Tax Planning to Avoid – or Limit – the Illinois Estate Tax

As an Illinois resident, you may think you won’t owe estate tax because your estate is below the federal exemption, currently $12.92M. However, did you know that Illinois is one of 12 states (and the District of Columbia) with its own estate tax? Illinois residents with estates in excess of $4M may be in for a surprise. Here’s what you need to know if you want to avoid or minimize your estate tax liability.

The Illinois Estate Tax Exclusion

If your gross estate is over $4M, an Illinois estate tax return is required to be filed, regardless if any Illinois estate tax will be owed. This means that when you die with an estate worth more than $4M, those assets may be taxed before being dispersed to your heirs, depending on what deductions your estate has (marital or charitable, etc.). The estate tax is applied on a graduated system with multiple factors being considered. The top rate is 16%, but the top marginal rate can go to approximately 28.5%.

What is Included in an Estate:

The estate tax applies to all residents of Illinois. Items often included in the estate tax are:

Bank accounts
Life Insurance Policies
Investments
Retirement accounts
Real Estate
Interests in family-owned businesses
Interests in any other business
Personal property

The estate tax also applies to non-Illinois residents who own real property in Illinois.

Planning and Considerations

With proper planning, the Illinois estate tax can be mitigated. Unlike the federal estate tax rules, the Illinois estate tax exclusion is not portable between you and your spouse. You will both be entitled to the Illinois estate tax exclusion of $4M, but no exclusion is available from a pre-deceased spouse for any amount of the $4MM not used by the first one to die. This is why developing a strategic estate plan is important to maximize your wealth transfer to your loved ones. Some common considerations we explore when addressing estate planning for Illinois residents are below.

Asset Titling Planning. One thing to consider is how your assets are titled if you are married. You can potentially reduce your tax liability if your assets are adequately divided between you and your spouse. For example, if you and your spouse’s total estate is worth $10M and all are titled in one person’s name, they would be taxed on $6M. If, however, they transferred ownership of assets so that one spouse had $4M titled in their name and the other $6M titled in their name, then after applying the exclusion of $4M each, they would only be taxed on $2M. Proper planning can ensure each spouse fully uses their $4M exclusion amount in order to protect $8M from Illinois estate tax between both spouses.
Update your Estate Plan. When was the last time you reviewed your estate plan? If you have one in place, ensuring it’s updated is important to leverage all your planning opportunities. If it’s been longer than five years, it’s time to review those documents. Things have changed in recent years, and it is vital your plan is up to date. Special attention by your attorney should be directed toward planning for allocations between the family and marital trusts formulas in order to minimize the Illinois estate tax.
Determine Your Residency. Do you live part of the year in another state that doesn’t have an estate tax? You may want to consider changing your permanent residence to help mitigate or eliminate state-specific estate taxes. Have you considered moving? States that have no estate tax are Indiana, Florida, and Texas, to name a few. Proper planning is required to achieve this result.
Real Estate Property Planning. If you own real estate in Illinois and are not an Illinois resident, how that property is titled can also impact how your estate is taxed. For example, if your real estate is held in a land trust, it will be taxable in Illinois as real property, whereas if held in an LLC, it is considered intangible property and is not taxable for Illinois estate purposes.

Remember, if you are an Illinois resident with a gross estate over $4M, it is better to prepare for the Illinois estate tax than to be surprised by it.

Estate planning is complex and requires strategic coordination with your attorney, advisor, and trusted CPA. Contact your Friedman + Huey team today to get started.