October 1, 2009

On September 8, 2009, a new Illinois law became effective that provides married couples additional flexibility with regard to the Illinois estate tax. To fully understand the implications, it is important to consider the background.

Beginning in 2009, the Illinois estate tax is imposed on decedents with taxable estates of $2 million or more, while the federal estate tax laws allow $3.5 million to pass without incurring a federal estate tax. Prior to the enactment of this new law, Illinois residents had two basic choices with regard to marital deduction/estate tax deferral planning on the first spouse's death:

  1. They could allow the full $3.5 million that can pass free of federal estate tax to pass to a "bypass trust," whereby that amount and any subsequent growth would escape both federal and state estate taxation on the surviving spouse's death, but at a current Illinois estate tax cost of $209,124. The balance would pass to a marital trust that would defer both the federal and Illinois estate tax on those assets until the survivor's death.

  2. Alternatively, they could choose to fund the bypass trust with only $2 million, thus avoiding both federal and Illinois estate tax at the first death. Again, the balance would pass to a marital trust that would defer the federal and Illinois estate tax on such assets until the survivor's death. This second option, however, essentially wasted $1.5 million of the amount that the predeceasing spouse could have passed free of federal estate tax, causing a potential additional federal estate tax of $750,000 upon the survivor's death. The additional estate tax is even greater if the growth of such assets between the first spouse's death and the death of the surviving spouse is factored in.

The conclusion was generally that, even after taking into account the so-called "time value of money," the potential savings in the surviving spouse's estate justified option 1 above. Nevertheless, many estate plans were drafted to provide flexibility with regard to these two choices. In essence, this enabled the deceased spouse's executor to choose the amount that would be funded to the bypass trust upon the first spouse's death.

A New Option for Married Couples

The recent Illinois legislation affords an additional and very appealing option for married couples: an Illinois-only marital deduction election for qualifying trusts. Known as an Illinois QTIP election, the deduction permits full utilization of the amount ($3.5 million) that can be passed free of federal estate tax by the first spouse to die, while deferring until the surviving spouse's death the Illinois estate tax ($209,124 under current law) that would otherwise be due on the amounts in excess of the $2 million that Illinois allows to pass estate tax free.

Under current Illinois and federal law, beginning January 1, 2010, the amount that can pass free of Illinois estate tax will again be aligned with the amount that can pass free of federal estate tax (unlimited in 2010; $1 million in 2011 and thereafter). However, it is expected that Congress will revise the federal estate tax laws to maintain the $3.5 million federal exemption. Without further changes to the Illinois estate tax law, this $3.5 million will also be the Illinois exemption. Therefore, unless Illinois enacts legislation to maintain a lesser exemption (e.g., $2 million), an Illinois QTIP election would then only be needed for decedents who die before December 31, 2009.

There are many issues to consider in determining if an Illinois QTIP election should be incorporated into your estate plan. Therefore, it is advisable for married Illinois residents to have an attorney review their situation and estate planning documents to determine if this option is appropriate for them. If you would like to discuss your estate plan, and whether it is advisable to create an Illinois QTIP trust, please contact your Much Shelist attorney.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.