What You Need to Know About Estate Planning in Illinois

When creating your estate plan, it’s essential to consider state-specific regulations that could affect how your finances are distributed. Unfortunately, Illinois is one of only 12 states (and the District of Columbia) that have an estate tax, also known as the death tax.

• What does this extra tax mean for your estate?

• How can you better prepare for this and other Illinois-specific legislation when building your estate plan?

Let’s find out. 

Understanding The Illinois “Death” Tax

Yes, Illinois does levy an estate tax, and you must pay it if your estate is valued at $4 million or more. This rule even holds true for married couples. If one spouse passes away first, you can’t add any of their unused exemption to your estate. What does that actually mean? Let’s say your spouse’s estate was worth $3 million when they passed away, and yours is projected to be worth $5 million. The state doesn’t allow you to strategically deduct the “leftover” $1 million from your spouse to get you under the limits. But that’s not all. There’s another catch: you have to pay tax on the entire value of the estate, not just the amount that meets or exceeds the $4 million mark. This makes it far different than the typical marginal tax system to which we’re so accustomed. Your exact tax rate depends on the size of your estate, but the highest is 16%, and the lowest is 0.8%. To find out how much you will potentially have to pay, you can use the Illinois estate tax calculator.

How Does Illinois Estate Tax Differ from Federal Estate Tax?

Right off the bat, the most significant difference between the Illinois state tax rate and the federal tax rate is the percentage. Federal estate tax ranges from 18% to 40%, depending on your income. The federal estate tax exemption is also much higher. You don’t have to pay federal estate tax if the value of your estate is under $12.06 million (or double for married couples) in 2022, a far cry above the $4 million for the state. While the federal exemption is presently at all-time highs, it’s positioned to reset to $5 million in 2026 (unless new legislation is passed beforehand), which would affect many more families. So, how can you strategically reduce the value of your estate while staying true to your legacy goals? Here are a few ideas:

• Give money away to your loved ones while you’re alive. In 2022, you can give up to $16,000 per individual ($30,000 for married couples) without reporting it as a gift to the IRS. Giving money to your loved ones today is a fantastic way to see your gift at work—helping your child with a downpayment on a home, supporting your grandchild’s education, and treating the family to an incredible vacation. Yes, it lowers the value of your estate, but more importantly, it allows you to be present to see how your wealth can impact your loved ones.

• Donate to charity. This option allows you to make a positive social impact while reducing the size of your estate. It also offers potential tax breaks, so make sure to speak with your advisor about how to optimize your giving strategy.

• Shelter assets in an irrevocable trust. Placing assets in an irrevocable trust removes them from your taxable estate. Remember, once you create this trust and its beneficiary, you likely won’t be able to change it, making thorough planning paramount. 

• Spend your money. It’s important to balance your present goals with your legacy goals. If you have some extra cash, perhaps it would be better spent enhancing your ideal lifestyle.

Be sure to speak with your financial advisor, tax professional, and estate planning attorney to create a coordinated strategy. 

New Feature: Remote Wills

Create a will from the comfort of your own home. At least, that’s what Illinois decided to legalize. The COVID-19 pandemic spurred this innovation, and other states are following suit. A will enables you to outline your wishes for your estate. It also gives you space to designate who will be in charge of carrying it out, like your executor, guardian for minor children, route for personal property, and more. While typically completed in a legal office, the new law allows people to execute their wills remotely, which is especially beneficial if you are unwell or have a compromised immune system. You still need witnesses and paperwork, but you can establish your will at home. Be sure to make your will as thorough and complete as possible. Doing so will help avoid confusion or conflict upon your passing. It’s also a good idea to look at your will annually with your financial and legal team to ensure it continues to reflect your wishes. This is a complex issue, so be sure to seek out professional counsel.

Consider Your Estate Plan Holistically

While Illinois has some unique estate planning factors, it’s essential to consider your plan holistically. Regardless of where you live, you’ll want to ensure a thorough plan that addresses your needs, like a will, updated beneficiaries and designations, key documents like power of attorney, guardianship, and medical directive, and perhaps establishing a trust. Trusts can have several benefits:

1. Provides legal protection for your assets.

2. Offers a great deal of flexibility in how your assets are distributed over time. You probably don’t want your 18-year-old to inherit an entire $100,000 IRA in one fell swoop. A trust enables you to set parameters, like age and purpose for the funds.

3. Streamlines the wealth transfer process. Most trusts avoid probate, which can save your loved one's time and money. 

Your estate plan should be unique to your circumstances, wishes, and assets. 

We’re Here to Assist You

Creating an estate is a culmination of all the financial milestones you’ve achieved through the decades, and it allows you to leave a legacy to improve the lives of your loved ones. Would you like to learn more about creating a thorough estate plan? Reach out today.