Losing a loved one can caused mixed emotions if you also received an inheritance from the decedent. An inheritance can provide a small boost to your budget or can lead to financial freedom, depending on the size of the inheritance. One thing you need to be sure that you understand if you received an inheritance is the tax implications of that gift. For example, if you are a resident of the State of Illinois, do you have to pay inheritance taxes in Illinois? While it is always best to consult both your financial adviser and an experienced Illinois estate planning attorney if you have questions about an inheritance, it may also help to gain a better understanding of how gift, estate, and inheritance taxes work in general.
Federal Gift and Estate Tax
When you die, you will leave behind an estate that is made up of everything you owned at the time of your death or in which you had an ownership interest. That estate must then go through the legal process known as probate. Though probate serves several purposes, one of the most important is to ensure that any federal gift and estate taxes the estate owes are paid before the estate assets are transferred to the intended beneficiaries and/or heirs of the estate. Federal gift and estate taxes can be complicated to compute given the numerous exemptions and exceptions; however, the tax is potentially imposed on the value of all lifetime gifts added to the value of the estate assets owned at the time of death. From that total, each taxpayer may then deduct the current lifetime exemption, which was permanently set at $5 million back in 2012 but is adjusted annually for inflation. For 2016, the limit is $5.45 million. Therefore, gift and estate taxes would be imposed on the amount that exceeds $5.45 million. Federal gift and estate taxes are paid by the estate, meaning that a beneficiary or heir does not need to worry about any tax obligation because any tax due to the federal government will already have been paid by the estate.
Do I Need to Pay State Estate Taxes?
Each individual state decides if it will impose a state version of gift and estate taxes in addition to the federal gift and estate tax. As of 2015, 15 states along with the District of Columbia impose a state estate tax. The State of Illinois is one of those states. The Illinois estate tax works basically the same way that the federal gift and estate tax works, except that the exemption amount in Illinois is $4 million instead of the higher $5.45 million the federal government uses. That means that an estate could be exempt from paying federal gift and estate tax but still owe estates taxes to the State of Illinois. In addition, where the federal tax rate is set at 40 percent across the board, the Illinois estate tax rate varies up to 28.5 percent. The Illinois estate tax applies to estates of Illinois residents, as well as the estates of non-residents who own real estate and/or tangible personal property located in Illinois.
Do I Have to Pay Inheritance Taxes?
It is important to understand the difference between estate taxes and inheritance taxes because an inheritance tax is not the same as an estate tax. As previously mentioned, an estate tax, whether levied by the federal or state taxing authority, is paid out of the estate during the probate process and before assets are passed on to beneficiaries and/or heirs of the estate. As such, recipients of those assets don’t have to worry about the tax because any tax due has already been paid. An inheritance tax, on the other hand, is a tax imposed after the gift has been received by the beneficiary or heir. Therefore, if an inheritance tax is imposed, it will be the recipient who is responsible for paying the tax. As of 2016, only six states (Iowa, Kentucky, Pennsylvania, Maryland, Nebraska, and New Jersey) impose an inheritance tax. Fortunately, residents of the State of Illinois do not pay inheritance taxes.
For additional information, please join us for one of our upcoming free seminars. If you have questions or concerns gift and estate or inheritance taxes in Illinois, contact the experienced Illinois estate planning attorneys at Nash Bean Ford & Brown, LLP by calling 309-944-2188 to schedule your appointment today.