A 1939 Trust Ruling Lets One State Tax Assets Another Already Taxed

Most estate planners will tell you that no one should pay tax on the same assets twice. The U.S. Supreme Court, however, has never agreed. In 1939, the Court decided Curry v. McCanless, a case that let two states tax the same trust assets concurrently. That ruling has never been overturned. It means that a trust structured to avoid tax in one state can still be taxed in another — and both states can collect.

The myth of a blanket prohibition on double taxation persists because federal law includes some offsets. The estate tax unified credit, for example, shields $13,610,000 from federal tax as of 2026 (see Internal Revenue Code Section 2010(c) for the inflation-adjusted figure). But that credit does not apply to state-level taxes. And the credit itself is a creature of statute, not a constitutional right. The real architecture of trust taxation is a web of overlapping jurisdictions, and the 1939 ruling is the keystone.

This article walks through how trust situs creates overlapping tax claims, what the 'unified credit' actually does, and three contract terms that planners can use to prevent surprise state tax. It is not a how-to guide for your specific situation. It is an explanation of how the rules actually work — and why the common advice to 'just move the trust to Delaware' often fails.

The 1939 Ruling That Upends the 'No Double Taxation' Myth

In Curry v. McCanless, the Supreme Court considered a trust created by a Tennessee grantor with a trustee in Alabama. The trust held intangible assets — stocks and bonds — that had no physical location. Tennessee taxed the trust because the grantor lived there. Alabama taxed it because the trustee administered it there. The Court held that both taxes were constitutional.

The reasoning turned on the concept of 'situs' — the legal location of property for tax purposes. For real estate, situs is straightforward: the land is taxed where it sits. For intangible assets, the Court said, more than one state can have a sufficient connection. The grantor's domicile and the trustee's location each provide a basis for taxation. The Due Process Clause does not require exclusivity.

The ruling is often cited for the proposition that double taxation is not per se unconstitutional. What is less commonly discussed is the practical consequence: a trust can be designed to minimize tax in one state only to face a tax bill in another. The 1997 statute that taxes a trust as empty while the grantor still occupies the property illustrates a similar disconnect between state and federal treatment.

The dissent in Curry warned that the ruling would lead to 'confusion and conflict.' That prediction proved accurate. Over the next eight decades, states expanded their reach, taxing trusts based on the grantor's residence, the trustee's location, the place of administration, and even the beneficiary's domicile. No single rule governs.

How Trust Situs Creates Overlapping Tax Claims

Trust situs is not a single fact but a bundle of potential connections. The most common bases for state taxation are: (1) the grantor's domicile at the time the trust became irrevocable, (2) the trustee's principal place of business, (3) the location of trust assets, and (4) the beneficiary's residence. Each state defines these connections differently.

Consider a grantor who lives in New York, creates a trust with a Delaware trustee, and the trust holds real estate in California. New York taxes the trust because the grantor is a resident. Delaware taxes the trust because the trustee is there. California taxes the trust because the real property sits there. All three taxes are constitutional under Curry.

The result is that a single trust can owe income tax, estate tax, or both to multiple states. For income tax, the trust's income is sourced according to each state's rules. For estate tax, the trust's value is included in the grantor's estate for federal purposes, but each state may apply its own inclusion rules. The lack of uniformity creates planning traps.

Some states have adopted the Uniform Trust Code, which includes a default rule that the trust is governed by the law of the trustee's location. But tax jurisdiction does not follow governing law. A trust governed by Delaware law can still be taxed by New York if the grantor or beneficiaries live there. The situs for tax purposes is independent of the situs for administration.

The 'Unified Credit' Illusion and the Limits of Portability

The federal estate tax unified credit exempts $13,610,000 per individual from federal estate tax as of 2026 (IRS Rev. Proc. 2023-34). This credit is often described as a shield against double taxation, but that is misleading. The credit applies only to federal tax. It does not reduce state estate tax, and it does not prevent multiple states from taxing the same assets.

Before 2005, the federal estate tax allowed a credit for state death taxes paid. That credit effectively reimbursed taxpayers for a portion of state estate tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 phased out that credit, replacing it with a deduction. As of 2005, the state death tax credit is gone. No federal offset for state-level double taxation exists today.

