Pritzker Trust Dodges Illinois State Income Tax

Jan 2 2014, 8:38am CST | by

Pritzker Trust Dodges Illinois State Income Tax
Photo Credit: Forbes Business

When you read about how the Pritzker family used trusts to shelter their wealth from income and estate taxes you will often see a “Don’t try this at home” warning tacked to the end of the article, which notes that many of their techniques no longer work if you lack an ancestor who set up entities offshore in the sixties. That makes it interesting to see a Pritzker trustee in court tweaking one of the trusts and executing a strategy that still works and would be of interest to mere millionaires. Lewis Linn, Trustee of the Autonomy Trust 3 v Department of Revenue  is a recent decision in the Appellate Court of Illinois Fourth District.  The trust was suing to have Illinois income taxes that it had paid refunded.  Hate to spoil the suspense, but the trust won.

Autonomy Trust 3 is an outgrowth of one of the twenty “P.G. Trusts” funded by A.N. Pritzker in May 1961. The trust was known as the “Linda Trust” for its primary beneficiary, Linda Pritzker (The case identifies her as A.N.’s daughter, but she is actually his granddaughter).  Linda Pritzker is the daughter of Robert Pritzker.  Linda Pritzker seems to keep a fairly low internet profile.  I did not find a lot about her that you won’t find elsewhere on Forbes, although I have to say that this story about building a Buddhist garden on an American Indian reservation is pretty interesting.  Dammit Jim, I’m a tax blogger, not an investigative reporter.

At any rate the “Linda trust” was not one of A.N. Pritzker’s storied off-shore trusts.  It was sited in Illinois and by its terms would be construed in accordance with Illinois law.  In January 2002 the trustees of the “Linda trust” used their powers to create the Autonomy 3 Trust.  This appears to be part of the somewhat painful process that the Pritzker clan went through in order to allow the 11 cousins to go their separate ways.  Litigation instituted by Linda’s half-siblings made the process more public than the family would have preferred.   Stephane Fitch chronicled the drama for Forbes in 2003. The Pritzker saga writes large the problem of maintaining a unified family business down the generations.  Siblings can make great business partners, but family unity frays when you get to cousins.

Autonomy 3 Trust was based in Texas.  The trustee petitioned a Texas probate court to have the trust amended so that it would be construed in accordance with Texas law.  Still A.N. Pritzker was an Illinois resident when the original trust was established.  I’m speculating a bit here, but it is likely that planners would not want to cut the cord to the original trust in order to preserve exemption from the generation skipping tax.  Thanks to A.N. Pritzker’s forethought the assets inside the trust will likely not be subject to any transfer tax as they pass to Linda Pritzker’s children.  Linda Pritzker is only 60 though, so decades of state income taxes could put a big dent in those estate tax savings.

By statute, the residence of the grantor at the time the trust became irrevocable subjects the trust to Illinois income tax. That was enough for the Sangamon County circuit court that had ruled in favor of the Revenue Department.  In the appeal, the trustee argued that Illinois taxing the trust was unconstitutional, since the trust no longer had any connection to Illinois.  It gets pretty lawyerly from there.

Plaintiff asserts the Autonomy Trust 3 has no connections to Illinois. He notes the Autonomy Trust 3 is a Texas trust that is governed by the laws of and administered in Texas. Moreover, in 2006, the Autonomy Trust 3′s trustee, beneficiary, and protector were all not residents of Illinois. Without any connections to Illinois, the imposition of Illinois income tax on the Autonomy Trust 3 would be unconstitutional under the due process clause. Plaintiffs have shown no connections appear to exist with the trust in this case. However, defendants contend connections do exist because (1) the Autonomy Trust 3 owes its existence to Illinois, and (2) Illinois provides the Autonomy Trust 3′s trustee and beneficiary with a panoply of legal benefits and opportunities. We note that, on appeal, defendants do not argue that, in 2006, the Autonomy Trust 3 still contained terms to be interpreted under Illinois law and that the Illinois choice of law provision in the March 1961 agreement applies to the Autonomy Trust 3.

The Court went with the trustee.  It noted that the trust was inter vivos, which gives it a much more attenuated connection to Illinois than a trust under a will that would have been subject to Illinois probate.

This is hardly an earth shattering decision, but it does serve as a useful planning reminder.  It can be rather challenging for an individual to claim domicile in a tax-free state, without, you know, actually going there and living there and stuff.  Not so with a trust.  There will not be that much of a payoff if the trust distributes most of its income to beneficiaries subject to state income tax, but if accumulation is what you are looking for, you should be looking to put your trust in a tax-free state.  Alaska and Florida have even made it more attractive to those of a dynastic bent by loosening up on the rule against perpetuities.  Keep in mind though, that your great-great grandchildren are going to be third cousins and might not like everything being in the same pot.

