Does a Nevada trust set up by an Illinois decedent's family member have to file an Illinois fiduciary income tax return (IL-1041), even though the trust was created and is administered in Nevada?

Subject

Trust Residency

Plain-English summary

A taxpayer wrote to the Illinois Department of Revenue asking for help resolving a dispute with her Nevada accountant over whether a trust needed to file an Illinois fiduciary income tax return (IL-1041). Her mother-in-law, an Illinois resident, died in 2019, and her grantor trust called for a trust to be created for her disabled daughter (an Illinois resident) instead of a lump-sum inheritance. The taxpayer's husband — the decedent's son, who lives in Nevada — opened a Nevada trust to manage the money for his sister. All trust income was reported on a K-1 and passed through to the sister, who planned to report it on her own IL-1040; the sister received only monthly payouts (or additional funds for special needs).

The Department explained that a trust's Illinois filing obligation can arise in two ways. First, under 35 ILCS 5/201(a), 202, and 203(c), if the trust itself earns or receives net income allocable to Illinois, it must file and pay tax regardless of distributions to beneficiaries. Second — and this is the crux of the letter — a trust can also owe Illinois tax simply because it is an Illinois "resident trust" under 35 ILCS 5/1501(a)(20)(C) or (D), even without independently sourced Illinois income.

Applying those residency tests, the Department could not give a definitive answer, because the facts in the taxpayer's letter were ambiguous on two points central to the residency analysis: (1) whether the "grantor trust" created by the mother-in-law would legally qualify as a "will" under Illinois law (relevant to subsection (C)), and (2) who the grantor of the Nevada trust actually was, and whether/when that trust became irrevocable (relevant to subsection (D)). The Department stated that if either test was met, the trust would be an Illinois resident trust required to file an IL-1041; if neither was met, the corresponding subsection simply would not apply. It did not resolve which scenario applied to this taxpayer's trust.

As the letter itself notes, this is a General Information Letter — not a Private Letter Ruling — so it is not a statement of Department policy and is not binding on the Department (86 Ill. Adm. Code 1200.120(b) and (c)).

What this means for you

Families setting up out-of-state trusts for Illinois beneficiaries

Moving trust administration to another state does not automatically avoid Illinois filing obligations. Under 35 ILCS 5/1501(a)(20)(C) and (D), a trust can be an Illinois "resident trust" — and required to file an IL-1041 — based on either (1) the Illinois domicile of the decedent whose will created the trust, or (2) the Illinois domicile of the grantor at the time an irrevocable trust became irrevocable. Where the trust is administered, and where its investments are held, are not the deciding factors under these two subsections.

Accountants and tax professionals

This GIL highlights exactly which facts matter for the residency analysis: whether the document creating the trust is legally a "will," and whether the trust is revocable or irrevocable and, if irrevocable, the grantor's domicile at that time (with reference to whether the grantor is treated as owner under IRC Sections 671-678). The letter is a useful roadmap for issue-spotting this kind of interstate trust dispute, but because the Department found the facts as presented too ambiguous to apply the test, it does not resolve the underlying disagreement between the taxpayer's Nevada accountant and Illinois advisers.

Anyone who wants a definitive answer

Because the Department found key facts unclear, it could not tell this taxpayer whether her family's specific trust must file an IL-1041. The letter itself suggests the path for taxpayers who want a binding answer: submit the information required by 86 Ill. Adm. Code 1200.110(b) and request a Private Letter Ruling, which — unlike a GIL — is binding on the Department.

Common questions

Q: Did the Department decide whether this specific Nevada trust must file an IL-1041?
A: No. The Department explained the legal tests for trust residency but said the facts in the taxpayer's letter left key questions open — including whether the "grantor trust" qualified as a "will" and who the grantor of the Nevada trust was — so it could not reach a definitive conclusion on this trust.

Q: What makes a trust an "Illinois resident trust" for income tax purposes?
A: Under 35 ILCS 5/1501(a)(20)(C) and (D), a trust is an Illinois resident if either (1) it was created by the will of a decedent who was domiciled in Illinois at death, or (2) it is an irrevocable trust whose grantor was domiciled in Illinois when the trust became irrevocable.

Q: If the trust is a nonresident trust, does that mean no Illinois tax is ever owed?
A: Not necessarily. Even a nonresident trust must file and pay Illinois tax if it earns or receives income allocated or apportioned to Illinois under IITA Sections 301 through 308, separate from the residency-based filing requirement.

Q: Does passing all the income through to the beneficiary on a K-1 eliminate the trust's own filing obligation?
A: Not according to this letter. The Department stated that if the trust has net income as defined by the Illinois Income Tax Act, it must file a return "regardless of any deductions or distributions to beneficiaries." A resident trust's filing obligation is also separate from and unaffected by distributions.

Q: Why couldn't the Department just decide who the "grantor" is and whether the trust is irrevocable?
A: A GIL responds only to the facts a taxpayer provides in writing; the Department does not investigate or take evidence. Because the taxpayer's letter did not clearly establish these facts, the Department could only describe the applicable rule conditionally ("if... then...") rather than apply it to a resolved set of facts.

Q: Is this letter binding on the Illinois Department of Revenue?
A: No. It is a General Information Letter under 86 Ill. Adm. Code 1200.120(b) and (c), which is not a statement of Department policy and is not binding on the Department. A taxpayer who wants a binding answer on these exact facts would need to request a Private Letter Ruling under 86 Ill. Adm. Code 1200.110(b).

