This memorandum is intended to provide our Illinois clients with a discussion of the impact of the Tax Cuts and Jobs Act of 2017 on their estate plans. Some estate plans, regardless of value, will need to be updated in light of this new law.
- Married couples whose combined estates are likely to be less than $4,000,000 can
simplify their estate plans if estate tax avoidance provisions were previously
included in their trusts. They still need trusts to avoid probate, but the
provisions of those trusts can be simplified. - Married couples whose combined estates are over, or likely in the future will be
over, $4,000,000 should make sure their plan appropriately minimizes estate taxes
while providing for the surviving spouse. For most couples, this means that a
single-fund marital trust is created at the first death. - Married couples whose combined estates are in excess of roughly $12,000,000 may want to review their estate plans to consider whether additional lifetime gifting might be
appropriate. - Single taxpayers do not have the benefit of another exclusion amount the way married
couples do. However, a variety of gifting strategies also are available to them.
The Illinois Estate Tax. With the significant recent increase in the federal estate tax exclusion amount to $11,180,000 ($22,360,000 for a married couple) and indexed for inflation, the estate tax that many of our clients will face is the Illinois estate tax. Illinois charges an estate tax beginning at $4,000,000. Calculating the amount of tax is complex, as it involves a variety of tax rates. The following chart is the easiest way to explain it:
Taxable Estate Illinois Estate Tax
$4,000,000 $ -0-
$5,000,000 $285,714
$6,000,000 $456,071
$7,000,000 $565,603
$8,000,000 $680,634
$9,000,000 $801,049
Any amounts over $9,000,000 are taxed at a flat rate of 16%. The $4,000,000 exemption amount is not indexed for inflation and, at present, there is no indication that it will go away.
Careful planning is required for any couple with combined assets, including life insurance proceeds, that presently is, or in the future could be, in excess of $4,000,000. We have developed strategies that keep estate plans as simple as possible, while at the same time making sure that a couple’s Illinois exemptions are fully utilized.
The 2026 Cutback. Congress never makes planning easy. The federal estate tax exclusion amount is scheduled to drop dramatically in 2026, to about $6,000,000 per person, depending on the inflation rate between now and then. Whether this will actually happen is anyone’s guess, as who can predict what our political climate will be during the next eight years. Estate plans must be flexible enough to withstand this change.
Estate Tax Reduction Versus Capital Gains Tax Reduction. While estate tax liability is decreasing, capital gains tax liability is increasing. For Illinois taxpayers, the capital gains rates now range from 19.95% to 28.75% (and up to 36.75% on art and collectibles). This is higher than the 16% Illinois estate tax rate, but less than the 50% combined federal and Illinois estate tax rate. As a result, our emphasis in planning for clients not likely to pay a federal estate tax is the minimization of capital gains taxes.
Capital gains are avoided, or at least minimized, by structuring a descendant’s trust to be included in the descendant’s estate for estate tax purposes, because this qualifies the trust assets for a stepped-up income tax basis upon the descendant’s death. Ideally, trusts would be structured to exempt assets from estate taxes if the beneficiary has a large estate, but to cause assets to be subject to estate tax if the beneficiary has a smaller estate, thus allowing for a stepped-up basis on death.
The problem, of course, is how to predict what would be the best result for trust beneficiaries at death far in the future. There are too many variables: What will the estate tax exclusion be? What will the rate of the estate tax be? What will the capital gains tax rate be? How much of the money will be spent during the beneficiary’s lifetime? How much will the assets appreciate?
The best answer to this dilemma, we believe, is to designate a person (called a “trust protector”) who is not a beneficiary but who is given the power to determine whether or not a particular beneficiary’s trust will be taxable for estate tax purposes. The beneficiary’s estate planning advisor can analyze the matter periodically during a beneficiary’s lifetime and ask the trust protector to adjust the trust as necessary. We believe this plan will maximize estate and capital gains tax benefits for the beneficiary no matter what changes happen in the tax law.
Couples Using A-B Plans. Many married couples with estate plans drafted before 2010 have what is known as an A-B trust plan. The A trust qualifies for the marital deduction, while the B trust (often called the credit shelter or bypass trust) is sheltered from estate tax. In our documents, the A trust is called the Marital Fund, and the B trust is called the General Fund.
This plan did a great job of minimizing estate tax when exemption amounts were much lower. But under today’s tax law, the A-B trust plan can lock in the taxability of post-death capital gains on all of the assets of the first spouse to die. The plan also lacks some flexibility in dealing with the fact that the federal and Illinois exemption amounts are very different. Couples with older trust plans should have the plans reviewed to make sure that they are achieving the best possible tax result.
Gifting as an Estate Planning Technique. Gifting still has a place in an estate plan. Gifting moves future appreciation of gifted property to younger generation members who have the same larger exclusion amounts, but have smaller estates, and who may be in lower brackets for income tax purposes. The widely-used annual gift tax exclusion amount per donee has been increased from $14,000 to $15,000. Very wealthy couples able to maintain their lifestyle while setting aside $22,000,000 in assets can give gifts to each other in a special kind of trust to lock in today’s high estate tax exemption. This type of planning will become particularly popular among wealthy taxpayers as 2026 approaches.
Charitable Giving Through Your Estate Plan. Charitable giving to your favorite charities at your death still can produce effective income tax savings for estates that do not face an estate tax. Most clients will have Individual Retirement Accounts, 401(k) plans or 403(b) plans that have not been fully spent down at death. Any charitable gifts should be made from such assets which pass to charity tax free but which would be taxed, if passed to children.
Charitable giving received additional encouragement by increasing the income tax deduction for gifts of cash to 60% of taxable income (AGI) while leaving gifts of appreciated property at 30% of taxable income (AGI).
The new $10,000 limit on the deductibility of real estate and state income tax and the elimination of the deductibility of tax preparation and investment advice fees may cause even many higher income taxpayers to use the standard deduction, thus reducing the tax benefits of charitable giving. This reemphasizes the potential benefits of doing charitable giving through Individual Retirement Accounts for taxpayers over age 70. Taxpayers under 70 may want to consider bunching their giving for two or three years into a donor advised fund in one year. Charitable remainder trusts used to avoid capital gains on sales of low basis assets also can be used to concentrate charitable giving in one or several years.
Our clients are invited to call or email us with any questions or to have us review present estate plans in light of the changes made by the new tax Act.