If you are wealthy enough when you die, you might have to pay the Illinois estate tax. In other words, you would pay taxes on your estate after you die but before your heirs receive your money.
A good idea is to know what your estate tax will be before you pay it. In Illinois, the estate tax rate is graduated, with the highest rate being 16%. However, it is essential to understand which strategies will allow you to avoid estate tax in Illinois.
Also, use Beem to file your federal and state taxes to get the maximum refund at the best price.
how to avoid illinois estate tax
Illinois has a $4 million estate tax exemption. This means estates valued under $4 million won’t pay any state estate tax. Here are the best strategies to avoid the Illinois estate tax for residents:
Strategic Gifting:
- Annual Exclusion: You can gift up to $17,000 per person each year (in 2024) without it counting towards your lifetime exemption or incurring gift tax.
- Lifetime Exemption: While there’s no longer a federal estate tax exemption, Illinois still has a $4 million lifetime exemption. Using this effectively through life to reduce your taxable estate is strategic.
- Spousal Gifts: Transfers of assets to your spouse are generally unlimited and tax-free.
Trusts:
- Irrevocable Trust: Putting assets in an irrevocable trust removes them from your taxable estate but also relinquishes some control. Consider this carefully.
- Revocable Living Trust: These trusts are flexible, but don’t bypass estate tax as the assets are still considered part of your estate.
Charitable Donations:
- Donations to qualified charities are tax-deductible and reduce your taxable estate. It’s a win-win for a meaningful cause.
Life Insurance:
- Establishing an Irrevocable Life Insurance Trust (ILIT) can help pay for estate taxes by providing liquidity without increasing the taxable value of your estate.
Also Read: Does Illinois have Estate Tax?
How to Minimize Estate Tax in Illinois?
All of this can be managed with the help of estate planning techniques. It’s a good idea to plan advanced gifts. In many cases, life insurance planning is also effective. Here are some strategies one can follow to minimize estate tax.
- The first step to minimizing estate taxes is to understand this threshold. Over $4 million estates will be subject to Illinois’ estate tax as of 2023.
- You can decrease your estate value by gifting assets to beloved family members while alive.
- You may choose a revocable or irrevocable trust to minimize your estate’s tax liability. A revocable trust, a living trust, lets you retain control. It is generally unchangeable once an irrevocable trust is established, which removes the assets from your taxable estate, but you lose some control over those assets.
- An estate tax can be minimized through ownership structures such as joint tenancy. Property can pass directly from one joint tenant to the next, avoiding the need for an estate.
- Tax liability can be reduced significantly by avoiding the probate process entirely, and by avoiding the probate process altogether, certain assets and ownership structures can be exempt from probate.
- Having a financial power of attorney can help you make timely decisions that can reduce the value of your estate during the settlement of debts and distribution of your assets.
- Alternatively, you can move to a state with no estate tax and sell any estate holdings you still have in Illinois.
- Typically, state estate taxes do not apply to assets left to civil union partners, surviving spouses, or charities.
What is the Estate Tax in Illinois?
Estate taxes apply to transferring assets between generations, from parents to their heirs. These taxes are generally imposed on estates with a total value exceeding a certain amount, which varies from state to state.
There are, however, differences between states regarding estate taxes. For Illinois, the estate tax rate is progressive and varies based on the estate’s value. Estates over $3 million are subject to marginal estate tax rates ranging from 0.8% to 16%.
Illinois Estate Tax Exemption
The Illinois estate tax exemption is similar to the federal exemption. It also reduces the amount of estate taxes that have to be paid. The state exemption amounts to $5,000,000; you do not owe Illinois estate taxes on transfers up to that amount.
Who Does the Illinois Estate Tax Apply to?
The state imposes estate taxes on two types of estates. The first is for residents with estates valued at over $4 million. The second is for nonresidents with property worth more than $4 million in the state.
What Are the Differences Between the Illinois Federal and Estate Taxes?
Illinois and the federal government tax estates separately. Each has its tax rate for estates over $4 million. Illinois taxes estates over $4 million at variable rates. A surviving spouse might have portability options for federal taxes on estates over $11.18 million at a 40% rate.
| Feature | Illinois Estate Tax | Federal Estate Tax |
|---|---|---|
| Exemption Amount | $4 million | $12.92 million (2023), $13.61 (2024) |
| Tax Rates | 0.8% – 16% | 18% – 40% |
| Who It Affects | Illinois Residents | US Citizens & Resident Aliens |
| Portability | No | Yes |
| Filing Deadline | 9 months | 9 months |
What Is Included in an Illinois Estate?
Illinois’ estate tax applies only to estates worth more than $4 million. The tax also applies to nonresidents who own physical or real property in Illinois worth more than $4 million. The tax on estates over $4 million is 28.5%, while estates over $11.18 million are taxed at 40%.
Whenever an estate has assets valued at more than $4 million, the executor must file an estate tax return with the state of Illinois. The executor is responsible for finding all assets. If a federal estate tax return is not required, the executor must file this within nine months of their death.
Conclusion
The estate tax can be complicated, but you must factor it into your planning. A high federal and state estate tax can significantly affect what you leave to your heirs because of estate tax planning.
When you pass away, the Federal and Illinois estate taxes can significantly reduce the assets your family receives. Tax minimization strategies are available to minimize the applicable tax. Check out Beem to file your federal and state taxes without any hidden charges and get the maximum refund.
FAQs
Is Illinois estate tax portable for married couples?
There is no automatic portability of Illinois estate taxes between married couples. If both spouses die, the estate can only use the exemption of one of the spouses.
Are estate tax and inheritance tax the same?
No, the main difference between an estate tax and an inheritance tax lies within the name itself. A deceased individual’s estate pays the estate tax before distributing the money to their heirs. On the other hand, the person who inherits the deceased person’s money/assets pays inheritance tax.
When are estate taxes due?
After the date of death, the estate tax return must be filed. If you apply for an extension before the due date and pay the estimated amount of tax before the due date, you may receive an extension of six months. Gift tax returns should be filed by April 15th, following the year they were given.
Who is responsible for filing an estate tax return and paying estate tax in Illinois?
In Illinois, the estate executor is responsible for locating all the assets in the estate. The executor must file a state estate tax return if the assets are valued over $4 million.
