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.
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Source: Forbes Business