Our Estate Planning Blog

New Illinois Tax Bill Puts Farmers, Small Business Owners in Crosshairs

Many states have moved away from taxing assets after people die because of the harm to family businesses and farms. However, a new proposal before state lawmakers would double Illinois’ estate tax.

Illinois House Bill 3920, if passed, would increase the existing Illinois state tax on estates of over $4 million to 9.95% from 4.95%. Illinois is one of 12 states that still have an estate or inheritance tax. The Tax Foundation stated that the top marginal estate tax rate under this proposal would become the highest in the country at 21%.

Illinois Policy’s recent article entitled “Illinois Is One of Few States With ‘Death Tax.’ Bill Would Double It” reports that the bill’s sponsors intend the extra revenues to be used to support Illinois residents with disabilities. However, increasing the tax may make things more financially difficult for family farmers; reduce the accumulation of productive assets, encourage spendthrift behavior, fuel tax avoidance and evasion; and drive wealth to other states.

Opponents say that upping the estate tax would harm all Illinois residents, not just Illinois’ wealthiest families.

When an individual passes away, the federal government imposes an estate tax of up to 40%. And in Illinois, there a state estate tax of up to 16%.

Those opposed to the tax rate hike say that estate taxes can also threaten family farms. That’s because with combined federal and state tax rates, it can potentially exceed 50% of the land’s value. Farms can be asset rich and cash poor, which will force families to sell assets to make estate tax payments.

Research from the American Farm Bureau Federation found that at current farmland prices in the Corn Belt, an exemption level of $3.5 million would mean Illinois farms of 473 acres would be impacted by an estate tax. That’s about 31% of Illinois farms. An exemption level of $5.8 million would end up affecting Illinois farms with 784 acres, or 21% of Illinois farms. As a result, at Illinois’ $4 million exemption level, a large number of farming operations could be subject to this tax. In light of the fact that family farms dominate the state, with more than 94% of farms family-owned, the tax increase would make it harder for many families to pass their farms from one generation to the next.

An estate tax would also add to the exodus from that state. In 2020, Illinois experienced a seventh consecutive year of population loss and its worst single-year loss since World War II. Illinois lost more than 253,000 residents during the past 10 years—three times more than any other state. Doubling the tax would likely encourage wealthy Illinoisans to move and could push more retirees out of the state, opponents argue. Research shows estate and inheritance taxes are a big factor on the location decisions for those at the top of the income distribution.

Tax minimization can be accomplished via many different strategies, including but not limited to the use of living trusts, aggressive gifting, business succession planning and others.  Speak to a qualified Chicagoland estate planning attorney about how to best structure your plan to avoid this potential liability and preserve your family’s wealth.

Reference: Illinois Policy (March 25, 2021) “Illinois Is One Of Few States With ‘Death Tax.’ Bill Would Double It”

Suggested Key Terms: Inheritance, Estate Tax, Unified Federal Estate & Gift Tax Exemption

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