United States: Illinois Appellate Court Holds Imposition Of Income Tax On Trust With Insufficient Connections Violated Due Process

The Illinois Appellate Court has held that the imposition of Illinois income tax on an inter vivos trust1 violated the Due Process Clause of the U.S. Constitution because there were insufficient connections between the state and the trust.2 During the tax year in question, the trust did not have the necessary connections with Illinois because all of its business was conducted outside Illinois; the trustee, protector and the noncontingent beneficiary3 resided outside Illinois; and none of the trust's property was located in Illinois. The fact that the grantor was an Illinois resident was not sufficient to satisfy due process.


In 1961, a trust agreement created 20 separate irrevocable inter vivos trusts.4 At the time of the agreement, A.N. Pritzker (the grantor) and Meyer Goldman (the trustee) were Illinois residents and the trust assets were deposited in Illinois. The trustee had the authority to distribute the trust corpus to the beneficiary for each of the trusts after the beneficiary reached 30 years of age. Also, the agreement provided that the trusts would be administered under Illinois law. One of the trusts was for the primary benefit of a relative of the grantor, Linda Pritzker, and was named the "Linda Trust."

The grantor died in 1986 as an Illinois resident and his estate was probated in Illinois. In 2002, three successor trustees of the Linda Trust (at least two of which were Illinois residents) distributed the assets to the trustee of a new trust, Autonomy Trust 3 ("AT3"), for the exclusive benefit of Linda Pritzker. The trustee of AT3 was a Texas resident. The original overall "protector" of AT3 and the rest of the new wave of trusts was an Illinois resident, but he was replaced by a Connecticut resident. AT3 was to be construed and regulated under Texas law, but key terms were to be interpreted under Illinois law. In 2005, a Texas probate court granted the request of AT3's trustee to strike the language referring to Illinois law so that the trust would be construed and regulated only by Texas law.5

In 2006, Linda Pritzker, her children and AT3's contingent beneficiaries were not Illinois residents. The Texas trustee of AT3 administered AT3 in Texas. AT3 had no assets in Illinois. In April 2007, AT3 filed a 2006 nonresident Illinois income and replacement tax return that reported no tax was due because there was no income from Illinois sources. The Illinois Department of Revenue reclassified AT3 as an Illinois resident, taxed all of its income and assessed a deficiency liability. After paying the tax under protest, the trustee filed a complaint arguing that imposition of Illinois income tax on AT3 violated the Commerce, Due Process and Equal Protection Clauses of the U.S. Constitution.6 The trial court granted the Department's motion for summary judgment and explained that the 1961 trust agreement provided Illinois law was to govern any subsequent trusts, which would include AT3. According to the trial court, the fact that Illinois law governed AT3 was a sufficient contact to satisfy the Due Process and Commerce Clauses. The Texas trustee timely appealed.

Trust Was Illinois Resident

Illinois imposes income tax on trusts for the "privilege of earning or receiving income in or as a resident" of the state.7 A "resident" includes "[a]n irrevocable trust, the grantor of which was domiciled in [Illinois] at the time such trust became irrevocable."8 Because AT3 was an irrevocable trust and the grantor was an Illinois resident, the trust was an Illinois resident subject to Illinois income tax. However, the Appellate Court was required to determine whether Illinois income taxation of AT3 violated the U.S. Constitution.

Imposition of Tax Violated Due Process

The Appellate Court reversed the trial court and held that imposition of Illinois income tax on AT3 violated the Due Process Clause.9 In Quill Corp. v. North Dakota, the U.S. Supreme Court held that a tax must satisfy the following requirements to comply with the Due Process Clause: (i) a minimum connection must exist between the state and the person, property or transaction it seeks to tax; and (ii) "the income attributed to the State for tax purposes must be rationally related to values connected with the taxing State."10

The trustee successfully argued that AT3 had no connections to Illinois because it was a Texas trust governed by Texas law and the trustee, beneficiary and protector were not Illinois residents. The Appellate Court determined that the trustee demonstrated that no connections existed between AT3 and Illinois. The Department argued that connections existed because (i) AT3 owed its existence to Illinois; and (ii) Illinois provided AT3's trustee and beneficiaries with a variety of legal benefits and opportunities.

The Appellate Court thoroughly considered a Connecticut Supreme Court decision, Chase Manhattan Bank v. Gavin,11 which was decided after Quill. In Gavin, the taxpayers argued that Connecticut's income taxation on the undistributed taxable income of four testamentary trusts and one inter vivos trust was unconstitutional because it violated the Due Process and Commerce Clauses. Because the instant case concerned an inter vivos trust, the Illinois Appellate Court relied on the analysis in Gavin related to the inter vivos trust.12 In considering the due process argument, the Connecticut Supreme Court found the critical link between the state and the income was the fact the inter vivos trust's noncontingent beneficiary was a Connecticut resident during the relevant tax year.13

In support of its argument that AT3 owed its existence to Illinois because the trust's grantor was an Illinois resident, the Department relied on the portions of Gavin concerning the testamentary trusts. However, the Appellate Court rejected this argument on the grounds that the link of a testamentary trust to the grantor's state resulting from the probate of a decedent's will in a state court is much stronger than the link of an inter vivos trust to the grantor's state. Due to the fact that AT3 did not have a noncontingent beneficiary in Illinois, the application of Gavin supported a finding that there was no sufficient connection with Illinois to impose the tax. Furthermore, decisions from other states have found the grantor's in-state residence insufficient to establish a minimum connection.14 The Appellate Court determined that the fact AT3's grantor was an Illinois resident was not a sufficient connection to satisfy due process.

