Most people think that the estate tax is something only the extremely wealthy have to deal with, but that is not necessarily the case— especially if you are a resident of Illinois. $4 million dollars may sound like a lot of money, but if you are a farmer or a business owner you may be a lot closer to that mark then you might think. This article is to give a brief introduction to the Illinois estate tax, how it works, and who is subject to it. It is much easier to understand the Illinois estate tax system if you have a general understanding of the federal estate tax system. If you need a refresher click here to read my last article of the federal estate tax.
First off, who and what is subject to the estate tax? Of course the obvious answer is Illinois residents, however, it might be surprising to learn that residents of other states who also own property or businesses in Illinois may also be subject to the estate tax. How is that possible? It all has to do tax jurisdiction. Illinois has tax jurisdiction on all property of Illinois residents except for real or tangible property physically situated in another state, and Illinois also has tax jurisdiction over real or tangible property of non-residents physically situated in Illinois.
Similar to the federal estate tax, Illinois also has an exemption that offsets the total value of your estate upon your death, but instead of the $11.58 million federal estate tax exemption, the Illinois estate tax exemption is only $4 million. This means that the first $4 million of an individual’s estate may pass to the beneficiaries of the estate tax-free. Any amount in excess of the exemption will be the taxable portion and will be subject to a series of tax brackets beginning at 0.8% and gradually increasing to 16% for estates worth more than $10.04 million.
For federal tax purposes, a spouse may transfer their unused portion of the exemption to their surviving spouse. This transfer of the unused exemption is typically referred to as portability. In contrast, a spouse’s unused portion of the Illinois’ estate tax exemption is not transferable to the surviving spouse and is not portable. As such Illinois residents typically require a more detailed estate tax planning structure to maximize each spouse’s estate tax exemption. In most cases, this planning is fairly straightforward and may be achieved by retitling assets and/or dividing the assets between reciprocal spousal trusts. To avoid the issues of Illinois non-transferable exemption all together an irrevocable life insurance trust may also be implemented.
Curiously, Illinois does not have a unified gift tax system similar to the federal system. This means that an unlimited amount of property may be gifted while an individual is still alive and not be subject to any form of gift tax on the state side. However, before you go gifting your property away to avoid the Illinois estate tax, you need to first compare the effects of missing out on the step-up in basis rules for inherited property and the possibility of being subject to the federal gift tax.
One of the greatest estate planning tools around is the ILIT, or irrevocable life insurance trust. An entire article could itself be written about the ILIT, but for now we will cover it just briefly. The ILIT is a type of trust that leaves a legacy to your heirs while allowing you to take advantage of two of the biggest tax breaks in the internal revenue code. As the name suggests, it is an irrevocable trust — meaning no changes may be made to it — in which the grantor contributes cash which is used to pay premiums on a life insurance policy owned by the trust. When the grantor passes away, the death benefit of the policy is paid to whomever are the beneficiaries of the trust. Because death benefits of life insurance policies are already tax-free, no income tax is due, and because the transfer of property to an irrevocable trust is considered a completed gift, the death benefit of the policy is also completely removed from the decedent’s taxable estate, effectively avoiding the estate tax as well.
If you think there is even a chance of your assets approaching the $4 million Illinois estate tax exemption please seek help from a qualified professional. It is important to work with someone that understands the Illinois estate tax in great detail. Please reach out to either John Zeidler at Wall Street Financial Group, Inc. or Chad Richter at Mathis, Marifian & Richter, Ltd. for a no-obligations consultation. John can be reached at (217) 854-2691 and (618) 656-2244 for Chad.