For most people, the primary goal of estate planning is to make sure that loved ones are taken care of after they are gone. If that is one of your primary estate planning goals you undoubtedly want to ensure that the full value of the assets you leave behind is passed on to your beneficiaries. With that in mind, you may be wondering “Is the inheritance you leave behind taxable?” The simple answer to that question is that as a general rule no. If you live in Illinois and your assets are less than $4 million in value, the inheritance you leave to beneficiaries is not taxable; however, it also helps to understand why that is and when you might encounter an exception to the general rule.
As you likely already know, the United States federal government, in the form of the Internal Revenue Service (IRS) levies a tax on just about everything. With that in mind, it is understandable that you might wonder about taxing an inheritance. In a sense your inheritance is taxed; however, it is taxed before it is transferred to the intended beneficiaries.
When you die, all of your estate assets must be identified and valued. In addition, all gifts made during your lifetime must be valued. The combined total of your estate assets and the gifts you made during your lifetime is then potentially subject to federal gift and estate taxation. Every taxpayer, however, is entitled to exempt up to the current lifetime exemption limit — currently $5.45 million for 2016. Therefore, if the value of your estate assets and lifetime gifts exceeds the lifetime exemption limit the portion of your estate that exceeds the limit will incur federal gift and estate taxes at the rate of 40 percent. All of this occurs during the probate of your estate which takes place immediately following your death. Only after all assets are accounted for and all taxes paid can your estate assets be passed down to the intended beneficiaries or heirs of the estate.
Although your children will most likely not have to pay federal taxes on an inheritance, there are a handful of states, including Iowa and Illinois, that impose some type of state inheritance or estate tax. The Illinois estate tax exemption is $4 million. Therefore, more estates are subject to Illinois estate tax than federal estate tax. Each state decides if an inheritance tax is levied and, if so, how it is calculated and what the tax rate will be on the inheritance. This is just one of the many reasons why you should always consult with an experienced Illinois estate planning attorney when creating or updating your estate plan. Contact the experienced Illinois estate planning attorneys at Nash, Nash, Bean & Ford, LLP by calling 309-944-2188 to schedule your appointment today.