We reported in the June 2008 issue of this publication that in 2009 and thereafter, based upon existing Illinois law, a married Illinois resident who dies with a typical “reduce to zero” estate plan, bequeathing the Federal applicable exclusion amount of $3,500,000 to his or her Family Trust and the balance of his or her estate to the surviving spouse or to a marital deduction trust for the surviving spouse, would result in no Federal estate tax and an Illinois estate tax of $200,000. This is because, in summary and unlike the Federal estate tax law, there is no marital deduction under Illinois law and the exemption is capped at $2,000,000 per person.
One way to avoid the Illinois estate tax would be to limit the size of the Family Trust of the first spouse to die to $2,000,000, but doing so, all other factors being equal, forgoes the use of the deceased spouse’s full federal applicable exclusion amount, thus exposing an additional $1,500,000 to potential federal estate tax – at a 45% tax rate – at the time of the surviving spouse’s death. The following diagram – all numbers are approximate and taxable gifts are not considered – illustrates that, for Illinois gross estates in excess of $5,000,000 for couples, there are substantial aggregate tax savings when the first spouse to die funds his or her Family Trust to $3,500,000 and the surviving spouse or deceased’s heirs pay the Illinois estate tax.
Husband and Wife Gross Estate
| Size of Family Trust of First Spouse to Die
| Illinois Tax Payable on First Death
| Estate Taxes Payable On Spouse’s Subsequent Death
Illinois Federal
| Total Estate Taxes
|
$5,000,000
| $2,000,000
| -0-
| $167,000
| -0-
| $167,000
|
$3,500,000
| $209,000
| -0-
| -0-
| $209,000
|
$7,000,000
| $2,000,000
| -0-
| $352,000
| $517,000
| $869,000
|
$3,500,000
| $209,000
| $209,000
| -0-
| $418,000
|
$10,000,000
| $2,000,000
| -0-
| $680,000
| $1,700,000
| $2,380,000
|
$3,500,000
| $209,000
| $543,000
| $1,016,000
| $1,768,000
|
If you have a typical “reduce to zero” estate plan that dictates a Family Trust of $3,500,000, the surviving spouse should know that the aggregate estate on the death of his or her spouse will suffer a $209,000 Illinois estate tax, but that there will be tax “savings” on the surviving spouse’s subsequent death. The spouses can plan for this tax at the first spouse’s death by purchasing life insurance, reducing the size of their taxable estates by adopting family limited partnerships or limited liability companies, or other strategies.
Please do not hesitate to call us if you have any questions about the Illinois estate tax.