You can follow me on twitter @peterreillycpa.

The Other Pritzkers

Source: Forbes Business


Don't miss ...


<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.


blog comments powered by Disqus

Latest stories

Britain deploys military helicopters to aid for Ebola-hit Sierra Leone
London, Nov 27 (IANS) Britain has deployed Royal Navy helicopters to deliver materials to northern Sierra Leone as the part of its ongoing efforts to tackle Ebola, the British Department for International Development (DFID) said Wednesday.
Pakistan blocks three Saarc connectivity pacts; Modi, Sharif avoid meeting (Intro Roundup)
Kathmandu, Nov 26 (IANS) Pakistan Wednesday played spoilsport by blocking three major Saarc connectivity projects initiated by India, even as Indian Prime Minister Narendra Modi conspicuously avoided meeting his Pakistani counterpart Nawaz Sharif while he met five other South Asian leaders here.
Way out of debt crisis far from easy: Angela Merkel
Berlin, Nov 26 (IANS) German Chancellor Angela Merkel Wednesday said the way out of the European debt crisis is long and far from easy.
The Black Friday 2014 Sales You can Shop Today 11/26
The Black Friday 2014 Sales You can Shop Today 11/26
Over 20 Black Friday 2014 sales are already launched. Get the deals early to get your head free for the hard to get Black Friday deals to be released on Thanksgiving Day.

Latest from the Network

Britain deploys military helicopters to aid for Ebola-hit Sierra Leone
London, Nov 27 (IANS) Britain has deployed Royal Navy helicopters to deliver materials to northern Sierra Leone as the part of its ongoing efforts to tackle Ebola, the British Department for International Development (...
Read more on Business Balla
Katie Holmes craves 'inspirational' romance
Katie Holmes can't imagine living in a world without romance. The 35-year-old actress - who was married to Hollywood superstar Tom Cruise from 2006 to 2012 - gave an interestingly cryptic answer when she was questioned...
Read more on Celebrity Balla
Angelina Jolie reveals her political ambitions
Angelina Jolie is open to a move into politics. The Oscar-winning actress recently spoke of her desire to spend more time behind the camera directing movies, but she's now also confirmed she'd be keen to enter politics...
Read more on Celebrity Balla
Andy Murray gets engaged to Kim Sears
Andy Murray is engaged to his long-time girlfriend Kim Sears. The former Wimbledon tennis champion and the 26-year-old beauty have been an item for more than nine years and their representatives have confirmed the...
Read more on Celebrity Balla
Bette Midler performs Ariana Grande U-turn
Bette Midler has backtracked on her criticism of Ariana Grande. The 'Wing Beneath My Wings' singer recently hit out at the 21-year-old star, saying she has a ''silly high voice'' and dresses in an overly-provocative way...
Read more on Celebrity Balla
Cumberbatch wants new title for fans
Los Angeles, Nov 27 (IANS) Actor Benedict Cumberbatch doesn't want his fans to be called as 'Cumberbitches'. He wants a different name for them. The 38-year-old, who has a dedicated following of female supporters who...
Read more on Celebrity Balla
Ridley Scott misses his younger brother
Los Angeles, Nov 27 (IANS) Filmmaker Ridley Scott terribly misses his younger brother Tony Scott, who committed suicide in August 2012. The 76-year-old has confessed that he got "very close" to his sibling before he...
Read more on Celebrity Balla
British couple arrested on suspicion of 'terror offences'
London, Nov 27 (IANS) A couple in Britain has been arrested on suspicion of Syria-related "terrorism offences", police said Wednesday. The West Midlands Police Wednesday said the couplefrom Walsall in central England...
Read more on Politics Balla
Putin says Russia to stay out of geopolitical conflict
Moscow, Nov 27 (IANS) Russian President Vladimir Putin said Wednesday Russia is not a threat to any other countries, vowing that Russia will stay out of any geopolitical conflict. "We are not threatening anyone and we...
Read more on Politics Balla
Brothers sentenced on terrorism charges in Britain
London, Nov 27 (IANS) Two brothers from London have become the first Britons to be jailed for attending terrorist training in Syria, London's Metropolitan Police said Wednesday. Mohommod Hassin Nawaz,31, was sentenced...
Read more on Politics Balla