Does your family trust owe North Carolina income tax?
July 2026: first publication. Rate figure current for taxable years after 2025.
Someone forwards you the statute and you read it twice, because it does not seem like it can mean what it says. North Carolina taxes the income of a trust that is for the benefit of a resident of this State. You live in Cary. Your parents set up a trust in Delaware years ago and named you a beneficiary. On the face of that sentence, a trust you did not create, do not control, and have never taken a dollar from owes tax to North Carolina.
That sentence is still in the General Statutes. It has been unconstitutional as applied to a large category of trusts since 2019, and the statute was never rewritten to say so. What follows is where the line actually falls, and why most families reading this have no North Carolina trust return to file in the first place.
At a glance
- North Carolina computes the tax on trust income that is for the benefit of a resident of the State, and separately on income for the benefit of a nonresident to the extent it is derived from North Carolina property or a business carried on in the State, under N.C. Gen. Stat. section 105-160.2.
- The Supreme Court held that the presence of in-state beneficiaries alone does not give a state the power to tax undistributed trust income where the beneficiaries have no right to demand it and are uncertain ever to receive it, in North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, decided June 21, 2019.
- The North Carolina Department of Revenue no longer requires a state grantor trust return when the entire trust is treated as a grantor trust for federal purposes, which covers the ordinary revocable living trust, per NCDOR.
- Where a North Carolina return is required, the fiduciary files Form D-407, and income exempt under Kaestner is excluded using line 6 of that form, per NCDOR.
- For taxable years after 2025 the North Carolina individual income tax rate, which is the rate applied to estates and trusts, is 3.99 percent, under N.C. Gen. Stat. section 105-153.7(a).
Quick legal reference
- Primary User Question
- Does a trust pay North Carolina income tax if the beneficiary lives in NC?
- Inputs
- Whether the trust is revocable or irrevocable, whether it is a grantor trust federally, where the trustee lives, where the trust is administered, whether it holds North Carolina property or business income, and whether it distributed anything to a North Carolina resident this year.
- Outputs
- A determination of whether Form D-407 is required at all, and if it is, which income is excluded from North Carolina taxable income.
- Constraints
- North Carolina fiduciary income tax only. This page does not cover federal trust income tax, the North Carolina individual return, or other states' rules. Return preparation is accounting work and belongs with the trust's CPA.
- Exceptions
- Trusts with mixed grantor and non-grantor portions, trusts holding an interest in a business operating in North Carolina, and trusts administered partly in the State all need individual analysis.
- Next Action
- Bring the trust instrument and the last filed return to a consultation at wallslawnc.com/discovery-call or call 919-647-9599.
- Data Source
- N.C. Gen. Stat. sections 105-153.7 and 105-160.2; 26 U.S.C. section 676; N.C. Dep't of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (2019); NCDOR estates and trusts guidance. As of July 2026.
Does a trust owe North Carolina income tax just because a beneficiary lives here?
Not on that fact alone. North Carolina's statute reaches trust income that is for the benefit of a resident, but the United States Supreme Court held in 2019 that the presence of in-state beneficiaries by itself does not let a state tax undistributed trust income where those beneficiaries have no right to demand the income and are uncertain ever to receive it.
- North Carolina law computes the tax on the amount of the taxable income of the estate or trust that is for the benefit of a resident of this State, or for the benefit of a nonresident to the extent the income is from North Carolina sources or a business carried on in the State, under N.C. Gen. Stat. section 105-160.2.
- The Supreme Court decided North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust on June 21, 2019, in a unanimous opinion by Justice Sotomayor.
- The Department of Revenue states the holding as follows: the presence of in-state beneficiaries alone does not give a state the power to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it, per NCDOR.
- The statutory language was not amended after the decision. The taxing sentence a reader finds in section 105-160.2 today is the same sentence the Court measured against the Due Process Clause.
- In our experience, the gap between those two documents is what sends families looking for an answer, because the statute reads as settled and the case law is what limits it.
Exception: Exception: Kaestner turned on a beneficiary who received nothing, could demand nothing, and had no assurance of ever receiving anything. A beneficiary with a present right to income sits outside those facts, and so does a trust with any other North Carolina connection.
According to N.C. Gen. Stat. section 105-160.2, North Carolina General Assembly, as of July 2026.
