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!