.jpg)
For married couples living in Illinois, understanding both the federal and Illinois estate tax laws is essential to ensure that your estate plan effectively reduces and or eliminates estate upon the death of one or both spouses.
While the federal estate tax system offers a valuable benefit known as portability, Illinois does not provide the same advantage.
Understanding Federal and Illinois Estate Tax Exemptions
As of 2024, the federal estate tax exemption is set at $13.61 million per individual, meaning that most estates will not be subject to federal estate taxes if the total value of the estate is under this threshold.
For married couples, this can effectively double to $27.22 million, as each spouse is entitled to their own exemption. However, it’s important to note that this historically high exemption is set to expire at the end of 2025, unless Congress acts to extend it. On January 1, 2026, the exemption will revert to the pre-2017 level of $5 million per individual, adjusted for inflation, which is expected to be approximately $6.4 million.
In contrast, Illinois has its own estate tax, which operates independently of the federal system. The Illinois estate tax exemption is significantly lower, at $4 million per individual. This means that even if your estate is below the federal exemption threshold, it could still be subject to Illinois estate taxes if it exceeds the state’s $4 million exemption. The Illinois estate tax rates are progressive, starting at 0.8% and reaching up to 16% for estates valued over $10 million.
Federal Portability: A Key Benefit for Married Couples
One of the most valuable features of the federal estate tax system is the concept of portability, introduced by the Tax Relief Act of 2010. Portability allows a surviving spouse to claim any unused portion of their deceased spouse’s federal estate tax exemption. This means that if one spouse passes away without fully utilizing their $13.61 million exemption, the surviving spouse can add the unused portion to their own exemption, potentially shielding up to $27.22 million from federal estate taxes.
To take advantage of this benefit, the surviving spouse must file a federal estate tax return (Form 706) within nine months of the deceased spouse’s death (with a possible six-month extension) to elect portability. Failing to file this return within the required timeframe means losing the ability to use the deceased spouse’s unused exemption.
Portability can be particularly beneficial in scenarios where the surviving spouse’s estate may grow significantly before their death, such as through investments, inheritance, or appreciation of assets. It provides a powerful tool for married couples to maximize their federal estate tax exemptions and minimize the tax burden on their estate.
Illinois Estate Tax: No Portability Benefit
Unlike the federal estate tax system, Illinois does not offer portability for the state estate tax exemption. This means that if one spouse in Illinois dies without fully utilizing their $4 million exemption, the unused portion is lost. The surviving spouse cannot claim the deceased spouse’s unused exemption, which can result in a higher estate tax liability at the state level.
For example, if a married couple in Illinois has a combined estate worth $7 million and the first spouse to die uses only $2 million of their $4 million Illinois exemption, the remaining $2 million is forfeited. When the surviving spouse passes away, their estate may face Illinois estate taxes on the portion that exceeds their $4 million exemption, potentially subjecting the estate to a significant tax bill.
Strategic Estate Planning for Illinois Residents
Given the lack of portability under Illinois estate tax laws, it’s crucial for married couples to carefully plan how to use both spouses’ exemptions.
One strategy is to create a trust, such as a credit shelter trust (also known as a bypass trust), to preserve the first spouse’s Illinois exemption amount. Upon the first spouse’s death, assets up to the exemption amount can be placed into the trust, ensuring that the Illinois exemption is fully utilized and not lost. The assets in the trust can benefit the surviving spouse during their lifetime, while also reducing the taxable estate upon their death. The surviving spouse can then also elect to claim any unused portion of their deceased spouse’s federal estate tax exemption through portability.
Navigating the Complexities of Estate Tax Planning
Estate tax planning is a complex and ever-evolving field, especially when balancing both federal and state tax laws. For married couples living in Illinois whose estates are likely to be over the $4 million Illinois estate tax exemption amount, it is important to understand how to maximize the benefits of federal portability while also understanding the limitations of Illinois estate tax laws.
This article is a service of Attorney Chad A. Ritchie and the Ritchie Law Office, Ltd.
Click Here or call (309) 662-7000 to learn more about Ritchie Law Office, Ltd. and our Estate Planning process, which starts with an initial consultation called our “Ritchie Legacy Planning Session”.
To sign up for the Ritchie Law Office, Ltd. monthly newsletter, click here! Keep up with estate planning news, federal and state legislation affecting your estate plans, and the latest events and happenings at Ritchie Law Office, Ltd.