By now, you have probably heard plenty of news coverage about the Tax Cuts and Jobs Act of 2017 (“TCJA”). The new law includes many changes to individual and corporate tax rates, deductions and other rules. While there was also much discussion about repealing the federal estate tax, the final tax bill does not repeal estate tax. Thus, there is still a federal estate tax. Additionally, the Illinois estate tax remains unchanged.
The TCJA doubled the federal estate/gift tax exemption for individuals, from $5 million to $10 million. These amounts are indexed for inflation, which means that an individual dying in 2018 has a federal estate tax exemption of approximately $11.2 million. Prior to the enactment of TCJA, that individual would have had an exemption of $5.6 million in 2018. The federal estate/gift tax rate remains at 40%.
This is not a repeal of the estate tax. In fact, this change to the exemption amount is not even permanent. The new law provides that it will increase each year for inflation, but only until 2025. In 2026, the federal estate/gift tax exemption will revert back to the pre-TCJA amount, which (with inflation adjustments factored in) will be somewhere between $6-7 million. Further, between now and then, new legislators may repeal or make changes to the TCJA, possibly lowering exemption amounts.
It is important to note that Illinois estate tax exemption has not increased. It is still $4 million. This means that an individual may not be subject to federal estate tax because of the increased exemption amount, but could owe Illinois estate tax, if proper planning is not done.
So what does this mean for you and your estate plan?
If you did not have a taxable estate prior to the new tax law, then you still do not have a taxable estate. However, that does not mean that you do not need to do any estate planning. There are numerous non-estate tax considerations in preparing your estate plan. Naming guardians and trustees for your minor or adult disabled children, protecting your family’s inheritance from their creditors or spouses, minimizing estate administration time and expenses, designating who will make health care and financial decisions for you in the event of your incapacity … just to name a few.
If you are married and have a combined estate totaling close to, or more than, $4 million, you need to include provisions in your documents now to utilize the Illinois exemption at the first spouse’s death. Failure to do so may result in estate tax liability at either the first or second spouse’s death, which could have been avoided or reduced.
If you have estate planning documents from before 2010, or even from after that date, depending on the planning that was included in them, your death may result in the creation of unnecessary trusts and unnecessary exposure to future capital gains tax. Under the previous laws, it made sense to include formulas in married couples’ living trusts which require the creation and funding of trusts for your spouse following your death in order to minimize estate tax. The trade-off was some capital gains tax exposure, which was a much lower cost to your family as a whole. This is not the case anymore. Thus, you need to update your old documents to allow for flexibility and post-mortem tax planning, given the current and ever- changing tax laws.
Should you have any questions about preparing an estate plan customized for your personal situation, whether or not you have a taxable estate, or would like to schedule a no-charge initial consultation with one of our experienced estate planning attorneys to discuss your concerns and wishes, please contact Waltz, Palmer & Dawson, LLC at (847) 253-8800.
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