Illinois has not joined with other states that have abandoned estate, inheritance, or other “death taxes.” Illinois estate tax is still here, and should be taken into account when you make a will or make a trust.
Kiplinger’s recent article entitled “State Estate Taxes Not Dead Yet” advises you not to hold your breath waiting for your state’s estate tax to be repealed. Instead, you might be able to avoid the tax with the help of an experienced estate planning attorney.
In 2000, every state and DC had an estate tax on the books. With the federal estate tax law permitting a dollar-for-dollar credit for up to 16% of state estate and inheritance taxes paid, it seemed like a good idea. This let states impose their own estate taxes, without adding to the tax burden of their residents.
However, this changed in 2001 when a new law gradually eliminated the federal credit (and completely repealed it in 2005). Consequently, if a state wanted to impose an estate tax, it meant “extra” taxes on its resident estates, in addition to the federal estate tax they were required to pay. Even so, more than 20 states decided to eliminate their own taxes out of fear that wealthy residents would flee because of the added tax burden. This resulted in a wave of estate tax repeal measures in many states.
Now, there are only 12 states and DC that still impose the tax, including Illinois. There is some positive news for those people in that estate-tax exemption amounts are rising in 2020 in half the states with the tax, but estate tax is still here.
Even if you escape state estate taxes, your heirs still might be subject to state inheritance taxes. Estate taxes are paid by the estate and are based on the estate’s overall value, in contrast, inheritance taxes are paid by an individual heir on whatever property they are given.
Six states currently have an inheritance tax—Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
Even if there’s an inheritance tax on the books in your state, some of your relatives who inherit your property still might not have to pay it. Typically, your closest relatives will be exempt from the tax when you pass away, but your more distant family members probably won’t have that perk. For example, in Iowa, a decedent’s spouse, parents, children, and grandchildren are exempt from paying the state’s inheritance tax. However, other heirs, like nieces, nephews, uncles, aunts, and non-relatives, are required to pay. In addition, state inheritance tax rates can also be higher for distant relatives or for more valuable property. Take Nebraska, for instance, where the inheritance tax on heirs who are immediate relatives is only 1% and doesn’t apply to property that’s worth less than $40,000. However, remote relatives must pay a tax rate of 13%. Their exemption amount is only $15,000. For all other heirs, the tax is imposed at an 18% rate on property worth $10,000 or more.
When you are talking to your Chicagoland estate planning lawyer, remember to ask what you can do to minimize this risk for your family.
Reference: Kiplinger (Feb. 3, 2020) “State Estate Taxes Not Dead Yet”