The Illinois Department of Revenue made a revision to Schedule M of the 2014 IL-1041 form that may go unnoticed by many trust tax preparers. The change is meant to clarify that preneed accounts established pursuant to the Illinois Funeral or Burial Funds Act may take an adjustment that will eliminate the preneed trust’s state tax liability.
Approximately a year ago, this author reviewed the tax returns prepared by one of the country’s largest tax prep firms and noted that income taxes were being paid on all accounts. I provided that firm a copy of 2000 Practitioners’ Questions and Answers to suggest that the client trusts were overpaying taxes to the State of Illinois. The tax prep firm did not feel the Q&A was sufficient to change its procedures. The Q&A indicated that 86 Ill. Adm. Code Section 100.2470 would be amended to include the rule set out by the Q&A, but that action was never taken. Consequently, the tax prep firm took the position that Illinois income taxes had to be paid on all QFT accounts.
What the tax prep firm failed to understand was that Section 100.2470 had been amended to exempt income earned by preneed trusts established under the Illinois Pre-Need Cemetery Sales Act. For purposes of the Federal Form 1041qft, all preneed trusts are taxed the same regardless of which state preneed law has jurisdiction. Accordingly, this author framed the issues in a request to the IDOR. In a somewhat cryptic response, the IDOR issued a General Information Letter that agrees the two types of accounts are to be taxed in the same manner by the State of Illinois. The General Information Letter failed to explain how the Il-1041 should be prepared, and in subsequent telephone conversations a procedure was agreed upon until Schedule M could be amended. That procedure included a disclosure to the IDOR explaining why the Federal Form 1041QFT would differ from that to be attached to the Il-1041.
The end result should be that a Qualified Funeral Trust has no tax liability to the State of Illinois. Most preneed trust have probably paid income taxes to the state because the IDOR’s General Information Letter points out that trustees can only go back three years to file for refunds when returns are amended.