Shakman v. Dept. of Revenue (Illinois 2020): A trust-declaration tax case from hell

Charles E. Rounds, Jr.
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Client purchases aircraft. Pays $7370 use tax. Then declares himself owner in his capacity as trustee-settlor of his revocable, inter vivos trust. Illinois deems declaration a taxable “transfer” and assesses him another hefty sum ($7511). Client loses all appeals. Appellate court warns that de-entrusting aircraft could generate yet a third $7000+ use tax. The Illinois Aircraft Use Tax Law says what it says: The “transfer” of an aircraft is a taxable event. Presumably this unfortunate deference to form over substance is now being cured legislatively. But wait. In the case of a declaration of trust (settlor and trustee are one and the same), there is no “transfer” of legal title, title being in same person pre and post entrustment. Had court been made aware of this peculiar feature of trust declarations, things might have gone a different way. See 2019 Il App. (1st) 182197, appeal denied, 144 N.E.3d 1203 (Table) (2020). This peculiar feature of trust declarations is taken up generally in §3.4.1 of Loring and Rounds: A Trustee’s Handbook, the relevant portions of which section are reproduced in Appendix I below.

Nor did the aircraft’s owner “transfer” some beneficial interest at time of aircraft’s entrustment. As to the non-transfer of the beneficial interest, when a settlor has reserved a general inter vivos power of appointment in the form of a right to revoke, while technically contingent equitable property rights are bestowed on the successors in interest, see National Shawmut Bank v. Joy, 53 N.E.2d 113 (1944), the settlor has reserved an “ownership-equivalent” power. See Restatement (Third) of Trusts Sect. 74, cmt. a (such a power enables “elimination” by settlor of the interests of the other beneficiaries). See also the relevant portion of §8.1.1 of Loring and Rounds: A Trustee’s Handbook (2020), which portion is reproduced in the Appendix II below.

Thus functionally there was neither a transfer of the legal title nor of the ownership interest when the aircraft was entrusted.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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