In an effort to reduce or eliminate federal estate taxes, most potentially taxable estate plans provide that the credit shelter trust – frequently referred to as the “family trust” – is funded up to the federal applicable exclusion amount, which is $2,000,000 in 2008 and increasing to $3,500,000 in 2009, and provide the balance of the estate is to pass to the surviving spouse outright or in a marital trust. That strategy usually results in no federal estate tax at the time of the first spouse’s death.
For Illinois estate tax purposes, the applicable exclusion amount is frozen at $2,000,000 for persons dying in 2008 and 2009. Therefore, for Illinois residents who do not own out-of-state property and who die in 2009, the typical estate plan that fully funds the credit shelter trust at $3,500,000 that reduces federal taxes to zero will incur an Illinois death tax of $229,200. That is a tax rate of 15.28% on $ 1,500,000 of assets in the credit shelter trust that are subject to the Illinois death tax.
A strategy to avoid the Illinois death tax would be to limit the size of the family trust to $2,000,000, but doing so forgoes the use of the deceased spouse’s full federal exclusion amount, thus exposing an additional $1,500,000 to potential federal estate tax at the surviving spouse’s death. The cost of saving $229,200 could be as much as $675,000 ($1,500,000 x 45%federal estate tax rate), if the surviving spouse has a federally taxable estate at the time of his or her death. Hence, it appears to be fiscally prudent to incur the Illinois death tax at the death of the first spouse and preserve the $1,500,000 balance of the federal exclusion amount for a probably higher federal estate tax rate at the time of the surviving spouse’s death. If this strategy is adopted, most married clients with a federally taxable estate should plan for an additional cash outlay to pay the Illinois death tax at the time of the death of the first spouse to die.
All this may change, as you may be aware, on or before 2010, when amendments in the federal estate tax law are anticipated. In addition, there is legislation currently proposed in Illinois that is intended, like the federal practice, to defer the Illinois death tax until the death of the surviving spouse. If enacted, such legislation could provide additional estate planning opportunities. As estate and business planning is a substantial portion of our firm’s practice, we will continue to monitor changes in the law and new opportunities for tax savings.
The Illinois death tax must be considered in all taxable estates that exceed $2,000,000. Please do not hesitate to call us if your estate plan should be updated or if you want to discuss the implications of the Illinois death tax. Even if your estate does not exceed $2,000,000, you should periodically review your wills and trust to be certain they are consistent with your intentions.