Everything You Need to Know About Illinois’ Estate Tax

Estate planning is an essential part of managing your personal finances. This is especially important if you have significant assets to consider. You want to make sure that your assets are handled and distributed in accordance with your wishes when you pass, but this may not happen if you don’t take a proactive role in preparing your estate. If you have a high-value estate, you should regard estate taxes as a key consideration.

What Is Estate Tax?

An estate tax is a tax levied on the taxable value of an individual’s property at the time of their death. The estate tax is levied on the estate itself, so this amount comes out of the estate before it goes to an inheritor or heir. 

The estate tax is based on the value of your taxable estate. To determine this number, you must first calculate your gross estate. The gross estate is the accumulated value of all your property, including real estate, trusts, annuities, insurance, securities, cash, and other assets. These assets are assessed based on their fair market value, which is what they are currently worth, not what they were worth at the time of their purchase.

There are certain allowable deductions from your gross estate. These include:

• Estate administration expenses.
• Debts.
• Mortgages.
• Properties donated to charities.
• Properties passed to surviving spouses.

You may also be able to reduce the value of certain farms or operating business interests. Once these deductions are made, you’ll come to the taxable estate.

What’s the Difference Between Estate Tax and Inheritance Tax?

Estate tax is deducted from the initial taxable value of the estate before it’s distributed to anyone. Inheritance tax is paid by the heir or inheritor after they have received their portion of the estate. There is no inheritance tax in Illinois as of 2021.

How Does Illinois Handle Estate Taxes?

Only 12 states and the District of Columbia have their estate taxes separate from the federal estate tax. Illinois is one of those states, so you need to understand how these taxes work when considering your estate planning.

In most cases, you will not need to pay an estate tax in Illinois. You are only subject to the state’s estate tax if the gross estate increased by the individual’s specific gift tax exemption and the adjusted taxable gifts exceeds a certain amount. For 2023, that amount is $4 million in Illinois. If the estate is worth more than $4 million, it’s subject to a graduated state estate tax. The highest possible estate tax in Illinois is 16% as of 2023.

The Illinois attorney general handles the state’s estate taxes. Each year, new forms are provided via the website for individuals to file estate taxes. You must use the forms applicable to the year in which the individual died. Payments must be made to the Illinois state treasurer.

What Is the Federal Estate Tax?

The federal estate tax works much like the state estate tax. However, it exempts estates of less than $12.92 million in 2023. This amount will increase to $13.61 million in 2024. Only a few estates are valued high enough to fall subject to this tax. For those that do, the IRS assesses taxes ranging from 18% to 40% depending on the taxable value of the estate.

Can the Illinois Estate Tax Be Avoided?

There are several estate planning strategies that you can use to reduce your taxable estate. If you can get the value of your estate below the taxable threshold, you may not have to pay the Illinois estate tax at all. Even if you are still subject to some of the state’s estate tax, you can make sure that you pay as little as possible by preparing your assets properly. Consult a qualified financial planner about the following strategies.

Marital Deductions

If you’re part of a married couple, it’s important to understand how your estate works when one of you passes. Assuming that there’s a surviving spouse, you can pass an unlimited amount of assets to them. This includes any jointly owned property. 

Trusts

There are several trusts that can reduce the taxable value of your estate. When you place your assets into any form of irrevocable trust, they leave your control and are thus exempt from the estate tax. When you establish this type of trust, you will name the beneficiary and lose control of the assets. Though you can name yourself as the beneficiary, you will no longer have the same ownership or control of the assets, because they legally belong to the trust. Either the trust itself or the beneficiary will pay income taxes on undistributed gains.

You can also place assets in a revocable trust, also known as a living trust. This type of trust designates a trustee to manage the assets after you die. It also specifies the beneficiaries of the assets included in the trust.

Life Insurance

If you expect that there will be estate taxes to pay after your death, you can set up your life insurance to pay them. This is a handy approach because life insurance is exempt from income tax. You will typically need to place the estate in a trust that’s appropriate for this purpose.

Exclusion Gifts

You can make a gift of up to $15,000 per person every year and still avoid the federal gift tax. If you’re a married couple, you can gift up to $30,000 per person each year. If you know that you want to leave a significant portion of your estate to certain individuals, parceling it out early in the form of annual gifts is one convenient way to chip away at your estate so there’s less tax when you pass.

Prepare Your Estate

Working with a financial planner now is the best way to prepare your estate and protect it from unnecessary taxes. Our team at Pasquesi Sheppard LLC can help with all your personal finance needs, including estate planning, so you can rest easy knowing your assets are in the right hands.

low-angle photography of brown mansion under a cloudy sky during daytime by Fabian Wiktor is licensed with Unsplash License