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Written by: Thomas Van Spankeren, CFA, CFP® | RISE Investments
- Upon passing, an individual’s property may be subject to federal and state estate taxes above a certain exemption threshold
- Illinois estate taxes are high and there is an Illinois estate tax exemption of only $4 million per person with no portability between spouses
- Equalizing assets between spouses and utilizing credit shelter trusts are effective Illinois estate tax planning strategies
Understanding Estate Taxes and Estate Tax Exemptions
An estate tax is a tax on property held by an individual at the time of their death. Both federal and state governments offer an “exemption”, which is the amount of an estate that is not subject to estate tax.
For instance, estates under $13.99 million per person, or $27.98 million for a married couple, are exempt from federal estate taxes. Estates greater than those amounts are subject to federal estate taxes which is usually at a 40% tax rate. It is worth noting that unless Congress passes legislation, the federal estate tax exemption is set to expire in 2026 and the federal estate tax exemption is estimated to decline to approximately $7 million per person.
What is the Illinois Estate Tax?
Illinois residents are subject to more restrictive estate tax exemptions. Illinois has an estate tax exemption of just $4 million per person, meaning if you pass away with an estate valued at over $4 million, you will be subject to Illinois estate tax.
Also, the amount subject to Illinois estate tax is based on the entire amount of your estate, not just the value in excess of $4 million.
Illinois residents need to be aware of the key differences of the portability of their estate tax exemption at the federal and state level. Portability of the estate tax exemption between spouses means a surviving spouse can use a deceased spouse’s unused exemption in addition to their own to reduce estate taxes. Portability is allowed for federal estate taxes.
The $4 million Illinois estate tax exemption is not portable between Illinois spouses, meaning that without proper estate planning, a high net worth surviving Illinois spouse may be subject to unnecessary Illinois estate taxes.
The Illinois estate tax is calculated based on a complex calculation. For simplicity, we outlined the Illinois estate tax and the Illinois estate tax rate for various sized Illinois estates below:
Strategies to Reduce Illinois Estate Taxes
Illinois spouses that may be subject to estate taxes should not only “equalize” their assets between each spouse but look to utilize credit shelter or “bypass” trusts in their estate plan.
Consider the example of two Illinois couples (Couple A and Couple B), each with an $8 million total net worth.
We assume that Couple A has no bypass trusts. When the husband of Couple A passes, all the assets are titled to go directly to his wife.
Couple B had set up credit shelter trusts for both spouses. When the husband of Couple B passes, $4 million goes into a trust for his wife, utilizing the husband’s Illinois estate tax exemption. The wife now has $4 million in her name and another $4 million in a credit shelter trust for her benefit.
Couple A is not able to utilize the full value of each spouse’s Illinois estate tax exemption and is subject to $680,634 in Illinois estate taxes leaving $7,319,366 to their heirs.
Couple B, with proper estate planning, can forgo paying Illinois estate taxes as both spouses’ Illinois estate tax exemptions were utilized leaving $8,000,000 to their heirs.
It is important to note that there are various other strategies for Illinois residents to consider when engaging in estate planning.
Conclusion
Estate planning is often an overlooked part of an individual’s financial plan yet starting estate planning today is essential. Proper Illinois estate planning by equalizing assets between spouses and using credit shelter trusts can allow for Illinois families to preserve more wealth across generations.
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Disclosure
RISE Investment Management, LLC ("RISE" or "RISE Investments") is an investment adviser registered under the Investment Advisers Act of 1940. Registration of an investment adviser does not imply any level of skill or training. This publication is solely for informational purposes and past performance is not indicative of future results. Any description of products, services, and performance results of RISE contained in this publication are not an offering or a solicitation of any kind. No advice may be rendered by RISE Investments unless a client service agreement is in place. Advisory services are only offered to clients or prospective clients where RISE Investments and its representatives are properly licensed or exempt from licensure. All of the information in this publication is believed to be accurate and correct as the date set forth. RISE does not have or accept responsibility or an obligation to update such information. Please note, this article is for education purposes and should not be treated as tax or legal advice. This article is not a substitute for legal or tax advice from your professional legal or tax advisor.