer friendly federal treatment of the Paycheck Protection Program (PPP) loan forgiveness. But while the positive news of Minnesota conformity (to PPP and a handful of other items, at least) was at the forefront of tax conversations, a change in the Minnesota resident trust law as a reaction to the 2018 Minnesota Supreme Court case in Fielding v. Commissioner was being considered but, in the end, failed to become law.

Minnesota resident trust statute for non-grantor trusts that become irrevocable after Dec. 31, 1995, are treated as a Minnesota resident trust if the trust was created by a will of a domiciled Minnesota decedent or if the grantor was domiciled in Minnesota when a non-grantor trust becomes irrevocable. Different rules apply to pre-1996 trusts that won’t be impacted by any future legislative changes in Minnesota resident trust laws.

The ruling of the court

On July 18, 2018, the Minnesota Supreme Court published its decision in Fielding, finding that the resident trust definition was unconstitutional as applied to the Fielding trusts. The court determined that it must look at the connections between the trust and the state of Minnesota, and whether the income that the state seeks to tax is rationally related to the benefits being conferred on the trust by the state.

The court looked at the following relevant factors when applying the facts in the Fielding case:
  • Domicile of the trustee.
  • Location of the trustee’s decision-making.
  • Location of the trusts’ administration.
  • Location of the trusts’ records.
  • Inter vivos trust versus testamentary trust using Minnesota probate court.
A proposed Minnesota House omnibus tax bill during the Legislative session included a “relevant connection” analysis to determine whether a trust could be taxed as a Minnesota resident trust. Relevant connections included, but were not limited to, the following:
  • One or more of the trustees, fiduciaries, nonfiduciary service providers, settlors, grantors or beneficiaries of the trust are residents or part-year residents of Minnesota.
  • Tangible or intangible assets making up any part of the trust are located in Minnesota.
  • Any part of the administration of the trust took place in Minnesota (i.e., investing and distributing trust assets, conducting trust business, litigation filing of tax returns, record keeping and making other fiduciary decisions).
  • The laws of Minnesota are specifically made applicable to the trust or to the parties to the trust, whether by choice of law or by operation of law.
  • The trust was created by a will of a decedent who at death was domiciled in Minnesota.
  • The trust and the will under which it was created were probated in Minnesota or were otherwise approved or enforced by Minnesota’s courts.
  • Minnesota’s courts have a continuing supervisory or other existing relationship with the trust.

Where we go from here

Although the redesigned Minnesota resident trust statute was not included in the final bill that Gov. Walz signed, it appears that the Fielding result may influence a broader and more fact- and circumstances-based test in determining whether a trust is subject to Minnesota tax. This is particularly evident when comparing the relevant factor test in the Fielding case with the relevant connection language in the proposed resident trust statute.

Tax professionals should discuss with their clients whether they have facts similar to the taxpayer in Fielding so they can tax a filing position that they are not a Minnesota resident trust. This conversation should be done now under the precedent before a broader statutory scheme is passed by the Minnesota Legislature — because a new definition of a Minnesota resident trust seems inevitable.

Paul J. Dinzeo, CPA, MBT, JD, CFP is the president of Dougherty Trust Company, a South Dakota trust company. He is an MNCPA member, and has appeared in numerous publications, including The Wall Street Journal and The New York Times. You may reach him at pdinzeo@doughertytrust.com.