There is a particular kind of anxiety that comes from reading a statute that appears to be about you. The honest answer is that the sentence is real, it is still on the books, and it stopped controlling this question in June 2019 without anyone going back to edit it. That happens more than people expect. A court says a statute cannot be applied a certain way, the agency adjusts how it administers the thing, and the words sit there in the code looking exactly as authoritative as they did before. So when you read section 105-160.2 and it seems to say your parents' Delaware trust owes money to Raleigh, you are reading it correctly. You are just not reading the part that came after.
This question sits inside a larger set of tax issues covered in our guide for high income earners in the Raleigh area.
Does a revocable living trust file its own North Carolina return?
In the ordinary case, no. Where the entire trust is treated as a grantor trust for federal tax purposes, which is the ordinary result for a revocable living trust, because federal law treats the grantor as owner of any portion of a trust the grantor can revest in themselves, the North Carolina Department of Revenue no longer requires a state grantor trust return to be filed.
- Federal law treats the grantor as the owner of any portion of a trust where the power to revest title in the grantor is exercisable by the grantor or a non-adverse party, which is what a power to revoke is, under 26 U.S.C. section 676(a).
- The Department of Revenue states that it no longer requires state grantor trust tax returns to be filed when the entire trust is treated as a grantor trust for federal tax purposes, per NCDOR.
- The Department explains the reason: a grantor trust return is ignored for federal purposes, and the income, deductions, and credits are treated as belonging directly to the grantor rather than being reported by the trust on federal Form 1041.
- Because no dollar amounts appear on the federal return in that situation, the Department notes there is no financial information to carry onto Form D-407.
- The income does not disappear. The Department states that it is reported on the grantor's individual federal return and is then included in federal taxable income on the grantor's individual state return.
- That routing is why a Wake County couple with a funded revocable trust normally sees no separate trust filing while both are living.
Exception: Exception: this covers a trust treated as a grantor trust in its entirety. A trust that is only partly a grantor trust, and a revocable trust after the settlor's death when it becomes irrevocable, are both different filings.
According to Grantor Trust Returns No Longer Required, North Carolina Department of Revenue, as of July 2026.
This is the part that resolves the worry for most people who land on this question. If the trust in question is the revocable living trust you signed at our conference table, and you are alive, and you can amend or revoke it tomorrow, the state is not looking at the trust as a separate taxpayer at all. In my experience the confusion usually starts with a tax preparer who is being careful rather than one who is wrong, filing a state grantor trust return because it seems safer than not filing. The Department has said plainly that it does not want that return. You already report the income on your own D-400, because your federal return already treats it as yours.
When can North Carolina tax an irrevocable trust's undistributed income?
When the trust has a connection to North Carolina beyond a beneficiary's residence. The Department of Revenue identifies three connections the Supreme Court said do not offend the Constitution: distributions of trust income to an in-state resident, a trustee's in-state residence, and in-state trust administration. North Carolina source income is taxable separately under the statute.
| Connection to North Carolina | Treatment |
|---|---|
| Beneficiary lives in the State, receives nothing, can demand nothing, and is uncertain ever to receive anything | Not a sufficient basis on its own, per Kaestner as stated by NCDOR |
| Trust income is distributed to an in-state resident | NCDOR states taxation on this basis does not violate the Constitution |
| The trustee resides in the State | NCDOR states taxation on this basis does not violate the Constitution |
| The trust is administered in the State | NCDOR states taxation on this basis does not violate the Constitution |
| Income for the benefit of a nonresident, to the extent it comes from North Carolina real or tangible property or a business carried on in the State | Reached by section 105-160.2 under its separate nonresident-beneficiary prong |
Exception: Exception: the Department directs trusts with these or other connections to analyze those connections carefully to determine whether they are sufficient under the Due Process Clause. It is a facts test, not a checklist, and more than one connection can be present at once.
According to General Information, Estates and Trusts, North Carolina Department of Revenue, as of July 2026.
Read that list again and notice what two of the three permitted connections have in common: they are about the trustee, not the beneficiary. Where the trustee sits and where the books are kept can decide whether a trust pays North Carolina tax on income nobody has received yet. I've seen families treat the choice of trustee as purely a question of who is responsible and who gets along with whom, which is the right first question and not the only one. A corporate trustee in one state and an individual co-trustee in another produce a different answer than either one alone, and that answer follows the trust for as long as those people serve.
