A successful estate plan will focus on more than just the distribution of your estate assets when you are gone. It will also help protect and grow those assets while you are alive and ensure that you and your loved ones are secure throughout the course of your lifetime and beyond. One specific thing you need your estate plan to do is to protect your estate from git and estate taxes that could be levied on your estate after your death. The Lincolnshire asset protection lawyers at Hedeker Law, Ltd. explain how to plan for the impact of estate taxes.
Federal Gift and Estate Taxes
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 $6 million in value. At the time of your death, you owned assets valued at $14 million. The combined total of $20 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 $8 million in federal gift and estate taxes.
Illinois Estate Taxes
A handful of states, including Illinois, also impose a state estate tax. The tax operates essentially the same way the federal estate tax does in terms of what is taxed and when; however, where the federal gift and estate tax rate is fixed at 40 percent, the Illinois tax rate varies depending on several factors.
Estate Tax Exemptions
For federal gift and estate tax purposes, every taxpayer is entitled to make use of the lifetime exemption which is essentially a deduction taken prior to calculating the tax. Historically, the lifetime exemption limit fluctuated on a regular basis prior to the passage of the ATRA. In 2012, ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. The Tax Act of 2018, also impacted the lifetime exemption amount, making the exemption $10,980,000 for an individual. This means that every taxpayer may deduct $10,980,000 from their taxable estate before federal gift and estate taxes are levied on the estate.
For the Illinois estate tax, there is also an exemption. Only estates valued at over $4 million are subject to gift and estate taxes by the State of Illinois. This means that your estate could be safe from federal gift and estate taxes, yet be heavily taxed by the state if you fail to plan ahead.
Planning for Estate Taxes
Along with making use of the lifetime exemption, you need to be proactive in your estate plan and include asset protection tools and strategies to limit the negative impact federal and state estate taxes could have on your estate. For example, make use of the annual exclusion that allows you to make yearly gifts valued at up to $15,000 to an unlimited number of beneficiaries without those gifts counting against your lifetime exemption. Gifting to four beneficiaries for just ten years allows you to transfer $600,000 tax-free. The more beneficiaries you gift to, and the early you start making use of the annual exclusion, the more of your wealth you can transfer prior to the end of your life.
In addition, you may decide to make use of one of the many trusts that can help protect your assets from the threat posed by federal and state estate taxes. Consulting with your estate planning attorney may also help you find additional tools and strategies to help you plan for the impact of estate taxes.
Contact Lincolnshire Asset Protection Lawyers
Please join us for a FREE upcoming seminar. If you have questions or concerns regarding federal and/or state gift and estate taxes, contact the experienced Lincolnshire asset protection lawyers at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.
Dean R. Hedeker
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