The recently enacted Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "Tax Relief Act") provides significant relief to many taxpayers from federal estate taxation. However, differences between federal and Illinois estate tax laws may cause many Illinois residents who escape federal estate tax to remain subject to Illinois estate tax.

Different Laws with Different Results

Federal and Illinois estate tax laws apply different tax rates and, more importantly, different exemptions. Under the Tax Relief Act, for the next two years, every individual is granted an exemption from federal estate tax of up to $5 million (up to $10 million per married couple). Married individuals also may take advantage of the new federal tax concept of "portability," which allows a surviving spouse to reduce his or her own federal estate taxes by applying the unused portion of his or her deceased spouse's federal estate tax exemption.

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In contrast to federal estate tax law, the recently enacted Illinois Taxpayer Accountability and Budget Stabilization Act provides an exemption from Illinois estate tax of only $2 million per individual. Moreover, because Illinois does not recognize the federal concept of "portability," any unused portion of a predeceased spouse's Illinois estate tax exemption will be irretrievably lost.

Planning for Illinois Estate Taxes

Notwithstanding the considerable differences between federal and Illinois estate tax laws, Illinois residents can implement planning strategies to minimize the burden of state estate taxes.

  • Illinois Gift Planning. Illinois does not impose a gift tax. Gifts made more than three years before death avoid Illinois estate taxation.
  • Illinois QTIP Trust Planning. Illinois estate tax laws permit a married Illinois resident to create a "qualified terminable interest property" trust (an "Illinois QTIP Trust") for his or her surviving spouse. An Illinois QTIP Trust defers Illinois estate tax until the death of the surviving spouse.
  •  Illinois Estate Tax Exemption Planning. Although federal portability is not recognized for Illinois estate tax purposes, married Illinois residents can maximize use of their Illinois estate tax exemptions by making inter-spousal transfers during life. If each spouse has at least $2 million, neither risks wasting his or her exemption for Illinois estate tax purposes, regardless of the order of death.