The use of a trust to avoid estate taxes is often dismissed when people see that the federal estate tax exemption is $13.99 million ($27.98 million for couples). “That’s nothing I need to worry about.”
Well, maybe. Maybe not. First, that exemption is scheduled to sunset at the end of the year and the eligible amount will be cut in half. Still sound like you are in the clear? The bad news is that amount is the federal exemption. The state of Illinois, one of about half the states in the U.S. that have estate taxes, sets the limit at only $4,000,000.
Keep in mind that the estate tax isn’t just calculated on what you have in the bank or invested. It includes all your property including life insurance proceeds and equity in your home. While you may not be at that level yet, look ahead 10 or 20 years and calculate how your current assets may have grown. And if you are in danger of meeting the thresholds, be warned that the estate tax is 40% at the federal level and in Illinois, the rate is calculated on the amount above the threshold and can range from 0.8% to 16%.
Do I have your attention now? Great. Now let’s talk about solutions.
One of the key tools in estate planning is a trust. A revocable trust allows you to place assets in the trust but gives you the flexibility to make changes. An irrevocable trust, as the name implies, does not allow changes. With an irrevocable trust, once you place assets in the trust they remain the property of the trust and are no longer counted against your total assets for estate tax purposes.
In both cases, as is always the case with the tax code, there are exceptions so always consult with an attorney or investment professional. The Illinois Trust Code is lengthy and complex so use an experienced guide but know that a trust is a useful and beneficial tool for estate tax avoidance.
One of the simplest strategies you can employ is to bestow some portion of your assets as a gift. Under current federal law, you can give any person a gift of up to $18,000 per year and not have the exchange taxed on either end. You can also gift the cost of medical bills or education without being taxed. Check carefully before proceeding, however, as some medical costs are limited and the IRS usually requires that the payments be made directly to the provider rather than the individual you are helping. A 529 plan for education provides a relatively easy means of making a gift.
Under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) you can set up what is known as a custodial account. With these tools you can transfer wealth to children or grandchildren but the gifts are not under their control until they reach a specified age.
Don’t forget charitable giving in all of this. Gifts to charitable and even political organizations can reduce your taxable estate. You can set up donations to pass to the receiver upon your death. The assets can include stocks, bonds, and mutual funds. Appreciable securities of this type can
be deducted from your estate upon death, at fair market value, without incurring any capital gains taxes.
There are many more details we can discuss but let’s begin with the principal idea that a trust is one of several key ways that you can help avoid estate taxes. To discuss further, give me a call at 847-253-8800 and let’s chart your course.