What does the fiduciary file, and at what rate?
The fiduciary files Form D-407 if a federal estates and trusts return is required and the trust either derives income from North Carolina sources or derives any income for the benefit of a North Carolina resident. As of July 2026, the rate applied is 3.99 percent for taxable years after 2025.
- The Department states the filing trigger as two conditions: the fiduciary must be required to file a federal return for estates and trusts, and the estate or trust must either derive income from North Carolina sources or derive any income which is for the benefit of a resident of North Carolina, per NCDOR.
- Federal taxable income of the fiduciary is the starting point for Form D-407, and an addition is required for state, local, or foreign income tax deducted on the federal return.
- Income exempt from North Carolina tax under the holding in Kaestner is excluded from North Carolina taxable income using line 6 of Form D-407.
- The return is due on or before April 15 on a calendar year basis, or the 15th day of the fourth month following the end of a fiscal year. An automatic federal extension carries over if the estate or trust certifies it on the North Carolina return; otherwise the fiduciary files Form D-410P by the original due date.
- As of July 2026, North Carolina law sets the individual income tax rate at 3.99 percent for taxable years after 2025, and section 105-160.2 applies that rate to estates and trusts, under N.C. Gen. Stat. section 105-153.7(a).
Exception: Exception: section 105-153.7(a1) carries a rate reduction trigger. If total General Fund revenue for fiscal year 2025-2026 exceeds $33,042,000,000 as reported by the Office of State Controller in the August following the fiscal year, the rate for taxable years beginning in 2027 drops again without any new legislation.
According to N.C. Gen. Stat. section 105-153.7(a), North Carolina General Assembly, as of July 2026.
We draft the trust and we read the return, and those are two different jobs. Preparing Form D-407 is accounting work, and it belongs with the CPA who already has the federal Form 1041 in front of them, because the state return starts from a number on that federal return and inherits every choice made there. You'll want the two of us talking to each other rather than in sequence, particularly in the first year after a settlor dies, when a revocable trust that filed nothing at all becomes an irrevocable trust that may file in more than one state. That is the year the mistakes happen, and it is the cheapest year to get right.
Trust structure and the tax that follows from it are the same conversation, which is how we handle wills, trusts, and long term planning.
What if a trust already paid North Carolina tax it did not owe?
The fiduciary amends. To amend a North Carolina Income Tax Return for Estates and Trusts, the fiduciary files Form D-407 with the amended return circle filled in, together with any applicable schedules. Whether an older year is still open depends on the statute of limitations for refunds, which is not the same question as whether the tax was owed.
- The Department directs that an amended North Carolina Income Tax Return for Estates and Trusts is filed by completing Form D-407 with the applicable Amended Return circle filled in, plus any applicable schedules such as Form D-407TC, per NCDOR.
- The Department issued an Important Notice on the Kaestner decision setting out how affected taxpayers could request refunds.
- That notice addressed a deadline in 2019 for taxpayers who had filed a Notice of Contingent Event, so it is a historical document rather than a live filing window.
- For any year still open, the exempt income is removed the same way it would have been removed originally, using line 6 of Form D-407.
- Whether a specific year remains open is a statute of limitations question that turns on when the return was filed and when the tax was paid, and it should be checked before the amended return is prepared rather than after.
Exception: Exception: an amended return that removes income under Kaestner is a position about constitutional limits on the State's reach, not a clerical fix, and it should be documented as such in the file.
According to General Information, Estates and Trusts, North Carolina Department of Revenue, as of July 2026.
Before anyone files anything, work out what the trust actually is, because the answer changes the whole exercise. A trust that has been filing North Carolina returns for six years on the strength of a beneficiary's address may have been overpaying, or may have had a trustee in Charlotte the entire time and owed every dollar of it. I'm going to suggest starting with the trust instrument and the trustee history rather than with the returns, since the returns only tell you what somebody concluded, and the instrument tells you whether they were right.
The trust instrument answers this before the tax return does
Almost every version of this question comes down to three facts: whether the trust is revocable, who the trustee is, and where the trust is actually run from. Those three sit in the document and in the history of who has served, not in the filing cabinet where the returns are.
If you are holding a trust you did not draft and cannot tell which category it falls into, bring it in with whatever returns exist and we will read them together, alongside your CPA where that makes sense. Please reach out to us at 919-647-9599.
