The Estate Tax is probably the biggest bogeyman associated with estate planning. Clients often approach us with fears of leaving their loved ones with a hefty tax bill after they die, and with lots of questions about how to keep their estates away from estate tax liability. Because we get this question so often, we want to outline some of the basics of the estate tax and related topics for you, to give you a better idea of whether this bogeyman might be under your bed!
What is the estate tax?
Simply put, the estate tax is a tax on the estate of a deceased person, which is generally assessed on the value of the estate before it is transferred to the decedent’s beneficiaries. In other words, after you die, but before your money goes to your children and grandchildren, the state or federal government assesses a tax and takes its cut out of the inheritance pot, which reduces the amount your children and grandchildren receive. The amount of tax is purely based on the total amount that the decedent’s estate is worth. The federal government has its own estate tax, as well as fifteen states, including Illinois.
What assets are considered part of my estate?
The short answer: everything! Any asset that is held in your name is part of your estate when you died. This includes, but is not limited to: real estate, personal possessions cars, stocks, cash, businesses, furnishings, retirement and investment accounts, and life insurance policies. When calculating the value of the estate, make sure to include ALL of these items in your total valuation.
How is that different from an inheritance tax?
An inheritance tax is similar to an estate tax, in that it is designed to tax transfers of inherited wealth. However, instead of taxing the pot of money, or the estate of the decedent, individuals who inherit are taxed on whatever amount that they receive from their loved one’s estate. Contrary to the estate tax, inheritance tax rates will vary based on a number of factors, including how much is being received, whether the recipient is a spouse, and how closely related the taxpayer is to the decedent. There is no federal inheritance tax, but as of 2021, six states have inheritance tax laws. Illinois is not one of those states.
What is the federal estate and gift tax?
The federal estate and gift tax is a tax that is assessed on the combined total of your taxable estate and the total amount of taxable gifts that you gave over the course of your life. Taxable gifts include gifts made of over $15,000(or $30,000 if given by a married couple) per person per year, but do not include certain gifts for tuition and medical expenses to your loved ones, certain gifts to political organizations, or gifts to spouses. As of 2021, the sum total of a decedent’s taxable estate plus any taxable gifts must be greater than $11.7 million. Anyone who dies with less is not subject to the federal estate tax, bur whether they are subject to the state estate tax is another question.
What is Illinois’s estate tax?
Illinois’s estate tax does not include taxable gifts like the estate tax, but it also has a much lower exemption threshold. Any Illinois resident’s estate worth more than $4 million may be subject to the estate tax.
So what’s the bottom line here?
The truth about the estate tax is that it will not apply the vast majority of people. Illinois residents with estates valued at under $4 million will not have an estate tax issue at either a state or federal level.
HELP!
I have more than $4 million in assets, how can I avoid the estate tax in Illinois?
A well-executed estate plan offers many tax benefits, including potentially savings and avoidance of the estate tax! Call or email AvoidProbate today for a free consultation, to see how we can help you plan for the future and protect your loved ones.