2009 Federal and Illinois Estate Tax Planning Update

On January 1, 2009 an important change in the Federal and Illinois estate tax laws took effect that may have a significant impact on your existing estate plan.

 

As of January 1, 2009, the Federal estate tax exemption amount increased from $2 million to $3.5 million. That is good news for taxpayers since it eliminates Federal estate taxes with respect to persons who die in 2009 with a taxable estate (including adjusted taxable gifts) valued at $3.5 million or less, and it will reduce Federal estate taxes with respect to persons who die in 2009 with larger estates.

 

However, at this time the Illinois estate tax exemption is to remain at its current level of $2 million for persons who die in 2009. Consequently, an individual with an estate greater than $2 million but less than $3.5 million may owe Illinois estate taxes even though he or she may be exempt from the Federal estate tax.

 

This disparity between the Federal estate tax exemption and the Illinois estate tax exemption (sometimes referred to as “decoupling”) could have unanticipated and adverse tax consequences for married couples if one of the spouses dies in 2009.  Because the Illinois estate tax exemption is scheduled to remain at $2 million instead of being increased to the Federal level of $3.5 million, a married couple residing in Illinois or owning real estate or tangible property in Illinois may owe Illinois estate tax if one of them dies in 2009. For example, if the first spouse dies in 2009 with an estate valued at $3.5 million and the estate plan allocates the maximum amount of Federal exemption available to a “Credit Shelter Trust” for the benefit of the surviving spouse, then upon the death of the first spouse the Federal estate tax would be zero, but the Illinois estate tax would be $209,124.