You might have heard about the recent changes to federal estate tax laws. The amount that can pass free of federal estate taxes is over $11 million (until December 31, 2025). While the federal estate tax will affect fewer individuals, persons domiciled in Illinois should be aware of the significant Illinois estate tax: Illinois imposes tax on assets passing at death to a non-spouse in excess of $4 million. Married couples can pass double the amount (i.e., $8 million) with proper planning. Illinois includes taxable gifts which are made during lifetime when calculating the Illinois estate tax.
As a result of these changes, many people have shifted their focus from the estate tax to income tax planning for “step-up” in income tax basis of assets which pass at death.
Now is a good time to review and consider changes to your estate plan – this is especially relevant if your plan provides for distribution of assets into one or more trusts for your surviving spouse’s benefit instead of outright to your surviving spouse (key words to look for: marital trust; credit shelter trust; family trust).
Married couples in second marriages often create a trust on the death of the first spouse to die to provide for the needs of their surviving spouse while ultimately leaving any assets which remain after the beneficiary spouse dies to pass to their own children. The surviving spouse is free to remarry without family concerns regarding assets ultimately passing to strangers.
Caution – Making taxable lifetime gifts under the $11.2 million exemption creates a “clawback” concern if you die after 2025, when the estate and gift tax exemption is lower. It’s unclear if the IRS will apply the gift tax exemption amount applicable at the time of the gift or at the time of your death.