By Aaron D. Evans^*

Estate tax is a one-time tax assessed on all the property you own at your death.  Both the State of Illinois and the federal government assess estate taxes.  Many people can avoid paying estate taxes due to the State and federal exemptions, which allow a certain amount of property to transfer at one’s death tax-free. 

New legislation approved by Governor Quinn raises the Illinois estate tax exemption starting in 2012.  The old exemption, which remains in effect for persons dying prior to 2012, was $2 million.  Now, the exemption is $3.5 million for those dying in 2012 and $4 million for those dying in 2013 and beyond.  For estates valued in excess of the exemption, the State will assess estate taxes up to a maximum rate of 16 percent.

Of course, Illinois and federal laws each tax estates differently.  The Illinois estate tax exemption is still less than the federal estate tax exemption, which is currently $5.12 million.  The current maximum federal tax rate is 35 percent.  However, the federal laws will expire at the end of 2012.  Unless Congress acts before then, the federal exemption will revert to $1 million with a top tax rate of 55 percent.

Given the uncertainty over the federal estate tax laws and the gap between the Illinois and federal exemptions, proper estate planning is essential to avoid tax windfalls at your death.  In general, taxes become due whenever property is transferred.  This is true whether the property is gifted, sold, or inherited.  Taking advantage of the exclusions to the various transfer taxes allows you to maximize the amount of property that can be passed on to your heirs.  There are three notable exclusions that can be used to eliminate or minimize estate tax:  the estate tax exemption, the annual gift tax exclusion, and the marital deduction.

Currently, Illinois does not tax gifts.  Although gifts are subject to federal tax, each person may gift up to $13,000 to any other person each year without incurring federal gift tax.  This means that you and your spouse could gift a total of $26,000 to each of your children or other heirs without paying any taxes on those gifts.  By starting a plan of gifting, you can decrease the value of your estate to fit within the estate tax exemptions.  It should be noted that gifts made in excess of the annual exclusion are subtracted from your federal estate tax exemption, but do not affect your Illinois estate tax exemption.

The last exception to transfer taxes is the marital deduction.  You can leave an infinite amount of property to your spouse at your death tax-free.  This is commonly used with a qualified terminal interest trust to defer estate tax on property in excess of the estate tax exemption until the second to die.  This allows each spouse to maximize their respective estate tax exemption. 

For additional information, or to begin your own estate plan, please contact our office.

^* Aaron D. Evans is an attorney with Rammelkamp Bradney, P.C. practicing in estate planning, probate, taxation, business transactions, and real estate.  He can be reached at (888) 834-3018.