Planning for the Illinois Estate Tax Protect Your Heirs’ Inheritance by Creating a Credit Shelter Trust
If you’re an Illinois resident in the midst of planning your estate, you may have heard that the federal estate tax only affects the wealthy, and so you assumed it wouldn’t apply to you. While the federal estate tax might not apply to you, Illinois is one of 18 states that imposes an estate tax on its residents that is lower than the federal limit. If this lower threshold would affect the size of the inheritance your heirs or beneficiaries would receive, you might consider making a credit shelter trust part of your estate plan.
The federal estate tax exemption varies each year based on rates of inflation, and experts estimate that the 2018 exemption will be $5.6 million per person based on current rates. However, the Illinois estate tax exemption is $4 million and not tied to inflation rates. Different types of assets you own can be included in your estate; not just cash or real estate. Once an estate exceeds $4 million in value, the state of Illinois will tax not only the portion that exceeds $4 million, but the value of the entire estate. Fortunately, with proper planning there are many ways to remove certain property from your taxable estate.
Credit shelter trusts, also known as AB trusts or family trusts, can serve numerous purposes, tailored to your family’s circumstances. One common arrangement is for the first spouse to designate that an amount of assets up to the estate tax exemption be transferred into a credit shelter trust at their death, with the remainder either going to the surviving spouse directly or into a marital trust. The beneficiary of the trust (usually a surviving spouse) can receive support during their lifetime in the form of the interest earned on the credit shelter trust funds, payments from that trust’s principal, or a combination of the two, depending on how the trust is written. When the trust beneficiary passes away, the trust’s principal is distributed to the heirs that the first spouse named in the trust documents. These funds won’t be considered part of the surviving spouse’s estate.
Many individuals who have remarried after a divorce use a credit shelter trust to provide assurance to children from their first marriage that the new spouse will not take the full value of their estate. Likewise, a credit shelter trust can protect assets should the surviving spouse remarry and divorce after the first spouse’s death.
This post concerns the Illinois estate tax and not the federal estate tax, or other taxes such as income tax which also require planning. It is for informational purposes only and is not legal advice and does not create an attorney-client relationship. For experienced, knowledgeable, and effective assistance in creating a comprehensive estate plan in Illinois, contact attorney Jeanine Friedman at 847-648-1739.