Gift and Estate Taxes, Death Taxes and Estate Tax Exemption

There are two types of death taxes that you should be concerned about: the federal estate tax and state estate tax. The federal estate tax is computed as a percentage of your net estate that is over the estate tax exemption. Your net taxable estate is comprised of all assets you own or control minus certain deductions. Such deductions can be for administrative expenses such as funeral and burial costs as well as charitable donations.

Federal Estate Taxes

In 2018, the Tax Cuts and Jobs Act (TCJA) provided a huge increase in the estate tax exemption, but only for the years 2018 through 2025. The tax exemption amount went up to $11.18 million in 2018 and then increases annually due to the inflation index. For example, in 2020, the estate tax exemption is $11.58 million for singles; in 2021, the estate tax exemption is $11.7 million for singles (and twice those amounts for married couples). The exemption level is indexed for inflation but only for 2018 through 2025. In 2025, the federal estate tax exemption is set to return to $5 million plus inflation. Many financial experts are predicting that the federal estate tax exemption could be lowered to well under $5 million, depending on which party wins the presidency and controls Congress.

Even if you believe that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes. Remember, you may have a taxable estate in the future as your assets appreciate in value or our lawmakers change the estate tax exemption. You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances. Please click here to schedule a free initial consult with Strategic Estate Planning.

State Estate Taxes

The state estate tax is computed as a percentage of your net estate that is over your state’s (where you reside at the time of your death) estate tax exemption. In Illinois, the state estate tax exemption of $4 million is much lower than the current federal estate exemption. Illinois does not offer portability for spouses. How the Illinois estate tax works, and how it works in combination with the federal estate tax is complicated. If you are concerned about either the Illinois or federal estate tax, please call us or click here to receive up to date information and advice.

Taxable Estate

Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes (both state and federal) imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.

Unlimited Marital Deduction

The federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes. In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over the applicable exclusion amount (a moving target) will be included in the survivor’s taxable estate. It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.

Portable Exemption Privilege

Since 2011, we have had federal gift and estate tax exemption portability for married couples. That means if one spouse dies without using up his or her exemption, the surviving spouse can inherit the unused exemption amount.