The Appellate Court rejected the Department's argument that AT3 existed only because of Illinois law. As explained by the Court, AT3 was created by provisions of the 1961 trust agreement that allowed for powers of appointment and not Illinois law. However, the Court determined that the focus of the due process analysis for income taxation should have been on the facts and circumstances in 2006, the tax year in question, not 1961. Any activities that happened historically with the trust in Illinois courts and under Illinois law had no bearing on the 2006 tax year. The Appellate Court also rejected the Department's argument that Illinois provided the trustee and beneficiary with a variety of legal benefits and opportunities. The Department's reliance on case law addressing testamentary trusts was not applicable because the instant case concerned an inter vivos trust. No Illinois probate court had jurisdiction over AT3. Also, the Appellate Court found that AT3 received the benefits of Texas law rather than Illinois law. Finally, the Court concluded that the trust met none of the factors that would give Illinois personal jurisdiction over AT3 in litigation.15


This decision provides valuable guidance and may be favorable to irrevocable inter vivos trusts that were created in Illinois but no longer have a connection with the state.16 The decision may also inspire these types of irrevocable trusts to relocate to a no-income tax state like Texas or Florida. The Illinois Appellate Court discusses Quill and applies the analysis from a decision of the Connecticut Supreme Court. For purposes of determining whether there is nexus for the undistributed income of an inter vivos trust, a critical factor appears to be whether the trust has noncontingent beneficiaries in Illinois during the relevant tax years. The presence of noncontingent beneficiaries in Illinois for the contested tax years satisfies the minimum connection test of Quill. In addition, the decision repeatedly emphasizes the distinction between inter vivos trusts and testamentary trusts. For testamentary trusts, the residence of the grantor is much more relevant in making a nexus determination. Considering the lengths to which the Appellate Court relied on case law outside of Illinois to reach its decision, as well as the constitutional grounds of the decision, the Department may decide to appeal this decision to the Illinois Supreme Court.

The case highlights the complexities of state income taxation of trusts, particularly when the location of trustees, beneficiaries and trust property often are located in different states, and may change over time. The facts in this case were very favorable for the trust from the perspective of Illinois income taxation because the trustee, beneficiaries and the trust's property were all located outside Illinois. Query what would have happened if just a small amount of the trust's property were located within Illinois, or if an additional trustee with an Illinois residence were added. While the case may provide some guidelines that may be helpful to those with trusts, ensuring that a trust with multistate presence complies with state tax reporting and payment obligations in the states that subject trusts to tax will remain a difficult task, even if such trust does not compare to the size of the Pritzker trust that was the subject of this controversy.


1 An inter vivos trust is a trust that begins when the person creating the trust is alive. In contrast, a testamentary trust begins when the person creating the trust is deceased.

2 Linn v. Department of Revenue, Illinois Appellate Court, 4th Dist., No. 4-12-1055, Dec. 18, 2013.

3 A noncontingent beneficiary's interest in a trust is not dependent upon a specified event occurring.

4 Under an irrevocable trust, the trustee and beneficiaries generally are unable to change the terms of the trust.

5 Note that the judgment provided that it was "effective as to each of the Trusts as of the date that the Internal Revenue Service issues a favorable ruling holding that the modifications and declarations of this Judgment to the Trust do not result in the loss of such Trust's generationskipping transfer tax exempt status or otherwise subject such Trust to the generation-skipping transfer tax."

6 The trustee also argued that the Uniformity Clause of the Illinois Constitution was violated.

7 35 ILL. COMP. STAT. 5/201(a).

8 35 ILL. COMP. STAT. 5/1501(a)(20)(D).

9 The trustee also argued that the Commerce Clause was violated, but the Appellate Court did not consider the Commerce Clause argument because it determined that the Due Process Clause was violated.

10 504 U.S. 298 (1992), quoting Moorman Manufacturing Co. v. Bair, 437 U.S. 267 (1978).

11 733 A.2d 782 (Conn. 1999).

12 As explained in Gavin, Connecticut taxes only the portion of the inter vivos trust's undistributed income that corresponds to the number of noncontingent beneficiaries that live in Connecticut. Therefore, in Gavin, the taxability of the inter vivos trust's income was based on the facts that the trust's grantor was a Connecticut resident when he established the trust and the trust's beneficiary was a Connecticut resident.

13 The Connecticut Supreme Court's decision was supported by a U.S. Supreme Court decision that held a state may tax the undistributed income of a trust based on the presence of the trustee in the state because it gave the trustee the protection and benefits of its laws. Greenough v. Tax Assessors, 331 U.S. 486 (1947). The Connecticut Supreme Court also cited to the California Supreme Court's decision in McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964).

14 Blue v. Department of Treasury, 462 N.W.2d 762 (Mich. Ct. App. 1990); Mercantile-Safe Deposit & Trust Co. v. Murphy, 242 N.Y.S.2d 26 (N.Y. App. Div. 1963).

15 These factors include: (i) provisions of the trust instrument; (ii) residence of the trustees; (iii) residence of the beneficiaries; (iv) location of the trust assets; and (v) location where the trust's business is conducted. Sullivan v. Kodsi, 836 N.E.2d 125 (Ill. App. Ct. 2005), citing People v. First National Bank of Chicago, 4 N.E.2d 378 (Ill. 1936).

16 Historically, the Department has taken the position that if there is an irrevocable trust and the grantor was domiciled in Illinois at the time the trust became irrevocable, the trust remained an Illinois resident forever. The Department followed this approach even if there remained no connection between Illinois and the trust. Under the Department's approach, nexus is permanent once it is established.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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