WILL YOUR ESTATE BY SUBJECT TO
ILLINOIS FEDERAL GIFT AND ESTATE
TAX?
ROBERT N. NASH ILLINOIS ESTATE PLANNING ATTORNEY
“When you sit down to create your comprehensive estate plan you will likely have several goals and objectives in mind that all need to be considered during the creation of your plan.”
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 2
When you sit down to create your comprehensive estate plan you will likely have
several goals and objectives in mind that all need to be considered during the
creation of your plan. The division of your estate at the time of your death may
be the primary goal of your estate plan; however, you may also want to
accomplish additional objectives such as tax avoidance.
If your estate is likely to be subject to federal gift and estate taxes it only makes
sense to try and limit your estate’s tax exposure by including tax avoidance
strategies in your estate plan. First, however, you need to determine if your
estate will, indeed, be subject to gift and estate tax.
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 3
WHAT IS THE GIFT AND ESTATE TAX?
When you die all of your assets must be located and valued during the probate
process. There are several reasons why this is required. One of those reasons is
to ensure that Uncle Sam receives any gift and estate tax due on the estate. Gift
and estate taxes are levied on all qualifying gifts made during your lifetime as
well as on all assets in which
you have an ownership
interest at the time of your
death.
For instance, let’s assume
that you made qualifying
gifts (almost all gifts qualify)
during your lifetime valued
at $3 million and that at the
time of your death your
estate assets were collectively valued at $8 million. The combined value of the
two ($11 million) is potentially subject to federal gift and estate taxes at the rate
of 40 percent after your death. That means that your family and loved ones
could lose a staggering $4.4 million if you fail to plan ahead and incorporate tax
avoidance strategies into your estate plan.
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 4
THE LIFETIME EXEMPTION
Fortunately, you will not owe gift and estate taxes on the entire $11 million
though because each taxpayer is entitled to exempt the value of assets up to the
lifetime exemption limit. In the past, both the lifetime exemption limit and the
gift and estate tax rate fluctuated wildly and regularly. Thanks to the American
Taxpayer Relief Act of 2013
(ATRA), however, the lifetime
exemption limit and tax rate
were made permanent. The
exemption limit was set at $5
million; however, a provision in
ATRA calls for the limit to be
increased each year to account
for inflation.
Therefore, the limit for 2015 will
be $5.43 million. Also, the gift and estate tax rate was permanently set at 40
percent. Therefore, you would be entitled to deduct $5.43 million from the $11
million estate, leaving $5.57 million subject to gift and estate taxes. Your estate,
therefore, would stand to lose $2,228,000 to gift and estate taxes instead of $4.4
million – still a staggering sum of money to lose to taxes.
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 5
THE VALUE OF YOUR ESTATE – DO YOU KNOW WHAT YOU
ARE WORTH?
If asked whether you know how much you are worth you would likely answer in
the affirmative; however, the truth is that most people really do not know the
value of their estate. For example, do you know the current value of your home?
What about your 401(k)? Have you actually sat down and added up the value of
all your estate assets? Although the lifetime exemption has permanently been
set at $5 million, you might be surprised at how easy it is for the average
taxpayer’s estate to exceed that amount.
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 6
WAYS TO AVOID INCURRING GIFT AND ESTATE TAXES
If you have worked hard all your life, saved regularly, and invested wisely you
undoubtedly want the benefits of all that to go to your loved ones, not to Uncle
Sam, when you die. To ensure that is what happens you need to work with your
estate planning attorney to incorporate tax avoidance strategies into your estate
plan. Although every estate plan is unique, some commonly used tax avoidance
strategies include:
Marital Deduction-– the marital deduction allows most taxpayer’s to
leave an unlimited amount of assets to a spouse tax-free. While this does
eliminate any gift and estate tax exposure for your estate when you die, it
can easily over-fund your spouse’s estate. Assume that your estate claimed
your lifetime
exemption of $5.43
million and the
remaining $5.57
million was gifted to
your spouse. Your
estate would owe
nothing in gift and
estate taxes pursuant
to the unlimited
marital deduction;
however, your spouse’s estate is already over-funded before even taking
any additional assets into account. Imagine, for example, that you spouse
owns assets valued at $7 million. Every penny of the $5.57 million gifted to
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 7
your spouse is now subject to gift and estate taxes should your spouse die
because he/she now has an estate valued at $12.57 million.
Trusts – When the proper type of trust agreement is chosen, you may be
able to transfer a significant portion of your wealth into the trust, thereby
avoiding, or at least limiting, the gift and estate exposure those assets
have. Once assets are transferred into an irrevocable trust, for example,
they are no longer part of your estate and, therefore, are not included in
the valuation of your estate for tax purposes.
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 8
Annual Exclusion – the annual exclusion allows you to make gifts valued
at up to $14,000 per year to as many beneficiaries as you wish tax-free. If
you are married, you and your spouse may use “gift-splitting” to combine
your gifts and gift assets valued at up to $28,000 per year tax-free. The
annual exclusion is often combined with a trust to further shelter assets. By
way of illustration, imagine that you and your spouse gifted the maximum
allowable value each year, for ten years, to your four children and six
grandchildren. Each year you should transfer 280,000 in assets tax-free.
After ten years you will have transferred $2.8 million in assets tax-free.
Moreover, gifts made pursuant to the annual exclusion are not counted
toward your lifetime exemption amount for gift and estate tax purposes.
If you wish to be certain that your hard earned assets are not lost to gift and
estate taxes when you die be sure to sit down with your Illinois estate planning
attorney and work on ways to incorporate tax avoidance strategies into your
estate plan.
IRS, Estate and Gift Taxes
Bankrate, Estate Tax and Gift Tax Amounts
Forbes, IRS Raises Limit on Tax-Free Lifetime Gifts for 2015
Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 9
About the Author
Robert N. Nash
Robert N. Nash is a partner in the law firm of Nash Nash Bean & Ford, LLP. The law firm has
offices in Geneseo and Moline, Illinois and conference facilities available throughout
Northwestern Illinois. Mr. Nash chose the estate and business planning arena because he
believes it provides a positive force in his clients’ lives. He practices preventative, rather
than remedial law. Robert Nash focuses on all aspects of estate planning, including estate,
gift and income taxes, trust and probate administration, real estate, and business.
Nash Nash Bean & Ford, LLP
www.nashbeanford.com
Geneseo 445 US Highway 6 East
Geneseo, IL 61254 Phone: (309) 944-2188
Fax: (309) 944-3960
Moline 5030 38th Avenue, Suite 2
Moline, IL 61265 Phone: (309) 762-9368
Fax: (309) 944-3960