Do nonresident beneficiaries owe Illinois income tax on annuity proceeds distributed to them through an Illinois estate?

Plain-English summary

An Illinois resident died owning a nonqualified annuity with no designated beneficiary. Because no one was named to receive it directly, the annuity proceeds were paid to her estate, and the estate then distributed those proceeds to her children — the actual beneficiaries. One of those children, the executor who wrote in for this ruling, is an Illinois resident; his brother and sister are nonresidents.

The executor asked the Illinois Department of Revenue (IDOR) whether the annuity proceeds count as Illinois-source income taxable to his nonresident siblings. He had already worked through the analysis himself: the Illinois Income Tax Act (IITA) taxes nonresidents on specific categories of nonbusiness income listed in IITA Section 303, and on business income under Section 304, but Section 301(c)(2) says that any item of income not covered by those specific sections — an "unspecified item" — is not allocated to Illinois when received by a nonresident individual, trust, or estate. Since annuity proceeds are not one of the items listed in Section 303, he reasoned they should be unspecified income, exempt from Illinois tax for his nonresident siblings.

IDOR agreed with him completely. It explained that IITA Section 307(b) requires the estate's nonbusiness income to be allocated to the beneficiaries "as if such items had been paid, incurred or accrued directly to such beneficiaries in their separate capacities" — meaning the proceeds are treated as if the annuity had gone straight to the children rather than through the estate. Since annuity proceeds are not a specified item under Section 303, they fall into Section 301(c)(2)'s "unspecified items" category, and under Section 301(c)(2)(A) that unspecified income is not allocated to Illinois for a nonresident individual, trust, or estate. So the nonresident siblings owe no Illinois income tax on their shares.

But the executor's own share is a different story. Because he is an Illinois resident, IITA Section 301(a) allocates all of a resident's income to Illinois, regardless of where it comes from. So his distributive share of the same annuity proceeds is taxable to Illinois, even though his siblings' identical shares are not.

What this means for you

Estate executors and administrators

If you're settling an estate that received payouts (like an annuity with no named beneficiary) and you're distributing those proceeds to a mix of resident and nonresident heirs, don't assume everyone gets the same Illinois tax treatment. The character of the income passes through the estate to each beneficiary "in their separate capacities," but each beneficiary's own residency status then determines whether Illinois taxes their share. A resident beneficiary and a nonresident beneficiary can owe completely different amounts of Illinois tax on the exact same underlying payment.

Nonresident beneficiaries of an Illinois estate

If you're a nonresident who inherited or received a distribution of unspecified income (income not listed in IITA Section 303 or 304) through an Illinois estate or trust, this GIL supports the position that Illinois cannot tax your share, per Section 301(c)(2)(A). Annuity proceeds specifically were found to be unspecified income in this letter. Keep in mind this is a non-binding GIL, not a Private Letter Ruling, so it doesn't guarantee the same result if your facts differ.

Accountants and tax professionals

The analysis hinges on three moving parts: (1) IITA Section 307(b), which passes estate/trust nonbusiness income through to beneficiaries as if paid directly to them; (2) whether the specific income item is "specified" under Section 303 (or 304 for business income) or falls into the residual "unspecified items" bucket under Section 301(c)(2); and (3) each beneficiary's own residency, since Section 301(c)(2)(A) shields nonresidents from unspecified income but Section 301(a) taxes residents on everything. When advising on mixed resident/nonresident beneficiary groups, run the residency-specific analysis separately for each beneficiary rather than applying one answer to the whole class.

Common questions

Q: Are annuity proceeds paid to an Illinois estate always exempt from Illinois tax for nonresident beneficiaries?
A: In this GIL, yes — because annuity proceeds are not a specified item of income under IITA Section 303, they were treated as unspecified income under Section 301(c)(2), which is not allocated to Illinois for a nonresident individual, trust, or estate under Section 301(c)(2)(A). But this is a fact-specific, non-binding GIL, not a blanket rule for every annuity or estate situation.

Q: Does the Illinois-resident beneficiary owe Illinois tax on his share of the same annuity proceeds?
A: Yes. IITA Section 301(a) allocates all of a resident's income to Illinois regardless of its source, so the executor's own distributive share of the annuity proceeds is taxable to Illinois even though his nonresident siblings' shares are not.

Q: Would the answer change if the annuity had named the children as beneficiaries directly, instead of the estate?
A: The executor raised this in his letter, suggesting the same nontaxable result would follow, but IDOR's response addressed only the facts presented — proceeds paid to the estate and passed through to beneficiaries under Section 307(b). It did not independently rule on a scenario where the annuity bypassed the estate entirely.

Q: Can this GIL be relied on as binding guidance?
A: No. A GIL is designed to provide general information and is explicitly not a statement of Department policy and not binding on the Department, per 2 Ill. Adm. Code 1200.120(b) and (c). The letter itself notes that taxpayers wanting a binding answer must request a Private Letter Ruling under Section 1200.110(b).

