2009 Estate Tax Changes

December, 2009
Spain, Spain & Varnet P.C.

In 2003, Illinois enacted estate tax rules which, beginning January 1, 2009, do not parallel
the federal rules for decedent’s dying after December 31, 2008. On January 1, 2009, the
federal estate tax exclusion amount increases to $3.5 million. This means $3.5 million
may be transferred upon death without a federal estate tax assessed. As part of the same
legislation, Congress phased out the credit that had been allowed for state estate taxes
(sometimes referred to as 'death' taxes).

For states such as Illinois that are tied to the federal estate tax, the new legislation meant
reduced revenue from the phase out of the state credit. In response to the federal
legislation, Illinois enacted legislation that disregarded the state phase out of the credit
(thus keeping the collection of IL estate taxes) and capping the maximum amount of state
exclusion at $2 million rather than extending the exclusion to $3.5 million. What this
means for Illinois decedents is that $3.5 million may be transferred at death without
incurring a federal estate tax due, but only $2 million will escape Illinois estate tax.
Thus, the standard credit shelter tax planning for a husband and wife which has enabled
sheltering the maximum allowable (up to $2 million) and accomplished no tax at the
death of the first to die, will no longer work. If more than $2 million up to the federal
maximum ($3.5 million) is sheltered from federal estate tax and is not part of the martial
deduction trust, the decedent will owe Illinois death tax.

One way to avoid paying an Illinois estate tax at the death of the first to die is to under
fund the federally tax sheltered trust and use the remainder to fund the marital which
would qualify for the marital deduction. However, since the increased marital trust is
then taxed at the death of the second to die, the benefit of avoiding tax at the death of the
first to die must be weighed against possibly paying a higher federal tax at the death of
the survivor.

We recommend that married couples who have estates which are potentially subject to
the Illinois estate tax schedule an appointment to discuss how these new estate tax rules
affect their estate planning. Even if your estate is under the $2 million level, if you have
not reviewed your estate plan in the last 8 years, you should contact our office to update
your powers of attorney and possibly your will or living trust so that your estate plan
reflects your current needs.