Must an irrevocable trust file an Illinois Form IL-1041 if its trustee and beneficiaries have all moved out of Illinois?

Plain-English summary

The Illinois Department of Revenue ruled that an irrevocable trust must file an Illinois fiduciary income tax return (Form IL-1041) even though its trustee and all beneficiaries had moved out of state.

The trust in question started as a revocable living trust and became irrevocable when its grantor died. The grantor was domiciled in Illinois at that time. Under the Illinois Income Tax Act, that single fact -- the grantor's Illinois domicile when the trust became irrevocable -- is enough by itself to make the trust an Illinois "resident" trust for tax purposes. Where the trustee and beneficiaries currently live does not change that.

The trustee had argued that the trust should still be treated as Illinois-based on other grounds too: it had always been administered in Illinois, its assets (bank accounts, escrowed attorney deposits, a checking account) had continuously stayed in Illinois, it had defended lawsuits in Illinois, it was registered with the Illinois Department of Revenue, and it had elected QTIP treatment. The trustee also pointed to a prior GIL, IT-21-0007-GIL, and to Lewis Linn v. Department of Revenue, 2013 IL App (4th) 121055 -- a case holding that taxing a trust as an Illinois resident based solely on the grantor's residence can violate Due Process if the trust has no other Illinois contacts.

The Department agreed the grantor-domicile test controls and required the filing on that basis. It then went further and explained that Lewis Linn would not help the trust anyway: unlike the trust in that case, this trust has substantial ongoing Illinois contacts (assets, bank accounts, litigation, and registration), so taxing it as a resident does not violate Due Process. And even if the trust were somehow treated as a nonresident, it would still have to file because its income-producing assets were located in Illinois, which independently triggers a filing requirement for Illinois-source income.

What this means for you

Trustees of trusts with any Illinois history

If a trust's grantor was domiciled in Illinois at the moment the trust became irrevocable, the trust is an Illinois resident trust for income tax purposes, full stop. Moving the trustee, beneficiaries, or trust records out of state afterward does not undo that status or eliminate the filing obligation.

Trust and estate attorneys

This GIL is a useful illustration of how the Department applies the two independent legal hooks for requiring an Illinois fiduciary return: (1) resident-trust status under the grantor-domicile test of IITA Section 1501(a)(20)(D), and (2) Illinois-source income under IITA Sections 201(a) and 502(a)(1), which applies even to a trust that isn't a resident. Either one alone supports a filing requirement, so a trust can't escape by defeating just one of them.

Trustees relying on Lewis Linn to argue against residency

Lewis Linn is not a blanket escape hatch. It applies only where the trust has essentially no ongoing Illinois contacts -- no Illinois trustee, beneficiaries, assets, or business activity. If the trust still keeps assets, bank accounts, or litigation in Illinois, the Department will distinguish Lewis Linn and find sufficient Due Process contacts to tax the trust as a resident.

Fiduciary accountants

Even where a client trust plausibly could argue nonresident status, check whether the trust holds Illinois-source income-producing assets. IITA Section 502(a)(1) requires a return for Illinois-source income regardless of the trust's residency classification, so residency arguments alone will not eliminate a filing obligation if Illinois assets are still generating income.

Common questions

Q: Does moving the trustee and all beneficiaries out of Illinois end the trust's Illinois residency?
A: No. Under IITA Section 1501(a)(20)(D), an irrevocable trust is an Illinois resident trust if its grantor was domiciled in Illinois when the trust became irrevocable. That test looks at the grantor's domicile at a fixed point in time, not at where the trustee or beneficiaries currently reside.

Q: What if the trust has no other Illinois contacts at all?
A: That is the Lewis Linn scenario. There, taxing a trust as an Illinois resident based solely on the grantor's residence violated Due Process because the trust had no Illinois trustee, beneficiaries, assets, trust-instrument provisions, or business activity. But this GIL shows that even a small set of ongoing Illinois contacts (assets, bank accounts, lawsuits defended, state registration) is enough to distinguish Lewis Linn and support residency-based taxation.

Q: If a trust is found to be a nonresident, is it off the hook for Illinois tax entirely?
A: Not necessarily. Under IITA Sections 201(a) and 502(a)(1), a trust with Illinois-source, income-producing assets must still file an Illinois return to report that income, regardless of its residency status.

