If the beneficiaries of an Illinois family trust move out of state and trust administration relocates with them, does the trust stop owing Illinois income and replacement tax?

Subject

Residency

Plain-English summary

The Illinois Department of Revenue addressed whether an irrevocable family trust can stop being taxed as an Illinois resident once its beneficiaries and administration move out of state. This is a General Information Letter (GIL), not binding on the Department -- it points to relevant law rather than resolving the taxpayer's specific facts, and it is not a statement of Department policy.

The trust at issue was created in Illinois by an Illinois resident and became irrevocable when he died. It holds a 50% interest in an Illinois farm, a 35% interest in an Illinois LLC that owns more farmland, and an investment account, with income going to the grantor's surviving spouse for life and the remainder passing to the couple's children. The spouse moved out of state full-time, is selling the Illinois residence, all the children live outside Illinois, and the trust's records were being moved out of state too, with a change in trust situs to another state effective January 1, 2022.

The Department explained that under IITA Section 1501(a)(20), a trust counts as an Illinois resident if its grantor was domiciled in Illinois when the trust became irrevocable -- a fact that doesn't change no matter where the beneficiaries, trustee, or records move afterward. The Department cited Lewis Linn v. Department of Revenue, 2013 IL App (4th) 121055, where an Illinois appellate court found insufficient due-process contacts to tax a trust as an Illinois resident because none of five factors (the trust instrument's provisions, trustee residence, beneficiary residence, location of trust assets, and location of trust business) pointed to Illinois. Here, though, the Department noted the trust still owns Illinois farmland and an Illinois LLC interest, so "it would seem to have sufficient contacts to be required to file form IL-1041 and pay tax on its net income." And even if the trust turned out not to be an Illinois resident, it would still have to file a return and pay Illinois tax on its Illinois-source income under IITA Sections 301(c)(2)(A) and 303.

What this means for you

Trustees and trust beneficiaries relocating a family trust out of state

Moving a trust's beneficiaries, trustee, and records out of Illinois does not, by itself, end Illinois residency for tax purposes. The residency test in IITA Section 1501(a)(20) looks backward, at whether the grantor was domiciled in Illinois when the trust became irrevocable -- a historical fact that can't be undone by later relocating the people involved.

Trusts holding Illinois real estate or an interest in an Illinois business

Even setting residency aside, a trust with an ownership interest in Illinois farmland or an Illinois LLC has contacts with the state that the Department flagged as likely enough to require filing Form IL-1041 and paying Illinois fiduciary income and replacement tax. And regardless of residency status, Illinois-source nonbusiness income -- such as capital gains, rents, or royalties tied to Illinois real or tangible property -- gets allocated to Illinois under IITA Section 303 and remains taxable.

Accountants and fiduciaries advising on trust situs changes

Don't assume that changing a trust's situs (via a trust-protector mechanism or otherwise) and relocating administration resolves Illinois filing obligations. Because this is only a GIL, it doesn't decide the taxpayer's actual filing question -- it identifies the controlling statute and case law and flags that the trust's continuing Illinois asset interests are a real obstacle to the outcome the taxpayer was hoping for.

Common questions

Q: Does moving a trust's beneficiaries and administration out of Illinois end the trust's Illinois residency for tax purposes?
A: Not by itself. Under IITA § 1501(a)(20), an irrevocable trust is an Illinois resident if its grantor was domiciled in Illinois when the trust became irrevocable. That's a fixed, backward-looking fact -- it doesn't change because the spouse, children, trustee, or trust records later move to another state.

Q: What did the Lewis Linn case say, and does it help trusts like this one?
A: In Lewis Linn v. Department of Revenue, 2013 IL App (4th) 121055, an Illinois appellate court held that taxing a trust as an Illinois resident based only on the grantor's residence violated due process where none of five contacts (trust provisions, trustee residence, beneficiary residence, asset location, and location of trust business) tied the trust to Illinois. Here, though, the Department pointed out the trust still holds an interest in Illinois farmland and an Illinois LLC, so it appears to have contacts sufficient to require filing and paying Illinois fiduciary tax -- unlike the trust in Lewis Linn.

Q: If the trust isn't an Illinois resident after all, does it owe any Illinois tax?
A: Yes. Even a nonresident trust must file a return and pay tax on its Illinois-source income. Under IITA § 303, nonbusiness income items like capital gains or losses on Illinois real or tangible property, and rents or royalties from Illinois real or tangible property, are allocated to Illinois regardless of residency.

Q: Does this letter resolve whether the trust in question has to keep filing Illinois returns?
A: No. This is 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." It identifies the relevant statute and case law rather than issuing a definitive conclusion on the taxpayer's specific facts.