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2020.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2020/it20-0009-gil.pdf

Original ruling text

IT 20-0009-GIL 06/19/2020 TRUST RESIDENCY
Whether a trust is +an Illinois resident dependent on definition of resident found in Sections
1501(a)(20)(C) and (D) of the IITA. (This is a GIL.).

June 19, 2020
Re: Illinois income tax
Dear Xxxx:
This is in response to your letter dated May 18, 2020, in which you request information regarding
Illinois income tax. The nature of your request and the information you have provided require that we
respond with a General Information Letter, which is designed to provide general information, is not a
statement of Department policy and is not binding on the Department. See 86 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at www.tax.illinois.gov.
Your letter states as follows:
I could use some help as soon as possible so we can finish filing 2019 tax returns. My Nevada
Accountant and I have a difference of opinion and need clarification.
My mother-in-law, an Illinois resident, died on XX/XX/2019 and specified in her grantor trust
that another Trust was supposed to be created for her daughter, instead of a lump sum
inheritance, so that her money would be managed by her son, for her daughter. The daughter
lives in CITY, Illinois and is 72 and has been on disability, and now on social security for many
years.
So when his mother died, the son, my husband, who lives in Nevada, opened up a Nevada
Trust because he manages and administers the money from Las Vegas, NV. The money is
invested with an investment firm in New York. All income from that trust is passed down on a
K-1 to his sister and she will file IL-1040. A Federal return for the trust will be filed and show
the dividends, interest and capital gains as "passed through" to the beneficiary. The daughter
only receives monthly payouts, or if there is an additional special need that requires additional
funds.
Does an IL-1041 need to be filed also? It seems like this is just an informational return that
shouldn't be required. And if so, how often? My local accountant feels that capital gains are not
to be passed through to beneficiary, but taxed at the trust level. And the way she reads the
instructions for the IL-1041, she feels it says the trust has "Illinois residency" and we should file
it. An Illinois lawyer/accountant said, per the LINN case, it does not have to be filed. And
Illinois Taxpayer Assistance line has said NO:
NAME,
If the trust was setup in Nevada, it would be considered to have residency in Nevada,
and wouldn't be required to file an IL-1041, unless it had Illinois Income. The income
generated by the trust and passed through to the Illinois resident, would be reported on

IT 20-0009-GIL
Page 2
the federal K-1, and then claimed on the Illinois residents IL-1040 (as stated would
happen in your original email).
I cannot provide permission for you not to file the return, I can only help guide you
based on the Illinois Income Tax Act and the facts that are presented to me. My
recommendation, if you want something in writing, is to submit a written request to our
Legal Services division and request a letter ruling regarding your exact situation.
So I am writing to you, for this clarification, proper forms to file and permission.
RULING
In determining whether trust income is subject to Illinois income taxation, in the case of a trust, as
with any taxpayer, it is necessary to determine whether the trust is a resident or non-resident of the
State of Illinois. Section 201(a) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/101 et seq.) imposes
a tax on trusts for the privilege of earning or receiving income in or as a resident of this state.
Accordingly, if a trust is a resident of the state, or earns or receives income in Illinois, it must file a
return and pay taxes. In the case of a non-resident, trust income is allocated or apportioned to Illinois
in accordance with IITA Sections 301 through 308. Concerning §203(c), base income of a trust is the
trust's taxable income for the taxable year subject to a number of addition and subtraction
modifications. IITA Section 202 provides that net income is that portion of base income allocable to
this State. Thus, if the trust has net income, as defined by the Illinois Income Tax Act, it must file a
return regardless of any deductions or distributions to beneficiaries.
Alternatively, the trust may be required to file a return because it is a resident of this State. Sections
1501(a)(20)(C) & (D) of the IITA define which types of trusts are considered residents. Section
1501(a)(20)(C) states "[a] trust created by a will of a decedent who at his death was domiciled in this
State" is a resident. According to your letter, the trust in question was created as specified in your
mother-in-law’s grantor trust. Your mother-in-law is a decedent who was domiciled in Illinois at the
time of her death, but from your letter, it is unclear whether the “grantor trust” you refer to would be
considered a “will” under Illinois law. If the trust in question was created by your mother in-law’s will,
then it would be considered an Illinois resident trust. If the “grantor trust” does not meet the definition
of “will,” then Section 1501(a)(20)(C) is inapplicable.
Section 1501(a)(20)(D) of the IITA states "[a]n irrevocable trust, the grantor of which was domiciled in
this State at the time such trust became irrevocable" is a resident. For purposes of this subparagraph,
a trust shall be considered irrevocable to the extent that the grantor is not treated as the owner
thereof under Sections 671 through 678 of the Internal Revenue Code. From your letter, it is unclear
whether your mother-in-law or your husband is the grantor of the Nevada trust. It is also unclear
whether the trust is irrevocable. Because of this, I cannot comment further except to say that if the
grantor of the trust was domiciled in Illinois at the time the trust became irrevocable, then it is an
Illinois resident trust. If the trust is revocable, and/or the grantor was not domiciled in Illinois when it
became irrevocable, then Section 1501(a)(20)(D) is inapplicable. If, by virtue of the aforementioned
IITA Sections 1501(a)(20)(C) or (D), the trust is an Illinois resident, the trust is subject to Illinois
income taxation and an IL-1041 is required to be filed.

IT 20-0009-GIL
Page 3
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions regarding this letter, you may contact me at (217) 782-2844.
Sincerely,

Michael D. Mankowski
Associate Counsel - Income Tax