Was income earned by an Illinois prepaid funeral trust currently taxable to the trust, or permanently exempt from Illinois income tax?

Plain-English summary

Income earned inside the prepaid funeral trusts was held in suspense, not permanently exempt from Illinois income tax. The Funeral or Burial Funds Act said that, because the eventual recipient was unknown when deposits and earnings arose, each account's principal and accrued earnings or losses stayed in suspense until the final recipient was determined.

The GIL treated funeral-trust accounts the same way as comparable cemetery-trust accounts. While the statutory suspense rule applied, Section 203(c)(2)(K) supplied the subtraction from the trust's federal taxable income used to compute Illinois base income.

The Department cautioned that this was deferral rather than a blanket exemption. The request also contemplated amended returns, but Section 911 allowed a refund only if the claim was timely—generally within three years after the return was filed or one year after the tax was paid, whichever was later.

What this means for you

Do not describe a suspense rule as permanent tax-free treatment. Track when the beneficiary or other recipient becomes finally determined, because that event can change who reports the accumulated income.

Before amending prior trust returns, test each year separately under the refund-limitation rule.

Common questions

Q: Were the trust earnings permanently exempt?
A: No. The GIL expressly said they were held in suspense.

Q: Did the rule apply only to cemetery trusts?
A: No. The GIL said Funeral or Burial Funds Act trusts received the same suspense treatment.

Q: Did the GIL guarantee refunds on all previously taxed earnings?
A: No. Any claim still had to be filed within Section 911's limitation period.

Citations and references

• 35 ILCS 5/203(c)(2)(K) — subtraction tied to Illinois statutory treatment
• 225 ILCS 45/4a(c) — funeral or burial account principal and earnings held in suspense
• 815 ILCS 390/16(f) — comparable cemetery trust rule
• 35 ILCS 5/911(a) — refund-claim limitation period
• 86 Ill. Adm. Code 100.2470(g) — statutory trust-income regulation

Subject

Subtraction Modifications – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2014/it-14-0013.pdf

Original ruling text

IT 14-0013 GIL 09/22/14 Subtraction Modifications – Other Rulings
Income from a trust established under the Illinois Funeral or Burial Fund Act may be subtracted from
federal adjusted gross income as provided in 225 ILCS 45/4a(c).
September 22, 2014

Re:

COMPANY Funeral Trust Income

Dear Xxxx:
This is in response to your letter dated June 23, 2014 in which you request a legal tax ruling
regarding the treatment of certain foreign disregarded entities. The Department’s regulations require
that the Department issue only two types of letter rulings, Private Letter Rulings (“PLRs”) and General
Information Letters (“GILs”). PLRs are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation. A PLR is
binding against the Department, but only as to the taxpayer issued the ruling and only to the extent
the facts recited in the PLR are correct and complete. GILs do not constitute statements of
Department policy that apply, interpret or prescribe the tax laws and are not binding against the
Department. See 2 Ill. Adm. Code 100.1200(b) and (c). The nature of your letter and the information
provided require that we respond with a General Information Letter.
Your letter states as follows:
I represent the COMPANY, which has been engaged to provide tax administration to
COMPANY funeral trusts established pursuant to the Illinois Funeral or Burial Funds Act (225
ILCS 45). Each of these COMPANY funeral trusts is also a “Qualified Funeral Trust” or “QFT”
pursuant to Internal Revenue Code Section 685.
In the “2000 Practitioners’ Questions and Answers”, your Department advised that “income
from a trust established under the Illinois Funeral or Burial Funds Act will be subject to Illinois
income tax only to the extent included in federal taxable income or adjusted gross income of a
taxpayer in the year a payment is made from the relevant individual account.” The Q&A also
advised that 86 Ill. Adm. Code Section 100.2470 would be amended to reflect ‘this rule’.
Subsequently, Section 100.2470 was amended to address COMPANY cemetery trusts
established pursuant to the Illinois COMPANY Cemetery Sales Act (815 ILCS 390), but no
reference was made to COMPANY funeral trusts. The amendment made for COMPANY
cemetery trusts differs from the 2000 Q&A rule in that all income earned by such trusts is
exempt from Illinois income taxation. The Internal Revenue Service took a position several
years ago (Notice 98-6) that all COMPANY trusts are taxed the same way regardless of
whether they are for funeral contracts or cemetery contracts. We would also note that both the
Illinois Funeral or Burial Funds Act and the Illinois COMPANY Cemetery Sales Act require the
trust to accrue income. Consequently, I assume your Department applies Section 100.2470
consistently to both types of COMPANY trusts.
A predecessor administrator was unaware of either the 2000 Practitioners’ Questions and
Answers or Section 100.2470. Trust returns were prepared treating all income earned by the
individual accounts as taxable. It is our intent to amend those returns and request refunds.

