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
...
To continue reading
Request your trial