Estate planning, when done correctly, should accomplish more than just deciding how you want your estate assets to be distributed when you are gone. It should also protect and help grow your assets while you are alive and plan for those assets to help provide for loved ones after your death. One important factor in accomplishing those goals is the impact gift and estate taxes will have on your estate. To help you understand that impact, the Waukegan estate planning attorneys at Hedeker Law Ltd. explain gift and estate taxes.
What Is the Federal Gift and Estate Tax?
The federal gift and estate tax is essentially a tax on the transfer of wealth, levied at the time of a taxpayer’s death. Both transfers made during a taxpayer’s lifetime in the form of a gift and transfers made at the time of death in the form of gifts made pursuant to the terms of a Will or an intestate inheritance are subject to the tax. Historically, the estate tax rate fluctuated on a yearly basis; however, with the passage of the American Taxpayer Relief Act of 2012 (ATRA) the tax rate was permanently set at 40 percent. Before any deductions or adjustments to your estate’s value, that means your estate could lose 40 percent of its value to Uncle Sam because of a federal gift and estate tax obligation.
How Is the Gift and Estate Tax Calculated?
To determine your estate’s federal gift and estate tax obligation, you add the value of all qualifying gifts made during your lifetime and the value of all estate assets owned at the time of your death. For example, imagine that you made gifts during your lifetime worth a combined total of $3 million. At the time of your death, you also owned assets valued at $5 million. The combined total of $8 million would potentially be subject to federal gift and estate taxes. Without any further adjustments, your estate would lose $3.2 million as a result of federal gift and estate taxes!
The Lifetime Exemption
Fortunately, we do not stop there. Every taxpayer is also 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 American Taxpayer Relief Act of 2012 (ATRA). In 2012, ATRA set the lifetime exemption limit at $5 million, to be adjusted annually for inflation. For 2017, the exemption is $5.49 million. This means that every taxpayer may deduct $5.49 million from their taxable estate before federal gift and estate taxes are levied on the estate. In our example above, for an estate valued at $8 million, it will be reduced to $2.51 million after deducting the lifetime exemption for the purpose of calculating your gift and estate taxes due. The federal gift and estate tax due, therefore, is reduced from $3.2 million to $1,004,000 after factoring in the lifetime exemption.
State Gift and Estate Taxes
Along with the impact federal gift and estate taxes will have on your estate, you may also need to take into account state gift and estate taxes. Several states, including Illinois, impose a state level gift and estate tax. It is imperative to take state taxation into account because the exemption amount is frequently much less than the federal exemption, increasing the likelihood of an estate incurring a tax obligation. In Illinois, for instance, the exemption is only $3.5 million and does not change each year like its federal counterpart. The tax rate varies up to a maximum of 28.5 percent. Keep in mind as well that if you own property in another state, the estate tax laws of that state may impact any tax debt owed on that property. Always consult with an experienced estate planning attorney to ensure that you understand the impact federal and/or state estate taxes will have on your estate.
Contact Illinois Estate Planning Attorneys
Please feel free to download our FREE estate planning worksheet. If you have questions or concerns regarding gift and estate taxes, contact the experienced estate planning attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.