While the government discusses the bill that will raise the estate tax exemption to $8 million, the Illinois estate tax, with rates up to 16%, still impacts estates that exceed the threshold of $4 million as of 2024. Effective estate planning is essential for potentially lowering the estate's taxable burden and maximizing the assets passed on to intended beneficiaries. It is also important to consider the implications of federal estate taxes alongside the state tax.
Lewis CPA can provide tailored advice and assistance with estate and trust tax preparation services to help you achieve your estate planning goals. Contact us if you want to know how to avoid the Illinois estate tax in your case.
What Is the Estate Tax?
If you are wealthy enough when you pass on, your family might have to deal with the estate tax. That means that your estate would pay taxes after you die but prior to your money being dispersed to your heirs. This is also known as a death tax, but it's different from an inheritance tax that recipients might get hit with after the fact.
Illinois Estate Tax Exemption
For the year 2024, the Illinois estate tax exemption amount is $4 million. Estates valued below this threshold will not be subject to estate taxes in Illinois. If the estate's value exceeds $4 million, it will be subject to a progressive estate tax rate, which will apply to the value above the exemption limit before any distributions are made to heirs.
Who Does the Illinois Estate Tax Apply To?
The Illinois estate tax is imposed on estates that exceed a certain value threshold, with specific rules applying to both residents of the state and non-residents who own property within Illinois.
Applicability to Illinois Residents
For residents of Illinois, the estate tax applies to estates with a value that surpasses the current exemption of $4 million. The term 'resident' here refers to an individual whose permanent legal residence, or domicile, was in Illinois at the time of their death. It is not sufficient to merely reside in Illinois — the individual must also have the intent to maintain Illinois as their permanent home.
Applicability to Non-Residents
Non-residents who do not have Illinois as their legal domicile but own tangible personal property or real estate in Illinois are subject to Illinois estate tax if the value of their property within the state exceeds the $4 million exemption limit. For non-residents, only the value of their Illinois assets is considered for the Illinois estate tax, not their entire estate.
It's important to note that the Illinois Department of Revenue can assess the estate tax on non-residents even if the assets are held in various forms, such as trusts or partnerships.
What Is the Illinois Estate Tax Rate?
As of 2024, the Illinois estate tax applies to estates with values exceeding the $4 million exemption. The tax is assessed on a graduated scale with rates escalating up to 16%. Precise estate tax liability is determined based on the value of the estate over the exemption amount, using the most current tax rate table. Understanding these rates is essential for strategic estate planning, which can impact the structure of an estate and the amount of tax levied. For meticulous planning and execution, it's recommended to seek the expertise of a tax professional or estate planning specialist who is up-to-date with the latest tax laws and rates.
*The taxable estate is the amount above the $4 million exemption.
**The rate threshold indicates the point at which various marginal estate tax rates take effect.
Please note that the marginal rates are applied incrementally, not to the entire value of the estate over the exemption amount. For instance, an estate valued at $5 million would not incur a flat 16% on the entire taxable amount but would instead be taxed at varying rates according to each portion of the estate that falls within the specified tax brackets.
How Does the Illinois Estate Tax Differ from the Federal Estate Tax?
The Illinois estate tax and the federal estate tax each have distinct thresholds and rates as of 2024. Illinois imposes an estate tax on estates exceeding the $4 million threshold with progressive rates up to 16%. Importantly, Illinois does not offer portability, which means any unused portion of the exemption cannot be transferred to a surviving spouse.
In contrast, the federal government sets the estate tax exemption at $12.92 million for individuals, with an estate tax rate of 40% applied to estate values exceeding this amount. The federal tax system does include a portability feature, allowing a surviving spouse to utilize any unused portion of their deceased spouse's exemption.
This difference between state and federal estate taxation means that for individuals with substantial assets, estate planning needs to account for both sets of rules to optimize tax outcomes.
What Is Included in an Illinois Estate?
Remember, the estate tax only applies to estates worth over $4 million. This also applies to non-residents who own physical or real property in Illinois valued over $4 million. An estate would be taxed at 28.5%, while estates valued over $11.18 million are taxed at 40%.
Components of an Illinois estate encompass:
- Bank accounts;
- Real estate;
- Life insurance proceeds;
- Business interests;
- Personal property, including vehicles, jewelry, artwork, and antiques.
To mitigate or possibly even avoid the Illinois estate tax burden, individuals can employ strategies like gifting within annual exclusion limits, utilizing life insurance as part of estate planning, and setting up advanced trust arrangements.
The executor of the estate is charged with identifying and valuing all assets within the estate. For estates exceeding the $4 million threshold, the executor must file an Illinois estate tax return within nine months following the decedent's death, which is obligatory irrespective of whether a federal estate tax return is due.
Key Points to Remember
- Federal Estate Tax: For 2024, the federal estate tax exemption stands at $12.92 million. It is essential to engage with a tax professional to navigate the interplay between federal and Illinois state estate taxes.
- Illinois Estate Components: Your estate for tax purposes includes liquid assets, property, insurance payouts, business equity, and tangible personal assets. These elements can significantly influence your estate's tax liability.
How to Avoid the Illinois Estate Tax
There are several strategies to reduce or eliminate Illinois estate tax liability:
Annual Gifting
- Individuals can gift up to $17,000 per year to each beneficiary without triggering federal gift taxes (married couples can gift $34,000);
- Over time, annual gifting reduces the taxable value of an estate.
Estate Planning Strategies
- Establishing a properly structured living trust can transfer assets outside of one's taxable estate;
- Life insurance policies with beneficiaries bypassing the estate can minimize estate taxes.
Tax Exemptions
- Assets left to a surviving spouse/civil union partner or charity are exempt.
Other Approaches
- Spending assets while alive or moving to another state to avoid Illinois estate tax;
- Selling Illinois estate holdings removes them from tax liability.
FAQs About Illinois Estate Tax
Still, have questions? We have answers!
Minimize Illinois Estate Tax with Lewis CPA!
With the Illinois estate tax exemption now at $4 million per individual for 2024, proper planning is essential to minimize taxes and maximize wealth transfer for high-net-worth residents.
Whether you struggle with the Illinois estate tax exemption, the federal estate tax exemption, or both — Lewis CPA has extensive experience with estate tax preparation and planning strategies to navigate exemptions, exclusions, deductions, and state/federal requirements. Contact us and we help guide you through future financial planning services and estate tax returns!
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