RESPONSE
Section 203(c)(2)(K) Illinois Income Tax Act (“IITA”) provides for a modification of a trust’s base
income for an amount equal to amounts added to base income that would otherwise be taxable
income, but are exempt from taxation by this State by reason of its statutes or Constitution.
Department of Revenue Regulations Section 100.2470(g) provide that income of trusts created
pursuant to the Illinois COMPANY Cemetery Sales Act is held in suspense until the final
determination as to whom will receive the trust account funds.
g) Other income exempt from Illinois income taxation by reason of Illinois statute:
1) Income earned by certain trust accounts established under the Illinois COMPANY
Cemetery Sales Act [815 ILCS 390/16]. Section 16(f) of the Illinois COMPANY
Cemetery Sales Act provides that: because it is not known at the time of deposit or
at the time that income is earned on the trust account to whom the principal and the
accumulated earnings will be distributed, for purposes of determining the Illinois
Income Tax due on these trust funds, the principal and any accrued earnings or
losses relating to each individual account shall be held in suspense until the final
determination is made as to whom the account shall be paid.
The Illinois Funeral or Burial Fund Act (225 ILCS 45/1 et seq.) contains the same language with
respect to income on trust accounts as does the Illinois COMPANY Cemetery Sales Act. Section
4a(c) of the Illinois Funeral or Burial Funds Act provides:
Sec. 4a. Investment of funds.
c) Because it is not known at the time of deposit or at the time that income is earned on
the trust account to whom the principal and the accumulated earnings will be
distributed for the purpose of determining the Illinois income tax due on these trust
funds, the principal and any accrued earnings or losses related to each individual
account shall be held in suspense until the final determination is made as to whom
the account shall be paid.
Income on trust accounts under the Illinois Funeral or Burial Fund Act is treated the same as income
on trust accounts under the Illinois COMPANY Cemetery Act. Please note that the income from a prepaid funeral trust created under the Illinois Funeral or Burial Fund Act is not exempt from Illinois
Income taxation. Rather, pursuant to Section 4a(c) of the Act, taxation of the income earned on the
account is held in suspense until the final determination is made as to whom the account shall be
paid. This is also true of income earned by trust accounts established under the Illinois COMPANY
Cemetery Sales Act.
Section 911 of the IITA provides:
Sec. 911. Limitations on Claims for Refund.
(a) In general. Except as otherwise provided in this Act:
(1) A claim for refund shall be filed not later than 3 years after the date the return
was filed (in the case of returns required under Article 7 of this Act respecting any

amounts withheld as tax, not later than 3 years after the 15th day of the 4th
month following the close of the calendar year in which such withholding was
made), or one year after the date the tax was paid, whichever is the later; and
(2) No credit or refund shall be allowed or made with respect to the year for
which the claim was filed unless such claim is filed within such period.
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you have
any further questions, you may contact me at (217) 524-7580.
Sincerely,

Matthew Crain
Associate Counsel (Income Tax)