2009 Changes To Federal And Illinois Estate Taxes Warrant Estate Plan Review

For Illinois residents, older marital deduction formulas may not

capture the new federal exemption's full benefit; additional

planning may reduce the Illinois estate tax cost of realizing the

full increased federal estate tax exemption.

Starting January 1, 2009, changes to the exemptions for the

federal estate tax and the Illinois estate tax will alter how some

estate plan formulas for married taxpayers divide up the estate.

Existing formulas may not fully capture the benefit of the

increased federal exemption.

On January 1, 2009, the federal estate tax exemption increases

from $2 million to $3.5 million. State death taxes aside, this

means that in the estate plan of the first spouse to die, ideally

the estate plan formula would allocate $3.5 million to a

"family trust" for the benefit of the spouse and

children, and the balance to a "marital trust" for the

surviving spouse. The $3.5 million would not be taxed in either

spouse's estate, regardless of how large the family trust is at

the survivor's later death. Likewise, the marital trust would

not be taxed in the decedent's estate, but it would be subject

to estate tax at the survivor's later death. Under this

formula, federal estate tax is deferred until the death of the

second spouse to die and maximum use is made of each spouse's

federal estate tax exemption, thereby minimizing the federal estate

tax on the passage of funds to the next generation.

Unfortunately, the Illinois estate tax exemption will stay at $2

million. The consequences of the mismatch between Illinois' $2

million exemption and the federal $3.5 million exemption depend on

the type of formula in the estate plan. Consider the following two

examples.

Old Formula

Under older estate plans, at the death of the first spouse to

die, the formula will fund the family trust with the largest amount

that will produce no federal or state estate tax. Starting in 2009,

for an Illinois decedent, that would mean no more than $2 million.

Even though another $1.5 million could be allocated without the

imposition of federal estate tax, any amount over $2 million would

incur Illinois estate tax, so the balance of the estate would pass

under this formula to the marital trust. While this allocation

would result in no federal or Illinois estate tax at the death of

the first spouse to die, it would "waste" $1.5 million of

the decedent's exemption. The consequence of this is felt at

the surviving spouse's later death. It is then that this $1.5

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