Trust Taxation and Due Process

The taxation of undistributed trust income in multiple states has become a vexing issue. Some states tax undistributed trust income where the trustee administers the trust, some tax trust income where a fiduciary resides, some tax that part of the trust income earned by assets situated in the state and others tax income allocable to a beneficiary who is a resident of the state.

Many states, including Illinois and Minnesota, tax the undistributed income of an irrevocable trust based solely on the fact that the grantor was a resident of the state when it was executed, even if there is no longer a connection to the state. In this era of trust agreement empowering fiduciaries to change trustees, the situs or governing law of the trust, particularly to obtain tax advantages, the question becomes how minimum do the contacts have to be for a state to tax the undistributed income of a trust.

The issue being litigated in several states is whether the state constitutionally has sufficient nexus or minimum contacts with the trust to impose a tax on undistributed trust income. Not many of us practice in the lofty areas of constitutional law on a daily basis, but a recent Illinois case applied due process clause arguments to the taxation of irrevocable trusts.

Read a full analysis of this case — Linn v. Illinois Department of Revenue, 2013 IL App (4th) 121055, NO. 4-12-1055 (December 18, 2013) — by Mary D. Cascino, "Trust Taxation and Due Process," from the February 2014 issue of Trusts & Estates, the newsletter of the Illinois State Bar Association's section on Trusts & Estates.

Categories: Publications