One consideration in any will and/or estate plan is the type of taxes your beneficiaries could potentially face when the time comes. Will they forfeit their inheritance or at least some of it? Will they face taxes that exceed what they receive, or significantly impact their yearly income?
It’s important to understand the difference between the two, particularly when making your will and estate plan.
The Inheritance Tax
This is a direct tax on money or property you inherit (receive) from someone’s estate. Only six states impose an inheritance tax. The good news is that Illinois is not one of them. There are also no federal taxes on an inheritance. If you receive an inheritance of money or property in Illinois, it is considered a gift, and you are not taxed on it.
Inheriting from another state is a different story. The state charges a percentage of the amount of money or property left to you. A state may charge a percentage of inheritances over a certain amount, such as $1M or $5M.
If you live in Illinois but inherit from one of these states:
- New Jersey
You may have to pay an inheritance tax even though you don’t live there. Inheritance taxes are left up to the state to decide, including the tax rate and amount. Should you inherit money or property from one of these states, consult with a local estate attorney to discuss how to proceed.
The Estate Tax
Illinois does have an estate tax, as does the federal government. However, they may not apply to everyone.
The Illinois estate tax applies to estates with more than $4M in assets and assesses a minimum 8% rate with a maximum rate of 16%. If the estate is worth less than $4M, no state tax is imposed. Unlike federal estate tax, the exemption is not transferrable between the spouses, so the exemption stays the same when a married couple dies.
In 2020, the federal estate tax applies when an estate exceeds $11.58M at the time of death, currently adjusted for inflation. The taxes imposed can be as high as 40%. However, anything left to a surviving spouse isn’t subject to federal estate tax, and the exemption can be transferred. A surviving spouse could actually have an exemption of $23.16 when combined with the deceased spouse’s. The details can be found in IRS Form 706.
However, the current exemption is scheduled to sunset in 2026, and the exemption will then revert back to the previous rate of $5.49M. The flat tax rate on estate values and cumulative lifetime gifts over that figure remain at 40%.
Reducing The Possibility Of Estate Tax
Should you discover that your estate is subjected to an estate tax, there are some options available.
- Gifting—you can gift up to $15,000 per person, per year without triggering a tax. The annual inclusion for married couples can gift $30,000, per person, per year. Other gifts can include:
- Tuition or medical expenses on behalf of someone else (these must be paid directly to the institution)
- Gifts to a political organization
- Gifts to a spouse
- Trusts—create one or more as needed to remove it from your estate
- Leave assets to a qualifying charity.
- Spend some of the assets if you can
Of course, before doing anything, make sure to speak with your estate planning attorney first.
Contact James Provenza For Estate Planning In Illinois
Ensuring that your loved ones receive what you intended includes considering tax implications. With help from an experienced Illinois estate planning attorney, you can minimize the impact of your gift before the time comes.
James C. Provenza is an estate planning attorney in Illinois with more than 25 years of experience in helping clients with their estate planning needs. He can work with you to ensure that your final wishes are carried out the way you want them. Call our firm today at (847) 729-3939, or use our online contact form.