Tag Archives | Estate Tax

Understanding Illinois estate taxes

Federal estate taxes get all the press.  But don’t forget that Illinois has an estate tax too.

And, to be honest, the Illinois estate tax is one of the most misunderstood things in estate planning.  We frequently get questions about how it works…even from other Illinois estate planning attorneys.

Calculating Federal Estate Taxes

The federal estate tax is pretty straightforward.  You can gift or pass on up to the exemption amount (currently $5.12 million but scheduled to go down to $1 million in 2013) without paying any taxes.  If your estate is larger than the exemption amount, you pay taxes only on the excess.

Calculating federal estate taxes is a simple matter of subtracting the exemption amount ($5.12 million) and multiplying the remainder by the tax rate (currently 35%).

Calculating Illinois Estate Taxes

We prepared an Illinois estate tax chart to highlight how the exclusion works for different estate sizes.  A good picture can often make a point much more clearly than paragraphs of the best explanation.

The blue line shows the estate taxes due (these figures were obtained from the Illinois Attorney General estate tax calculator).  As you can see, no Illinois estate taxes are due until an estate exceeds $3.5 million (the amount of the 2012 Illinois estate tax exclusion).  But once an estate hits that mark, Illinois taxes shoot up like a rocket.  Then, around $4.8 million, the taxes level off.

The red line is a continuation of that part of the blue line above $4.8 million. It is there to show what the taxes would have been in the absence of the exclusion.  The straight line starting at zero and continuing on through the blue line tells us that the taxes at and above $4.8 million is a flat percentage of the entire estate, not just the amount of the estate over $3.5 million.

Illinois Estate Tax Example

Let’s see how that works in practice.  In 2011, the Illinois exclusion amount was $2 million.  In 2012, that amount was raised to $3.5 million.

So that means a person can pass on an additional $1.5 million to their heirs tax free in 2013, right?

Not necessarily!

It’s easiest to see by looking at an example.  We’ll use an estate size of $5 million because that is the amount of the federal exemption from 2011.

  • Illinois Estate taxes owed in 2011 (exclusion $2.0 million):  $352,158
  • Illinois Estate taxes owed in 2012 (exclusion $3.5 million):  $352,158

Yes, you read those numbers correctly!  The taxes owed on a $5 million estate are exactly the same regardless of whether the exclusion amount is $2.0 million or $3.5 million.

The convergence point seems to be around $4.8 million.  Below that amount, an estate will owe less taxes under the 2012 rules than under the 2011 rules.  But for any estates over that amount, the Illinois estate taxes didn’t change with the increase in the exclusion.

What It Means For You

If your estate is between $2 million and $3.5 million (or from $4 to 7 million for a couple with the proper estate planning to take advantage of both spouse’s exclusion amounts), you can rest easy.  The increase in the exclusion amount saved your future heirs lots of money in Illinois estate taxes.

But if your estate is above $4.8 million (or $9.6 million for a couple with the proper estate planning) the increase in the exclusion amount didn’t reduce your estate taxes by even a single penny.

The good news for everyone with an estate over (or even close to) $3.5 million (or $7 million for couples) is that estate tax reducing strategies are available.

The best medicine for treating estate taxes is a good strategy + time to make it work.

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Looking back at 2011: the Illinois estate tax resurfaces

The past year ushered in many changes to the Illinois estate planning landscape.  There’s a lot to cover, so I’m breaking it into three posts.  First up is the Illinois estate tax.

The Illinois estate tax rules have caught many people by surprise.  So much attention has been paid to the federal estate tax (which currently has a $5 million exemption) that many have forgotten that Illinois has an estate tax too.

Under the 2009 and 2011 Illinois estate tax rules (there was no Illinois estate tax in 2010), a person dying with an estate of $2.5 million would owe no federal taxes.  But their estate would have to write a $128,518 check to the Illinois Department of Revenue.  That big number often shocks people who think of their estates as “just a little bit over the $2.0 million limit.”

Good news arrived last week, though, for Illinois families.  On December 20, Governor Quinn signed a law raising the estate tax exclusion (the minimum estate size before Illinois estate taxes are due) from $2.0 million (currently) to $3.5 million for 2012 and $4.0 million for 2013 and beyond.

Too many times this year I’ve had clients ask whether they should consider moving to another state to avoid Illinois estate taxes.  By narrowing the gap between the Illinois and federal estate tax rules, fewer families will need to consider advanced planning techniques.

But…the good news from Illinois is tempered by the uncertainty behind the federal estate tax rules that is still hanging over everyone’s heads.  The federal estate tax exemption for 2012 is currently $5.0 million, but it drops back down to $1.0 million for 2013 and beyond.  Several proposals have been made in Congress for a permanent solution.  So stay tuned!

In Part 2, we’ll fill you in on the changes to powers of attorney.

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The beach delivers an estate planning lesson (it’s not all sand and surf!)

If there’s one thing I have learned, it’s that life can teach us a lesson at any time and any place.  One of those teachable moments happened to me recently while I was on a vacation at the beach with my husband (and law partner!), Jeff.

Let me start by saying that I am one of those moms who is very strict about sunscreen.  My kids do not go swimming or play outside for very long without a healthy coat of sunscreen.

But Jeff and I found ourselves on the beach on a very overcast day.  I know that clouds don’t prevent sunburns.  But we were also sitting under our very own tiki hut.  The thought of sunscreen entered my mind, but quickly left because we were “safe” under the tiki hut.

So there we sat — in the “shade” on a cloudy day — and read our legal books for hours and hours.  How did our little beach adventure turn out?

Sunburn.  Lots of it.  Jeff got the worst of it because he is very fair skinned.  But I didn’t escape scot free.