Q: Is this GIL binding on the Department for other taxpayers?
A: No. A General Information Letter is not a statement of Department policy and is not binding on the Department. It only points to relevant law and explains how the Department reasons about facts like these.

Citations and references

Statutes cited:

• 35 ILCS 5/1501(a)(20)(D) -- defines an irrevocable trust as an Illinois resident trust if its grantor was domiciled in Illinois when the trust became irrevocable
• 35 ILCS 5/502(a)(2) -- requires resident trusts to file an Illinois income tax return
• 35 ILCS 5/502(a)(1) -- requires a return to report Illinois-source income regardless of residency
• 35 ILCS 5/201(a) -- imposes tax on the privilege of earning or receiving income in or as a resident of Illinois
• 760 ILCS 3/108(b) -- Illinois Trust Code duty to administer a trust at an appropriate principal place of administration

Case law discussed:

• Lewis Linn v. Department of Revenue, 2013 IL App (4th) 121055 -- holds that taxing a trust as an Illinois resident based solely on grantor residence can violate Due Process where the trust lacks other Illinois contacts; distinguished here because this trust has ongoing Illinois assets, accounts, litigation, and registration

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2022/it22-0012-gil.pdf

Original ruling text

IT-22-0012 12/06/2022 MISCELLANEOUS
An Illinois resident trust with Illinois based assets must file an Illinois income tax
return. (This is a GIL.)

December 6, 2022
NAME
ADDRESS
Dear NAME:
This letter is in response to your letter dated August 20, 2021, in which you
requested information. The Department issues two types of letter rulings. Private Letter
Rulings (“PLRs”) are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation.
A PLR is binding on the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and
complete. Persons seeking PLRs must comply with the procedures for PLRs found in
the Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General
Information Letter (“GIL”) is to direct taxpayers to Department regulations or other
sources of information regarding the topic about which they have inquired. A GIL is not
a statement of Department policy and is not binding on the Department. See 2 Ill. Adm.
Code 1200.120. You may access our website at www.tax.illinois.gov to review
regulations, letter rulings and other types of information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we
respond with a GIL. In your letter you have stated and made inquiry as follows:
Plus, I require a Letter Ruling from the IDOR regarding a series of complex
Decantment Acts that I describe herein below, and which I have likewise directed
to the Office of the Associate Chief Counsel of the Internal Revenue Service.
Not unlike the circumstances cited in Letter Ruling IT-21-0007-GIL, the trustee
and beneficiaries of the TRUST have moved out of Illinois. However, as pointed
out by your Department in IT-21-0007-GIL, those are not the determining factors
in deciding whether or not an irrevocable trust is a resident of Illinois and is
required to file Form IL-1041. As a matter of fact, the TRUST has always been
administered in Illinois and all remaining trust assets are domiciled in Illinois.
Pursuant to Illinois Statute 760 ILCS 3, Section 108, “Principal place of
Administration,” subparagraph (b): A trustee is under a continuing duty to
administer the trust at a place appropriate to its purposes, its administration, and
the interests of the beneficiaries.
(1)
Pursuant to the Illinois Revenue Code, the trust is considered an
Illinois resident for income tax purposes;

TRUSTEE
Page 2
December 6, 2022
(2)
(3)
(4)
(5)
(6)

The trust is a legal entity registered to do business in Illinois;
The largest number of trust beneficiaries reside in just two States,
the State of Washington and the State of Illinois;
At no time has the trustee ever notified the “qualified beneficiaries”
of a change in place of administration from Illinois;
At no time has the trustee ever sought a change in place of
administration from Illinois.
The trust has elected QTIP treatment.

