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How Must an Indiana Trust Report a Distribution from Illinois Trust?

Forum|Forum|3 years ago
February 3, 2023
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In 2022, an Illinois (irrevocable, complex) Trust was liquidated and terminated by making distributions to two beneficiaries, one of which was an Indiana (irrevocable, complex) trust. Of course, this Illinois trust included forms K-1 and K-1-T regarding this distribution with its fiscal-year 2022 (federal) 1041 and IL-1041, respectively.

The Indiana trust has no connection to Illinois other than as a beneficiary of the Illinois Trust.

How should the Indiana trust report this distribution? Must the Indiana trust file a 2022 non-resident IL-1041 regarding the K-1-T that it received?

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Best answer by nello

The Illinois Department of Revenue (“IDOR”) lists these filing requirements for trusts:

https://tax.illinois.gov/research/taxinformation/income/fiduciary.html

Based on this IDOR page, there are (at least) two separate circumstances that would require a trust receiving a distribution (“Beneficiary Trust”) to file an IL-1041:

It received a distribution from an Illinois trust that included pass-through withholding; or
It had Illinois income.

As I understand, here are the operational ways to determine each of these conditions.

Illinois Pass-Through Withholding
Look at the IL-1041 for the trust making (as opposed to the receiving) the distribution (“Distributing Trust”). If there are zeros (or blanks) on the Distributing Trust’s IL-1041, Schedule D ("Beneficiary Information"), Section B ("Member's information") in both Columns F ("Share of Illinois Income subject to pass-through withholding") and G ("Pass-through withholding") for the Beneficiary Trust, then the Beneficiary Trust does NOT need to file an IL-1041 due to Illinois pass-through withholding.

Illinois Income

Look at the Beneficiary Trust’s Schedule K-1-T. If there is a non-zero amount in Column A (“Beneficiary’s share of US Schedule K-1, less nonbusiness income”) for any line (19-24) in Step 4 ("Figure your beneficiary's share of your business income or loss") then the Beneficiary Trust has Illinois business income and must file an IL-4041 to report it.

@Anonymous_ @Mike9241

Please reply with corrections, if any.

Thank you.

A

Anonymous_

Employee

Did the Illinois trust withhold any tax on the distribution to the Indiana trust?

Typically, an Illinois trust will withhold state tax when a distribution is made to an out of state beneficiary.

Regardless, I am going to page @Mike9241 since he is familiar with IL and IN tax law.

N

nelloAuthor

@Anonymous_ Asked: "Did the Illinois trust withhold any tax on the distribution to the Indiana trust?"

No, there was no withholding on the distribution. In fact, the Illinois trust was liquidated and terminated after all assets were distributed to the two beneficiaries, an Illinois trust and an Indiana trust.

Your answer is consistent with the answer I received from the Illinois Department of Revenue's (IDOR's) business tax email (REV.TA-BIT-WIT at illinois dot gov) which was:

"Was the income reported as pass-through withholding on the IL trust’s return? Generally speaking, if the trust is a non-resident and its tax liability was already covered (and it has no other IL income), it does not need to file a return with IL."

What gives me pause is that the Indiana trust’s FEIN was of course on its K-1-T. Won’t IDOR be looking for a return from this FEIN (and generate a matching notice for failure to file)? (Or, does the matching look at the mailing address on the K-1-T, see that it’s Indiana, and therefore disregard it?)

Do you have any comments @Mike9241 ?

A

Anonymous_

Employee

Yes, @nello, I know there is pass-through withholding (which the state clearly like - a lot) and, of course, if the out-of-state beneficiary believes the IL trust over-withheld, then that beneficiary has to file an IL return if they want a refund.

In this instance, I would imagine that the IN trust might owe tax to IL, but I will wait for @Mike9241 to respond on that issue.

N

nelloAuthorAnswer

The Illinois Department of Revenue (“IDOR”) lists these filing requirements for trusts:

https://tax.illinois.gov/research/taxinformation/income/fiduciary.html

Based on this IDOR page, there are (at least) two separate circumstances that would require a trust receiving a distribution (“Beneficiary Trust”) to file an IL-1041:

It received a distribution from an Illinois trust that included pass-through withholding; or
It had Illinois income.

As I understand, here are the operational ways to determine each of these conditions.

Illinois Pass-Through Withholding
Look at the IL-1041 for the trust making (as opposed to the receiving) the distribution (“Distributing Trust”). If there are zeros (or blanks) on the Distributing Trust’s IL-1041, Schedule D ("Beneficiary Information"), Section B ("Member's information") in both Columns F ("Share of Illinois Income subject to pass-through withholding") and G ("Pass-through withholding") for the Beneficiary Trust, then the Beneficiary Trust does NOT need to file an IL-1041 due to Illinois pass-through withholding.

Illinois Income

Look at the Beneficiary Trust’s Schedule K-1-T. If there is a non-zero amount in Column A (“Beneficiary’s share of US Schedule K-1, less nonbusiness income”) for any line (19-24) in Step 4 ("Figure your beneficiary's share of your business income or loss") then the Beneficiary Trust has Illinois business income and must file an IL-4041 to report it.

@Anonymous_ @Mike9241

Please reply with corrections, if any.

Thank you.