The tiki hut gave us a huge false sense of security.  We felt incredibly safe because we had taken some steps, even though they weren’t enough.  In a sense, the cloudy skies and tiki hut prevented us from taking the truly effective steps that we needed to take to protect ourselves.

I run into the same thing all the time when talking to people about their estate plans.

  • The people who told me they got a Will to avoid probate (but a Will actually guarantees probate)
  • The parents who were very proud that they named guardians in their Will (but had done nothing to address who would care for their kids on short notice or if they were injured but not killed)
  • The adult children who took money from their elderly parent’s accounts to reimburse expenses they had incurred (but they hadn’t kept proper records so their parent’s eligibility for Medicaid long-term care coverage was put in danger)
  • The people who tell me their estates won’t have to pay estate taxes (but they didn’t include the value of their life insurance policies when they added up their estate)
  • And many other stories we hear…

Each of these people felt a false sense of security because they hadn’t been properly educated by their attorney (or had gotten documents without seeing an attorney at all, such as from Legal Zoom).  We are strong believers in education because good decisions are only possible by having the full picture.  That’s why we became National Preparedness Coalition Members.

If Jeff and I had the full picture, we wouldn’t have had to stay inside for three straight days of our “beach vacation” because of a serious sunburn.  But the stakes are much bigger in estate planning.

So, get a head start on National Preparedness Month.  Ask yourself, have you fully investigated what you need to do to protect yourself and your family?  Or are you living under a false sense of security?  If you have any questions about your plan, call me and let’s talk about it.

But don’t just think about your own family.  If you believe someone you know — a friend or family member — has a false sense of security, take the initiative to send them this email.  Tell them to get prepared — and get their plan checked out.

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The estate tax is gone, but don’t celebrate yet

We are seven weeks into the new year and there is still no clear roadmap for the estate tax.  It’s probably not too early to think about what might happen in 2011 — a 55% estate tax with a $1 million exemption.

But what about 2010?  Should we all be celebrating the (at least temporary) demise of the estate tax?

Not so fast…

The estate tax hasn’t been removed, it has been replaced with another tax.  The new tax is the capital gains tax.

Thousands of estates will be impacted.  In fact, the chief tax counsel for the House Ways and Means Committee (the committee responsible for writing tax bills) estimates that an additional 65,400 estates will have to pay taxes in 2010 because of the elimination of the estate tax.

If that doesn’t make any sense, then let me explain the concepts of “basis” and “step up” and how they were affected by the change in laws on January 1.

If you buy an asset (for example: a house, shares of stock) and sell it later for a profit, you have to pay capital gains taxes on the profit.  The price that you paid for the asset is called the basis.

Sometimes the basis changes.  For someone dying last year, the basis of each of their assets would change (step up) to the value of the asset on the day that person passed away.

An example might make that more clear:

Appreciated Assets in 2009 (With An Estate Tax)

  • Steve buys 100 shares of Apple, Inc. stock for $5 in 1997.  His basis for each share is $5 (the total basis is $500).
  • Steve passes away in 2008.  At the time, the shares of Apple stock are valued at $100.
  • Steve’s trust leaves the shares to his daughter Kate.  Kate’s basis in the shares steps up (changes) to their value at Steve’s death — $100 (for a total basis of $10,000).
  • Kate sells the shares in 2010 for $200 each.
  • Kate has to pay capital gains taxes on a $10,000 gain (100 shares times the difference between the sale price of $200 and the basis of $100).

Here’s how that would have looked had Steve passed away under the laws as they currently stand for 2010:

Appreciated Assets in 2010 (With No Estate Tax)

  • Steve buys 100 shares of Apple, Inc. stock for $5 in 1997.  His basis for each share is $5 (the total basis is $500).
  • Steve passes away in 2010.  At the time, the shares of Apple stock are valued at $100.
  • Steve’s trust leaves the shares to his daughter Kate.  Kate’s basis in the shares does not change, but remains at $5 (for a total basis of $500).
  • Kate sells the shares in 2010 for $200 each.
  • Kate has to pay capital gains taxes on a $19,500 gain (100 shares times the difference between the sale price of $200 and the basis of $5).

Under the old estate tax system, a person could pass on assets worth $3.5 million (and for which the basis would be $3.5 million) without paying any federal taxes. Now, much smaller estates are exposed to taxes.

Congress hasn’t left us completely out in the cold, though.  In 2010 you can increase the basis of property you pass on by up to $1.3 million.  Again, let’s take a look at an example:

Using Your IRC § 1022 Basis Increase

  • An entrepreneur, Julie, starts a business with just $100,000 in seed money.
  • Julie’s business has grown to be worth $3 million when Julie passes away.
  • Julie trust leaves her business to her son, Mark.
  • Mark’s basis in the business, if he chooses to later sell his shares, can be increased to $1.4 million.  This would use the entire $1.3 million increase available to Julie.

The situation is even worse for couples.  Under the 2009 estate tax laws, all property left by the decedent to their spouse would get the setup up in basis.  Someone passing away in 2010 can only increase the basis of property left to a spouse by up to $3 million (in addition to the general basis increase of $1.3 million).

So who is at risk of additional taxes now that the estate tax is gone?  Many people could be swept up into these new taxes.  But two groups in particular should carefully consider their planning in light of the changes in the law in 2010:

  • Married couples or individuals with substantially appreciated assets or a closely-held business
  • Anyone with a net worth between about $1.5 million and $3.5 million that includes appreciated assets

If that sounds like you and your family — you’re not alone.  We could see a 1000% increase in the number of estates that owe taxes this year.  And then it’s all supposed to reset in 2011, with an estate tax at the antiquated limit of $1 million.

So this story is almost certainly not over.  Stay tuned!

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