In this article, we explain how the new federal tax law will affect estate tax planning strategies for Illinois residents in 2018 and beyond. The short answer is that even though the new tax law raises the federal estate tax exemption, estate tax planning strategies should not change for most Illinois residents. We will explain generally how estate tax works and discuss some basic strategies that we use to help our clients minimize it. We will then discuss the impact of the 2017 federal tax law and explain why the new law should not change your estate planning strategy.
Let’s start out with a quick refresher on how estate tax works. For a more detailed explanation of estate tax, and estate tax planning strategies, check out our article: How to Avoid Estate Tax.
When you pass away, the assets you leave behind (your estate) may be taxed on both the federal and state level before they pass to your beneficiaries. Whether your estate will be taxed depends on its value.
To the extent that the amount of your estate exceeds the federal estate tax exemption amount, your estate will be taxed on a federal level. Similarly, to the extent that your estate exceeds the Illinois state exemption amount, your estate will be taxed on the state level. Only the amounts over and above the exemption amount are subject to estate tax.
On the federal level, spouses can automatically take advantage of one-another’s estate tax exemption and add it to their own if necessary. Being able to take advantage of one another’s estate tax exemption is extremely advantageous, because it essentially doubles the threshold at which married couples need to start worrying about estate tax.
On the state level, spouses cannot automatically take advantage of one another’s exemption. However, through the use of revocable living trusts, we can allow married couples to take advantage of one another’s exemptions for Illinois tax in the same way that they can automatically do so for federal estate tax. This is typically the first line of defense for estate tax avoidance for Illinois residents.
The new federal tax law raises the federal estate tax exemption from $5.5 million for individuals and $11 million for married couples to $11 million for individuals and $22 million for married couples.
Under the previous law individuals with estates worth between $5.5 million and $11 million and married couples with estates worth between $11 million and $22 million were required to pay federal estate tax if they did not employ estate planning strategies to avoid it. Under the new law individuals and couples with assets in that range will not be required to pay estate tax. Individuals and couples with assets in excess of $11 million and $22 million respectively will only pay estate tax on assets over and above those amounts.
The 2017 federal tax law will not modify the Illinois estate tax exemption, which is set at $4 million. As we discussed above, the first tool we use in an Illinois estate plan to minimize estate tax is to allow couples to take advantage of one another’s exemptions through revocable living trusts. If done properly, this essentially raises the estate tax bar for a married couple from $4 million to $8 million.
Since the new federal tax law did not change the Illinois estate tax exemption amount, this estate planning strategy still makes sense, even if the raised federal exemption would eliminate your federal estate tax obligation.
Likewise, if more advanced estate tax minimization strategies such as Irrevocable Life Insurance Trusts or Grantor Retained Income Trusts would have been beneficial to you prior to the new tax law, they would still be appropriate after the passage of the law, because they will reduce your Illinois estate tax.
Finally, many people confuse estate tax minimization strategies with estate planning. You should be aware that even if you are well under the estate tax exemption, there are many reasons other than estate tax minimization to prepare an estate plan, all of which still remain important after the passage of the 2017 tax law. For example, even if your estate will not be subject to estate tax, it is likely that you should still have a revocable trust to make sure that your loved ones avoid a costly and time consuming probate case when you pass.