Currently, 12 states impose an estate tax, and 6 impose an inheritance tax. Some states, like Illinois, tax the entire estate of a resident, including real property located in other states. Illinois offers a credit for taxes paid to other states on that property, but the credit is capped at the Illinois tax attributable to the out-of-state property. If the other state's tax is higher, the excess is not refundable.

Portability, introduced by the Tax Relief Act of 2010 and codified in Internal Revenue Code Section 2010(c), allows a surviving spouse to use the deceased spouse's unused federal estate tax exemption. It is often described as a way to avoid wasting the exemption. But portability applies only to federal estate tax. No state has adopted a similar rule for its own estate or inheritance tax.

Consider a married couple living in Pennsylvania, which imposes an inheritance tax on transfers to anyone other than a surviving spouse. If one spouse dies and leaves assets to the surviving spouse, Pennsylvania exempts the transfer. But if the surviving spouse later dies and leaves those assets to a child, Pennsylvania taxes the entire amount, with no credit for the deceased spouse's unused exemption.

Even if the federal estate tax return elects portability, the state ignores it. Pennsylvania, New Jersey, Maryland, and other states with inheritance or estate taxes do not recognize portability. The surviving spouse's estate is taxed on the full value, subject only to that state's own exemption amount, which is typically much lower than the federal exemption.

The gap is especially large for families with assets between the state exemption and the federal exemption. For example, a family with $10 million in assets may owe no federal estate tax but may owe state estate tax in states like Massachusetts or Oregon, where the exemption is around $1 million. Portability does nothing to close that gap.

Clients often assume that state rules follow federal rules. That assumption is false. Planners who do not separately analyze state law may discover at the surviving spouse's death that the state estate tax bill is substantial, even though no federal tax is due. The insurance contract clause that defines a heart attack in an unexpected way is a parallel example of fine print overriding common assumptions.

The result is that a family with property in multiple states can pay estate tax to each state on the same assets. The federal unified credit does nothing to prevent this. Planners who assume that 'portability' or the federal credit solves the problem are relying on a framework that does not exist at the state level.

A Real-World Structure: The Delaware Incomplete Gift Trust

The Delaware Incomplete Gift Trust, or DING trust, is a popular structure for grantors who want to avoid state income tax on trust earnings. The trust is structured as an incomplete gift for federal gift tax purposes, meaning the grantor retains a power that prevents the transfer from being a completed gift. The trust's situs is in Delaware, which does not tax trust income retained by the grantor.

Internal Revenue Service Revenue Ruling 2004-64 confirmed that a grantor's retained power to swap assets of equivalent value makes the trust an incomplete gift. That ruling is the foundation of the DING trust. The grantor retains the power to reacquire trust assets by substituting other property of equal value. Because the grantor can get the assets back, the gift is incomplete, and the trust is treated as a grantor trust for income tax purposes.

The income tax benefit is that Delaware does not tax the trust's income because the trust is a grantor trust and the grantor is not a Delaware resident. But the grantor's home state may still tax the income. If the grantor lives in New York, New York will tax the trust's income as the grantor's income, ignoring the Delaware situs. The DING trust saves state tax only if the grantor's home state does not tax the trust's income or if the trust holds assets that generate no current income.

Estate tax is another trap. Because the gift is incomplete, the trust assets are included in the grantor's estate for federal estate tax purposes. The grantor's home state may also include the assets in its estate tax. The DING trust does not avoid estate tax; it defers income tax and may create a multi-state estate tax problem. The trust that collects a management fee on principal it never disbursed is a related cautionary tale about fees eating into intended tax savings.

Planners often market the DING trust as a state income tax solution. But the home-state audit risk is real. California, for example, has aggressively challenged DING trusts. In California Franchise Tax Board v. Eustace, a 2019 California Court of Appeal case, the court held that a DING trust created by a California resident was still subject to California income tax on its earnings, despite the trust being administered in Delaware. The court reasoned that the grantor's retained power to substitute assets made the trust a grantor trust for California purposes, and that California's tax code did not recognize the Delaware situs as dispositive. The structure works best for grantors who move to a no-income-tax state before creating the trust.

