Illinois Estate Tax

 

Understanding Illinois Estate Tax: Key Insights and Planning Strategies

Hi there. I'm Mani, the CEO and founder of Valor. Estate tax is a significant consideration when transferring a deceased person's estate to heirs. It varies based on the estate's location and size. In this article, we'll explore Illinois' estate tax rates and how they work, providing strategic advice to help you maximize your hard-earned wealth for future generations.

What is Estate Tax?

An estate tax is levied on the transfer of assets from one generation to another. It is typically based on the total value of the estate and any pre-death gifts exceeding a state-specific exempt amount. Starting in 2024, individuals can transfer up to $13.61 million during their lifetime or at death without incurring federal estate tax, an increase from the 2023 exemption threshold of $12.92 million.

Illinois Estate Tax: How It Works

Each state has its own estate tax laws. In Illinois, the estate tax rate is progressive, varying based on the estate's value. Here’s a detailed look at how Illinois estate tax operates:

1. Taxable Estate Threshold: Estates worth more than $4 million are subject to Illinois estate tax.
2. Marginal Tax Rates: The rates range from 0.8% to 16%, depending on the estate's value.
3. Example Calculation: If your taxable estate is $8 million, it exceeds the Illinois exemption and is therefore taxable. The estate tax in this scenario would be approximately $286,000.

Federal Estate Tax: Key Points

Federal estate tax is due nine months after death and is paid from the deceased individual's estate. The rates range from 18% to 40%. For instance, if you pass on $1 million over the federal exemption, you would owe $400,000 in federal estate taxes, leaving $600,000 for your heirs.

Estate Tax Exemption and Planning

The federal estate tax exemption allows individuals to transfer a certain amount tax-free during their lifetime and after death. For 2024, this exemption is $13.61 million per person. Married couples can transfer double this amount. Additionally, there’s an annual gift exclusion of $17,000 per person starting in 2023, which doesn’t count against the lifetime gift exemption.

With the federal estate tax exemption set to drop to $6.6 million in 2026, due to the expiration of the Tax Cuts and Jobs Act, it’s crucial to start estate planning now.

Effective Estate Tax Planning Strategies

Estate tax planning helps you organize your affairs to minimize the taxes you and your heirs will pay. Here are some strategies:

1. Grantor Retained Annuity Trust (GRAT): Combine GRAT with direct indexing to enhance volatility and potentially boost returns by 98% or more. This allows you to pass money to future generations estate tax-free without using your lifetime gift exemption.
2. Spousal Lifetime Access Trust (SLAT): Create a SLAT out of assets that your spouse can access during your lifetime, with appreciation passing to your heirs estate tax-free.
3. Dynasty Trust: Protect your fortune and reduce or eliminate inheritance taxes while ensuring assets are managed and passed down per your intentions over generations.
4. Charitable Lead Annuity Trust (CLAT): Transmit assets to future generations and charitable organizations, reducing taxable estate value without using your gift exemption.
5. Lifetime and Annual Gifting: Use your annual and lifetime gift exemptions to lower your estate's taxable value.
6. Life Insurance: Set up life insurance to pay estate taxes. It can be structured to avoid inheritance tax through an irrevocable life insurance trust (ILIT) or private placement life insurance (PPLI).

Conclusion

Estate tax planning is essential for preserving your wealth for future generations. By understanding Illinois estate tax and employing strategic planning, you can minimize tax liabilities and ensure a smooth transfer of assets.