Q: What happens to the nonresident individual income tax on the Illinois farm income?
A: The letter doesn't dispute the taxpayer's own statement that the spouse "will always be liable for Illinois nonresident income tax on all net income from the Illinois farms" -- that tax obligation is separate from, and unaffected by, the trust-residency question addressed in the ruling.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2021/it21-0007-gil.pdf

Original ruling text

IT-21-0007 10/14/2021 RESIDENCY
Whether an irrevocable trust continues to be subject to Illinois income tax
after the beneficiaries and trust administration are relocated out of
state.(This is a GIL)
October 14, 2021
NAME/ADDRESS
RE:

Letter ruling request concerning taxation of trusts

Dear NAME:
This is in response to your letter dated August 20, 2021, in which you request a
letter ruling regarding Illinois income tax treatment of a family trust. The nature of
your letter and the information provided require that we respond with a General
Information Letter (GIL). A GIL 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 accessed from the
Department’s web site at www.tax.illinois.gov.
Your letter states as follows:
I am contacting you in hopes of clarifying the Illinois tax treatment of a
revocable family trust made irrevocable following the death of the grantor.
In YEAR, an Illinois resident formed an Illinois revocable family trust that
became irrevocable upon his death in YEAR. The trust owns an undivided 50%
interest in an Illinois farm, a 35% interest in an Illinois LLC owning additional farm
ground, and an investment account at FINANCIAL INSTITUTION. Terms of the
trust provide income for life for the grantor’s spouse, with corpus passing to the
couple’s grown children upon the death of the spouse.
The spouse has moved to STATE fulltime and is in the process of selling
the family residence in Illinois. All children of the couple are grown and living
outside of Illinois. All trust records will be maintained in STATE.
The spouse understands she will always be liable for Illinois nonresident
income tax on all net income from the Illinois farms.
The spouse hopes to avoid filing Illinois trust returns for 2022 and beyond,
and to discontinue paying Illinois income and replacement tax on the net income
of the trust. In addition, the spouse hopes to discontinue paying nonresident
individual income tax on the interest and dividend income from the FINANCIAL
INSTITUTION account.
The trust was created as an Illinois trust. The trust document does allow
for the change in the situs of the trust as shown on the attached copy of section

19.06 of the 97-page trust document. A trust protector has been appointed by the
court, and all beneficiaries of the trust have been notified of the change in situs
from Illinois to STATE, effective January 1, 2022.
In light of the above, do you agree that for 2022 and beyond, the trust is
no longer required to file Illinois Fiduciary income and replacement tax returns?
Do you agree that for 2022 and beyond, the only tax owed to Illinois relating to
this trust will be the nonresident individual income tax owed on the net income
from the Illinois farms?
Your response to this matter is requested. Thank you very much for your
cooperation.
RULING
Section 1501(a)(20) of the Illinois Income Tax Act (IITA) defines residence
for purposes of a trust as an “irrevocable trust, the grantor of which was
domiciled in this State at the time such trust became irrevocable.” In Lewis Linn
v. Department of Revenue, 2013 IL App (4th) 121055, the plaintiff argued that
requiring a trust to file returns and pay income tax as an Illinois resident based
solely upon the residence of the grantor violated due process where the trustee,
beneficiaries and protector were all located out of state. The Illinois Appellate
Court found that the trust lacked sufficient contacts with Illinois to satisfy the Due
Process Clause, because none of the following factors existed to give Illinois
personal jurisdiction over the trust:
•
•
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The provisions of the trust instrument
The residence of the trustees
The residence of the beneficiaries
The location of trust assets
The location where the business of the trust is conducted.

In your letter you state that the trust owns an interest in Illinois farmland
and an Illinois LLC, so it would seem to have sufficient contacts to be required to
file form IL-1041 and pay tax on its net income.
Even if you determine that the trust is not an Illinois resident, it would still
be required to file a return and pay tax on its Illinois source income. IITA section
301(c)(2)(A) provides that a trust does not allocate to Illinois: “Any item of income
or deduction which was taken into account in the computation of base income for
the taxable year by any person other than a resident and which is not otherwise
specifically allocated or apportioned pursuant to Section 302, 303 or 304
(including, without limitation, interest, dividends, items of income taken into
account under the provisions of Sections 401 through 425 of the Internal
Revenue Code, and benefit payments received by a beneficiary of a
supplemental unemployment benefit trust which is referred to in Section

501(c)(17) of the Internal Revenue Code).” Under IITA section 303, the following
items of nonbusiness income are allocated to Illinois by a nonresident trust:
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Capital gains and losses from sales or exchanges of real property
located in this sate
Capital gains and losses from sales or exchanges of tangible personal
property with a situs in this sate
Capital gains and losses from sales or exchanges of intangible
personal if the commercial domicile is in this sate
Rents and royalties from real property located in this state
Rents and royalties from tangible personal property utilized in this state

As stated above, this is a GIL. A GIL does not constitute a statement of
policy that applies, interprets or prescribes the tax laws, and it is not binding on
the Department.
Very truly yours,
Brian E. Fliflet
Deputy General Counsel
Illinois Department of Revenue
100 W. Randolph St., 7-900
Chicago, IL 60601
Phone: (312) 814-1722
Email: [email protected]