Citations and references

Statutes cited:

• 35 ILCS 5/301(a) (IITA allocation of all income to Illinois for residents)
• 35 ILCS 5/301(c)(2)(A) (IITA unspecified income not allocated to Illinois for nonresident individuals, trusts, or estates)
• 35 ILCS 5/303 (IITA allocation of specific nonbusiness income items)
• 35 ILCS 5/307(b) (IITA allocation of estate/trust nonbusiness income to beneficiaries as if paid directly to them)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2022/it22-0005-gil.pdf

Original ruling text

IT-22-0005 04/12/2022 UNSPECIFIED INCOME-ANNUITIES
Annuity proceeds paid to Illinois estate and distributed to nonresident
beneficiaries are unspecified income not allocated to Illinois pursuant to
IITA Section 301(c)(2)(A) (This is a GIL.)
April 12, 2022
Re:

Illinois income tax

Dear NAME:
This is in response to your letter dated March 12, 2022, in which you request
information regarding Illinois income tax. The nature of your request and the
information you have provided require that we respond with a General
Information Letter (“GIL”), which is designed to provide general information, is not
a statement of Department policy, and is not binding on the Department. See 2
Ill. Admin. Code 1200.120(b) and (c), which may be found on the Department's
web site at www.tax.illinois.gov.
Your letter states as follows:
I am the executor of my mother's estate. She was an Illinois resident and
owned a nonqualified annuity that had no designated beneficiary, and was
therefore paid to the estate. The estate distributed the proceeds of the
annuity to her children, the beneficiaries. Although I am an Illinois
resident, my brother and sister are nonresidents.
I am requesting advice on whether the annuity proceeds are IL source
income that is taxable to the nonresident beneficiaries. In reading 35
ILCS 5/301 (and the following sections 302, 303 and 304), I believe the
annuity proceeds are not IL source income. Section 301(c)(2) provides
that any item of income that is not specifically allocated pursuant to
Sections 302, 303 or 304 shall not be allocated to this state for a
nonresident. The instructions to Schedule K-1-T contain a list of items of
nonbusiness income that are allocable to Illinois. The instructions further
state that other unspecified items of income of a nonresident individual are
not allocable to Illinois. Annuity proceeds are not one of the specified
items. Further, the annuity proceeds do not seem to constitute business
income that would be allocated to nonresidents. If the annuity designated
the children as beneficiaries, rather than the estate, I do not believe the
annuity would be taxable in Illinois to the nonresidents.
I am requesting advice to confirm that the annuity proceeds distributed
from the estate to the nonresident beneficiaries are not business income
and are therefore not taxable Illinois source income to them. In the event
the annuity proceeds are taxable to the nonresident beneficiaries, I would

appreciate knowing the applicable authority for this. I can be contacted by
mail, email, or by phone as shown on the heading of this letter.
RULING
Section 307(b) of the Illinois Income Tax Act, 35 ILCS 5/307(b), states as follows:
(b) Allocation of nonbusiness income by beneficiaries other than
residents. To the extent items of estate or trust income and deduction not
taken into account in computing the business income of an estate or trust
are deemed to have been paid, credited or distributed by the estate or
trust under Section 306, the respective shares of beneficiaries of the
estate or trust, other than residents, in such items shall be taken into
account by such beneficiaries in proportion to their respective shares of
the distributable net income of the estate or trust for its taxable year, and
allocated as if such items had been paid, incurred or accrued directly to
such beneficiaries in their separate capacities.
(emphasis added.)
According to Section 307(b), the annuity proceeds are required to be allocated as
if they had been paid directly to the beneficiaries in their separate capacities.
Section 301(c) of the Illinois Income Tax Act, 35 ILCS 5/301(c), states as follows:
(c) Other persons.
(1) In general. Any item of income or deduction which was taken
into account in the computation of base income for the taxable year by any
person other than a resident and which is referred to in Section 302, 303
or 304 (relating to compensation, nonbusiness income and business
income, respectively) shall be allocated to this State only to the extent
provided by such section.
(2) Unspecified items. Any item of income or deduction which was
taken into account in the computation of base income for the taxable year
by any person other than a resident and which is not otherwise specifically
allocated or apportioned pursuant to Section 302, 303 or 304 (including,
without limitation, interest, dividends, items of income taken into account
under the provisions of Sections 401 through 425 of the Internal Revenue
Code, and benefit payments received by a beneficiary of a supplemental
unemployment benefit trust which is referred to in Section 501(c)(17) of
the Internal Revenue Code):
(A) in the case of an individual, trust, or estate, shall not be
allocated to this State; and
(B) in the case of a corporation or a partnership, shall be
allocated to this State if the taxpayer had its commercial domicile in
this State at the time such item was paid, incurred or accrued.
2

Section 303 of the Illinois Income Tax Act, 35 ILCS 5/303, controls the taxation of
specific forms of nonbusiness income. Annuity proceeds are not one of the
specified items of income listed in Section 303. Assuming that the annuity
proceeds are non-business income, and that your siblings are nonresidents,
which appears to be the case from your description, then you are correct.
According to Section 301(c) of the Illinois Income Tax Act, the annuity proceeds
should be treated as unspecified items of income which are not allocated to
Illinois for nonresident individuals and are therefore not subject to Illinois income
tax. For beneficiaries that are residents, Section 301(a) of the Illinois Income Tax
Act allocates their distributive share of the annuity proceeds to Illinois making
them subject to Illinois income tax.
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 are not under audit and you wish to obtain a
binding Private Letter Ruling regarding your factual situation, please submit all of
the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions regarding this letter, you may contact me at (217) 7822844.
Sincerely,
Michael D. Mankowski
Associate Counsel (Income Tax)
cc:

Daily File
Correspondence file:

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