Estate Planning Alert : 2011 Major Estate Tax Changes

Recently, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Jobs Creation Act of 2010 (the “Federal Act”). The Federal Act not only extended President’s Bush’s income tax cuts through 2012 but also greatly impacted the federal estate, gift and generation-skipping transfer tax rules. To make matters more complicated, on January 13, 2011, Illinois Governor Quinn signed the tax bill (the “Illinois Act”) passed by the Illinois legislature that increased personal and business income taxes and greatly impacted Illinois estates valued at more than $2,000,000.

  1. The Federal Act increased the federal estate and GST exemptions to $5,000,000. The tax rate for federal gift, estate and GST purposes was fixed at 35%. Like the income tax provisions of the Federal Act, the gift, estate and GST rules are only in effect through the end of 2012.
  2. Under the Illinois Act, an Illinois estate tax of as much as 16% can be imposed on each Illinois resident who dies after January 1, 2011, with assets in excess of $2 million.

The increase in the federal gift tax exemption was unexpectedly good news for large estates. Unfortunately, the Illinois Act also reintroduced the Illinois estate tax. As a result, any excitement generated by the changes to the federal rules will be negated by these changes in Illinois.

In light of the distinction between the $5,000,000 federal estate tax exemption and the $2,000,000 Illinois estate tax exemption, it is important to review existing estate plans to ensure that both federal and state estate tax can be avoided to the extent possible. An estate plan prepared for a married couple with assets in excess of the estate tax exemption typically provides for the creation of trusts designed to take advantage of the federal and state estate tax exemptions while deferring payment of any required estate tax until the death of the surviving spouse. Because of the new difference, however, between the Federal and Illinois estate tax exemptions, it is possible under older estate planning documents that Illinois estate tax could actually be imposed on the first spouse’s death. This can be avoided if specific provisions are included in Wills and trusts.