Most of us know the term “estate tax,” but may not understand how it interacts with our own estate planning. One of the most frequently encountered — and misunderstood — topics in estate planning is the question of what actually constitutes the “taxable estate” for the purpose of assessing estate taxes, and how the value of the taxable estate is calculated. This calculation is particularly important in Illinois, one of only 12 states with a state estate tax threshold lower than that of the federal government. Understanding what comprises a taxable estate and how estate taxes are calculated is a critical first step in creating an estate plan that maximizes the value of your estate and protects the interests of your heirs, legatees, and beneficiaries.
What Is The Federal Estate Tax?
The federal estate tax is a tax on the right to transfer property at the time of your death. As of 2022, this tax applies only to estates that are larger than $12,060,000, an increase from the threshold of $11,700,000 if a decedent’s death occurred in 2021. For married couples, these exempt amounts are doubled. Any amount below these thresholds is exempt from tax. For estates above these exempted tax amounts, the IRS requires the filing of form 706, the United States Estate (And Generation-Skipping Wealth Transfer) Tax Return.
The federal estate tax rates are progressive, ranging from 18% to 40% of the taxable portion — the amount over the exempted amount — of the estate. The taxes are applied as follows:
|Tax Rate||Taxable Portion Of Estate|
|18%||$0 – $10,000|
|20%||$10,001 – $20,000|
|22%||$20,001 – $40,000|
|24%||$40,001 – $60,000|
|26%||$60,001 – $80,000|
|28%||$80,001 – $100,000|
|30%||$100,001 – $150,000|
|32%||$150,001 – $250,000|
|34%||$250,001 – $500,000|
|37%||$500,001 – $750,000|
|39%||$750,001 – $1 million|
|40%||$1 million +|
What Is The Illinois Estate Tax?
As noted above, Illinois is one of 12 states (plus the District of Columbia) that applies a state estate tax. Like the federal estate tax, the Illinois estate tax has a threshold, $4 million dollars, below which no estate will be taxed. However, the calculation of the Illinois estate tax is much more complex than the federal estate tax. This complexity is imposed because Illinois’ estate tax relies on a concept called the state death tax credit, which was phased out of federal law in the early 2000s. Under this concept, the Illinois estate tax applies only if the total value of the estate is over $4 million, but if this prerequisite is met, the entire estate is taxed. The Illinois estate tax is graduated, with a bottom rate of 0% and a top rate of 16% on estates exceeding $10,040,000, but the effective tax rate varies based on the size of the estate.
Also unlike the federal estate tax, the Illinois estate tax is not portable between spouses, so if both spouses in a married couple have died, the exemption remains $4 million.
Because of the complexity associated with calculating the Illinois estate tax, the Illinois attorney general provides an online calculator to help you understand the potential tax liability associated with estates of different sizes.
What Assets Are Considered Part Of The Taxable Estate
Given that estate tax only applies beyond statutory thresholds, it is even more important to understand what is included in the calculation of the estate’s taxable value — not all assets count toward this threshold.
Calculating the value of the taxable estate begins with a calculation of the “gross estate,” or the value of all assets before deductions. These assets are valued at their market value at the time of death, rather than their purchase price. These assets, as delineated in IRS form 706, include the decedent’s real estate holdings, stocks and bonds, annuities, the decedent’s portion of any jointly owned property, some life insurance payments (even if paid to other beneficiaries), certain transfers and gifts even if those transfers were made during the decedent’s life, and other qualifying assets.
The “taxable estate” is then determined by subtracting legally allowable deductions from the gross estate. These include obvious deductions such as the decedent’s debts, mortgages, and liens, but deductions are also permissible for items like funeral and administrative expenses, net losses to assets during administration, and charitable or public gifts made by the estate. Most critically, any bequests to a surviving spouse are deducted from the total value of the estate, although bequests to other types of beneficiaries are not deductible.
Why Is The Calculation Of The Taxable Estate Important?
Understanding the basics of how a taxable estate is calculated is a key step in creating an effective estate plan. The line between what might constitute an allowable deduction and what is properly included in the taxable estate can be confusing, and the decisions you make now can determine whether your Illinois estate will be subject to state or federal estate tax at all, as well as how much tax you may have to pay on that estate. An experienced, knowledgeable estate planning attorney is an essential partner in this process, ensuring that your loved ones’ interests are protected.
Have Any More Questions About Your Estate Plan?
Interested in learning more about state and federal estate taxes and how they can affect your loved ones? Ready to start discussing all of your options with an experienced, knowledgeable, and compassionate legal professional? We are here for you.
Our dedicated team can help you understand what goes into the estate planning process, evaluate your assets, and prepare all necessary documents, including basic wills, trusts, powers of attorney, and advanced directives.
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