Ultimately, the success, or failure, of your estate plan won’t be clear until it comes time to probate your estate. Creating a successful estate plan requires you to consider a wide range of inter-related goals and objectives. One of those is the impact federal (and sometimes state) gift and estate taxes will have on your estate. Failing to factor in estate taxes when creating your estate plan could result in a significant tax obligation that must be paid when your estate goes through the probate process. The Lincolnshire probate attorneys at Hedeker Law, Ltd. help you decide if your estate will be taxed.
Federal Gift and Estate Tax Basics
The federal gift and estate tax is effectively a tax on the transfer of wealth that is collected from your estate after you die. Every estate is potentially subject to federal gift and estate taxes. The tax applies to all qualifying gifts made during a taxpayer’s lifetime as well as all estate assets owned by the taxpayer at the time of death. By way of illustration, assume that you made gifts during your lifetime totaling $4 million in value. At the time of your death, you owned assets valued at $12 million. The combined total of $16 million would be subject to federal gift and estate taxes. Although the federal gift and estate tax rate fluctuated historically, the American Taxpayer Relief Act of 2012 (ATRA) permanently set the rate at 40 percent. Without any deductions or adjustments, that $20 million estate would owe $6.4 million in federal gift and estate taxes.
2018 Changes to the Lifetime Exemption
Every taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. For 2018, the lifetime exemption amount would be $5.49 million for an individual and $10,980,000 for a married couple; however, President Trump signed tax legislation into law that changed the lifetime exemption amount for 2018 and for several years after that. Under the new law, the exemption amounts increased to $11,200,000 for individuals and $22,400,000 for married couples. These exemption amounts are scheduled to increase with inflation each year until 2025. On January 1, 2026, the exemption amounts are scheduled to revert to the 2017 levels, adjusted for inflation. Consequently, that same $16 million estate would now only pay gift and estate taxes on $3.8 million, reducing the amount of federal gift and estate taxes to $1,520,000. The temporary increase in the lifetime exemption amount presents an opportunity for those with significant taxable assets to transfer more of that wealth without incurring taxes over the next few years.
The Illinois Estate Tax
A handful of states, including the State of Illinois, also impose a state gift and estate tax. In Illinois, however, the exemption amount is considerably lower at just $4 million. Therefore, an estate valued at $4 million or more must file an estate tax return even though deductions and adjustments may reduce the estate’s value down enough to avoid paying estate taxes. Unlike its federal counterpart that is set at 40 percent, the estate tax rate in Illinois varies up to 28.5 percent.
Tax Avoidance Strategies
While paying $1.52 million in taxes is certainly preferable to paying $6.4 million, making use of available tax avoidance strategies in your estate plan could reduce that tax obligation even more. The annual exclusion, for example, allows every taxpayer to make gifts of up to $15,000 to an unlimited number of beneficiaries without incurring a tax obligation. Moreover, gifts made using the annual exclusion don’t count toward your lifetime exemption. Imagine, for example, if you make annual gifts to six beneficiaries for 10 years. You could transfer $900,000 tax free. By working with your estate planning attorney you can incorporate additional tax avoidance tools and strategies into your estate plan now that can help minimize your estate’s exposure to federal and/or state gift and estate taxes. The key is to start implementing those strategies now, however, because many of them depend on making wealth transfers long before estate ends up in probate.
Contact Lincolnshire Probate Attorneys
Please feel free to download our FREE estate planning worksheet. If you have questions or concerns regarding the federal and/or state gift and estate tax, contact the experienced Illinois probate attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.