Changes in Illinois Estate Tax Laws

On December 16, 2011, Governor Patrick Quinn signed into law Public Act 97-0636 (the “Act”).  The Act received much press at the time as it was primarily meant to address tax incentives for Sears Holdings Corp. (“Sears”) and the CME Group, Inc. (“CME”) which operates the Chicago Mercantile Exchange (in response to Sears’ and CME’s threat to leave Illinois and take their jobs with them).  However, contained in the very last two pages of the lengthy Act are new rules regarding Illinois’ state estate tax exemption.  

Illinois imposes its own state-level estate tax on decedent’s estates (in addition to the Federally-imposed estate tax).  Illinois also provides an exemption to the state estate tax such that estates valued below a certain threshold are not subject to the state estate tax at all.  Traditionally, Illinois’ state estate tax exemption was tied to, or “coupled” with the Federal estate tax exemption.  For example, in 2008 both exemptions were $2,000,000.  In 2009, however, the Federal exemption increased to $3,500,000 where Illinois’ stayed at $2,000,000.  This divergence is referred to as “decoupling”, and can result in unintended estate tax liability unless proper language is included in estate planning documents.  

In traditional estate plans for married couples, upon the death of the first-to-die spouse, his assets are split into two trusts, the marital trust and the family trust.  The family trust is funded with the applicable Federal estate tax exemption amount, and any excess is used to fund the marital trust.  Because the marital trust qualifies for the marital deduction from estate tax, no estate tax would be due upon the death of the first spouse.  However, in this scenario, although no Federal estate tax would be due, Illinois would nonetheless impose its own, separate estate tax on the funds in the family trust that exceed Illinois’ exemption level.  For example, for 2009 decedents, this would mean a potential Illinois estate tax liability of over $200,000.

With passage of the Act, Illinois eased the decoupling-burden slightly—over the next several years, the Illinois exemption will increase to a maximum of $4,000,000.  In particular, the Act provides exemption levels of:

• $2,000,000 for persons dying prior to January 1, 2012;
• $3,500,000 for persons dying on or after January 2, 2012 and prior to January 1, 2013; and
• $4,000,000 for persons dying on or after January 1, 2013.

However, Illinois’ exemption will still not equal the Federal exemption of $5,000,000.  Therefore, decoupling remains an issue.  To deal with the potential state-level tax, we have crafted language that allows the Executor of the estate to make a marital deduction with respect to a portion of the family trust for Illinois purposes only.  In practical terms, upon the death of the first-to-die spouse, the family trust would be fully funded with up to $5,000,000 and qualify for the Federal estate tax exemption amount. The Executor would then make an election as to the assets in excess of the Illinois estate tax exemption amount (currently, as described above, $3,500,000) in the family trust to qualify for the marital deduction for Illinois purposes only. This allows maximization of both the Federal and Illinois exemptions without subjecting assets to either Federal or Illinois estate tax.

 

If you have a taxable estate above $3,500,000, and thereby are above the Illinois estate tax exemption, you should consider other “estate tax minimization” strategies to minimize your estate tax liability.  We can assist you with such strategies as gifting, charitable planning, sales to defective grantor trusts, and other advanced techniques to minimize estate tax exposure.

If you want to implement any of these “estate tax minimization” strategies or modify your estate planning documents to take into account of the above-described changes in Illinois law, contact me at eosborne@stahlcowen.com or 312-377-7761!

NEW Illinois Tenancy by the Entirety Law

The simplest asset protection measure a couple can take is to own their home as tenants by the entirety (“TBE”).  In Illinois, the only asset you can own as TBE is your principal residence.  Under TBE ownership, your home is deemed to be owned by both parties as a fused marital unit (or a fused civil union unit).  Therefore, an individual creditor of either person would be unable to reach the primary residence in satisfaction of a debt.  

Traditionally, spouses/partners would have to choose between asset protection concerns (TBE ownership) and estate planning concerns (ownership in a living trust)—the two concepts were mutually exclusive.  However, effective January 1, 2011, spouses and civil union partners in Illinois can hold title to their primary residence in their living trusts, as TBE.  In other words, they can now have the best of both worlds.

Note that this protection is not automatic—the deed conveying title must specifically reference not only the applicable living trust(s), but also TBE language.

Illinois Civil Union Act

On January 31, 2011, Governor Patrick Quinn signed into law the Illinois Religious Freedom Protection and Civil Union Act (the “Civil Union Act”).  The effective date was June 1, 2011.  The Civil Union Act provides that parties to a civil union are “entitled to the same legal obligations, responsibilities, protections, and benefits as are afforded or recognized by the law of Illinois to spouses.”  The Civil Union Act also provides for reciprocity—Illinois will recognize a “marriage between persons of the same sex, a civil union, or a substantially similar legal relationship other than common law marriage, legally entered into in another jurisdiction.”   

 

In other words, parties to a civil union or other similar relationship are governed by, and may take advantage of, all of the Illinois laws applicable to same-sex married couples, “whether they derive from statue, administrative rule, policy, common law, or any other source of civil or criminal law.”  Both same-sex and opposite-sex couples may enter into an Illinois civil union.  Note, however, for Federal purposes, The Defense of Marriage Act (“DOMA”) is still in effect and thus there is no recognition of same-sex relationships for Federal purposes.

What does this mean for parties to a civil union in Illinois?  Some of the rights, benefits, and protections include:

1. Protection from disinheritance (if a person dies without a Will, his or her civil union partner is entitled to all (if no children) or 50% (if children) of the decedent’s estate);
2. Domestic relations rights and procedure, including protection as to “marital property” upon dissolution of a civil union;
3. Adoption and parental rights;
4. Spousal treatment for Illinois income tax purposes;
5. Spousal testimonial privilege;
6. State spousal benefits such as workers’ compensation and spousal pension coverage; and
7. Emergency medical decision-making power and hospital visitation rights.

In addition, civil union partners are treated as spouses for Illinois estate tax purposes, including the marital deduction for estate taxes.  BUT, because Federal law does not recognize civil unions, additional estate tax minimization planning must be considered for those with gross estates in excess of $2,000,000 (the current Illinois estate tax exemption).   Gifting is a great tool for estate tax minimization, particularly in 2012 while favorable Federal laws remain in place.  Civil union partners can also benefit from irrevocable life insurance trusts (“ILITs”).  By making the owner and beneficiary of any life insurance policy an ILIT, the death benefit can be passed to beneficiaries of the ILIT (which can include a civil union partner) both estate and gift tax free at the Federal and State level.