The 'Alienation' Trap: When Moving Assets Triggers New Tax

A common strategy to reduce state tax is to move a trust's assets or trustee to a low-tax state. But moving assets does not automatically change the trust's tax situs. The New York Tax Appeals Tribunal's 2021 decision in Matter of Baer illustrates the trap.

In Baer, a trust was created by a New York grantor with a New York trustee. Later, the trustee was changed to a Nevada trustee, and the trust's assets were moved to Nevada. New York audited the trust and assessed tax on capital gains realized after the move. The Tribunal held that the trust was still a New York resident trust because the grantor was a New York resident and the trust continued to benefit a New York resident beneficiary.

The key factor was that the trust's income and principal were distributed to a New York resident. Under New York law, a trust is a resident trust if the grantor was a New York resident at the time the trust became irrevocable, regardless of where the trustee is located. The physical relocation of assets did not change the legal situs.

Other states have similar rules. California taxes trusts if the grantor was a California resident at the time the trust became irrevocable, even if the trustee is elsewhere. Connecticut taxes trusts if any beneficiary is a Connecticut resident. The only way to change the situs is to change the grantor's domicile before the trust becomes irrevocable, or to ensure that no beneficiary lives in the taxing state.

The lesson is that physical asset relocation does not equal tax situs change. Planners who move a trust to South Dakota or Nevada without also moving the grantor or beneficiaries may find that the original state still asserts jurisdiction. The trust may end up paying tax to two states instead of one.

Three Contract Terms That Prevent Surprise State Tax

Given the overlapping tax claims that Curry v. McCanless permits, planners need to build protection into the trust document itself. Three contract terms can reduce the risk of surprise state tax: mandatory arbitration of situs disputes, a tax reimbursement provision, and a trustee removal power triggered by state tax changes.

First, a mandatory arbitration clause for situs disputes can prevent costly litigation when two states claim taxing jurisdiction. The clause would require the trustee and the grantor's representatives to submit the situs question to binding arbitration, with the arbitrator applying a uniform set of factors. While arbitration cannot override a state's taxing authority, it can provide a mechanism for resolving competing claims before penalties accrue.

Second, a tax reimbursement provision can allocate the burden of multi-state taxation. The provision would require the trust to reimburse the grantor or beneficiaries for any state tax paid on trust assets that is later challenged by another state. This shifts the risk from the individual to the trust corpus. It also creates an incentive for the trustee to manage situs carefully.

Third, a trustee removal power upon a change in state tax law can protect the trust from future tax increases. The provision would allow the grantor or a trust protector to remove the trustee if the state where the trust is administered enacts a new tax or increases an existing tax that applies to the trust. This power gives the trust the flexibility to move to a more favorable jurisdiction without triggering a taxable event.

For example, a Florida trust with a California beneficiary might include a clause allowing the trustee to be removed if California expands its definition of resident trust to include trusts with California beneficiaries. The new trustee could be located in a state that does not tax the trust, preserving the original tax treatment. The key is to draft for the worst-case situs, not the best-case.

Concrete Takeaways for Planners

Here is what the Curry ruling means for your practice. First, never assume that a trust's tax situs is limited to one state. Review the domicile of the grantor, the location of the trustee, the residence of each beneficiary, and the physical location of trust assets. Each connection can support a separate state tax claim.

Second, build flexibility into trust documents. The three contract terms described above — arbitration, reimbursement, and removal power — are not theoretical. They can be drafted now to prevent disputes later. A trust that lacks these provisions may be stuck in a state that later increases its tax rate.

Third, educate clients about the limits of federal credits. The unified credit and portability are federal concepts that do not extend to state taxes. Clients with assets in multiple states should expect to pay state tax to each state that has a connection to the trust. Plan for that reality rather than hoping it will not happen.

Finally, consider the Curry dissent's warning: 'confusion and conflict' are the natural result of overlapping jurisdiction. The best defense is a trust that is drafted to anticipate conflict, not one that assumes it will be avoided. Review your trust documents today to ensure they include the protections that will prevent surprise state tax tomorrow.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. You should consult a qualified professional regarding your specific situation.