Thus, in compliance with my continuing duty to administer the trust at a place
appropriate to its purposes, its administration, and the interests of its
beneficiaries, I have declared that the place of administration is and shall remain
in Illinois, as it has always been.
As was the case in Letter Ruling IT-21-0007-GIL, the grantor is deceased. “The
spouse has moved to a state other than Illinois fulltime…All children of the couple
are grown and living outside of Illinois. All trust records will be maintained in a
state other than Illinois.”
Yet, “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.”
But here the circumstances are different.
Contrary to the finding in Lewis Linn v. Department of Revenue, in the case of the
TRUST there exist multiple factors which give rise to the state of Illinois being
able to exercise personal jurisdiction over the trust.
To begin with, trust assets have been continuously located in Illinois since the
year the TRUST was founded, including the years when Premier Trust of STATE
was interim temporary successor trustee.
• In YEAR, trust assets were located in Illinois in multiple locations,
including with FINANCIAL INSTITUTE and including escrowed deposits with one
or more Illinois attorneys (ATTORNEY1).
• In YEAR, trust assets were located in Illinois, including escrowed deposits
with an Illinois attorney (ATTORNEY2). Additionally, in YEAR, the TRUST
defended a lawsuit in CITY, Illinois (20-L-00002).
• In YEAR, not only were trust assets located in Illinois, including
maintaining a checking account with an Illinois financial institution (BANK), but

TRUSTEE
Page 3
December 6, 2022
that same year the business of the trust was conducted from an address in Illinois
after registering with the Illinois Department of Revenue, confirmation ##-######-###.
• In YEAR, trust assets were located in Illinois, including maintaining a
checking account with an Illinois financial institution (BANK). In YEAR, the Trust
defended a lawsuit in CITY, Illinois (21-L-00230). In YEAR, the business of the
trust was conducted from an address in Illinois after registering with the Illinois
Department of Revenue, confirmation ##-###-###-###.
In Letter Ruling IT-00-7, you state that: “Even before Quill was decided,
therefore, the Illinois appellate court recognized that due process does not
require that a testamentary trust’s trustee, or trust assets, be physically present in
Illinois, or that the administration of the trust take place in Illinois, before Illinois
could be deemed to have, or before an Illinois court could or would exercise,
continuing jurisdiction over the trust and/or its fiduciaries.”
“The United States Supreme Court has long acknowledged that residency alone
provides the basis for state taxation of all of a resident’s income, from whatever
source. New York ex rel. Cohn v. Graves, 300 U.S. 308, 312-13, 57 S.Ct. 466,
467-68, 81 L.Ed. 666 (1937).”
“Therefore, I conclude, as a matter of law, that the Commerce Clause does not
prohibit Illinois from taxing the income of the Trust, even if none of that income
was earned from Illinois sources.”
RULING
To define a “resident” for purposes of an irrevocable trust, subsections 1501(a)(20)(C)
and (D) of the Illinois Income Tax Act (IITA) state the following:
(C) “A trust created by a will of a decedent who at his death was domiciled in this
State; and
(D) An irrevocable trust, the grantor of which was domiciled in this State at the time
such trust became irrevocable. For purpose 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.”
You have represented that the grantor was a resident of Illinois at the time the trust
became irrevocable. Therefore, pursuant to IITA Section 1501(a)(20)(D), the TRUSTEE
Revocable Living Trust was an Illinois resident and was required to file an Illinois
income tax return under IITA Section 502(a)(2). However, you also stated that both the
trustee and beneficiaries were located out of state during tax years 2019-2022.
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

TRUSTEE
Page 4
December 6, 2022
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 of the U.S. Constitution, because none of the following factors existed to give
Illinois personal jurisdiction over the trust:
• 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
The Lewis Linn case does not apply to the situation that you have described because
there are sufficient contacts between TRUSTEE Revocable Living Trust and the State
of Illinois to satisfy the Due Process Clause of the U.S. Constitution given the location of
trust assets in Illinois. In Lewis Linn v. Department of Revenue, the court distinguished
that the focus on the due process analysis was on the tax year in question, so historic
events had no influence on determining the residency of the trust.
Even if the TRUSTEE Revocable Living Trust could be considered a nonresident under
the holding of the Lewis Linn case, the trust still was required to file an Illinois income
tax return for tax years 2019-2022 because the trust’s income-producing assets were
located here. IITA section 201(a) imposes a tax “on the privilege of earning or receiving
income in or as a resident of this State.” Therefore, IITA section 502(a)(1) would
require an income tax return to be filed to report the Illinois-source income.
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.
Sincerely,

Brian Fliflet
Deputy General Counsel