Although the primary goal of most estate plans is to determine who will receive which estate assets upon the death of the plan’s creator, most estate plans also include a variety of other goals and objectives as well. One common secondary goal is tax avoidance. If you are creating your estate plan, and are currently married or plan to marry in the near future, you need to understand how the Illinois marital deduction fits into an estate plan.
In Illinois, your estate is potentially subject to federal (and sometimes state) gift and estate taxes upon your death at the rate of 40 percent. Yes, that means that almost half of your estate’s value could be lost to taxes. There are, however, a number of exemptions, exclusions, and strategies that can be employed to limit your estate’s exposure to this tax. One exemption is the unlimited marital deduction. As the name implies, you can transfer an unlimited amount of assets to your spouse when you die without incurring any gift and estate taxes. Sounds like a simple solution right? Not necessarily.
The biggest problem is that you may then be over-funding your spouse’s estate. Each individual is entitled to a lifetime exemption of $5.25 million (adjusted yearly for inflation) for gift and estate tax purposes. Note that the Illinois estate tax exemption is less, $4 million and is not indexed for inflation. Assets owned at the time of death in excess of that limit are subject to taxation. Imagine that you and your spouse have an estate valued at $8 million when you die. You leave everything to your spouse pursuant to the unlimited marital deduction and your estate owes no taxes. Your spouse, however, now has an estate worth $8 million — $3 million over his or her Federal lifetime exemption limit and $1 million over the Illinois exemption limit.
All is not lost, however, as there are numerous strategies that can be used to solve this dilemma. First, your spouse may be able to make use of the portability provision of the tax laws. In essence, this allows a surviving spouse to use any portion of a deceased spouse’s lifetime exemption amount that was not used by the spouse prior to death. You may also decide that creating one or more trusts prior to your death and transferring assets into the trust is a viable option if you have children to whom you ultimately want assets to go.
Recent changes in the law now also allow same-sex spouses to make use of the marital deduction – something that was not possible previously. While this is good news for same-sex spouses, anyone with a non-citizen spouse is not so fortunate. The unlimited marital deduction does not apply to a non-citizen spouse.
As you can see, the marital deduction can provide a significant benefit when properly used in your estate plan; however, because of the complex nature of gift and estate taxes, you should consult with your estate planning attorney to ensure that you use the deduction wisely.
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