The use of a trust to avoid estate taxes is often dismissed when people see that the federal estate tax exemption is $15 million ($30 million for couples). “That’s nothing I need to worry about.”
Well, maybe. Maybe not. That is the current amount of the federal exemption. In Illinois, estates in excess of $4 million are taxed and that tax is not just on the overage. It applies to all assets.
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, such as the life insurance policies which would pay to your beneficiaries, your IRA or 401K, your home, your cars, your personal property and certain gifts made during your lifetime. Even if you are not at $4 million in assets today, if your total asset value is over $3 million, you should be worried about the Illinois estate tax.
Do I have your attention now? Great. Now let’s talk about solutions.
Not all estates over the $4 million dollar threshold are taxed in Illinois. In fact, some escape estate taxes altogether. For example, if you decide to give all your assets to charity, your estate will likely not be taxed. More commonly, if you give all assets to your surviving spouse, you will not be taxed at the first spouse to die. However, at the death of the survivor, estates over $4 million (that do not go to charity) will be taxed.
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.
That is where a revocable living trust can be useful. By using a trust created with tax planning provisions, at the death of the first spouse to die, his or her assets can be held, in whole or in part, in a separate trust that is available to the surviving spouse during life, but not included in the survivor’s estate. The rules related to these trusts are complex and require thoughtful planning to maneuver through. It’s important to work with an experienced attorney who is familiar with these provisions and often in concert with the vital input of an accountant and an investment advisor.
Another simple estate tax planning strategy to consider is lifetime gifting. Under current federal law, you can gift up to $19,000 per person annually without triggering tax consequences. You may also cover certain medical and educational expenses tax-free, provided payments are made directly to the provider. Lifetime gifting to charities can also play a key role in planning. Putting all of this together is the object of the estate plan.
Another simple estate tax planning strategy to consider is lifetime gifting. Under current federal law, you can gift up to $19,000 per person annually without triggering tax consequences. You may also cover certain medical and educational expenses tax-free, provided payments are made directly to the provider. Lifetime gifting to charities can also play a key role in planning. Putting all of this together is the object of the estate plan.
There are many details to consider, but at a high level, a trust is one of several key tools for estate tax planning. To discuss this further, call us at 847-253-8800 and let’s chart your course. www.navigantlaw.com