Interested in Saving $209,124 in Estate Taxes?

October 8, 2009

On September 8, 2009, Illinois enacted Public Act 96-789, which allows a surviving spouse to defer the payment of Illinois estate tax until the surviving spouse’s death and postpone estate taxes due at the state level.

Under current law, Illinois residents must pay both a federal estate tax at a maximum rate of 45 percent, and a separate Illinois estate tax at a maximum rate of 16 percent. The maximum federal and state-level taxes combined are approximately 54 percent (after taking into consideration the federal deduction received for any Illinois estate taxes paid).

Traditionally, not much attention was paid to the Illinois estate tax because any estate tax paid to the state of Illinois was subtracted from any federal estate tax due. In addition, Illinois estate tax exemptions were "coupled" with federal estate tax exemptions. For example, in 2008 when the federal estate tax exemption was $2 million, the Illinois estate tax exemption was also $2 million.

In 2009 the federal estate tax exemption was increased to $3.5 million. However, the Illinois estate tax exemption for 2009 is fixed at $2 million. As a result, for many Illinois decedents, this "decoupling" (divergence of the Illinois estate tax exemption and the federal estate tax exemption) may result in $209,124 of Illinois estate tax.

We have developed a solution to prevent these unintended tax consequences by allowing the executor to make a marital deduction election as to a portion of the credit shelter trust for Illinois purposes only. Since the passing of Illinois Public Act 96-789, our solution has been specifically sanctioned by the law. To avoid these unintended tax consequences, the credit shelter trust would be fully funded with $3,500,000 and qualify for the federal estate tax exemption amount. The executor would then make an election as to assets worth $1,500,000 in the credit shelter trust to qualify for the marital deduction only for Illinois purposes. This would allow you to maximize the federal and Illinois exemptions without being subject to either federal or Illinois estate tax on the death of the first spouse.

As a result of these changes in the law, we suggest amending your existing living trusts to include our newly developed tools which address this issue and help to minimize estate tax consequences.