Below is an excerpt from §5.2 of ESTATE ADMINISTRATION: BUSINESS AND TAX-RELATED ISSUES 2019 EDITION.
Introduction to Illinois Estate Tax and Federal Estate Tax
The Illinois Estate and Generation-Skipping Transfer Tax Act is imposed on all transfers by Illinois residents and on Illinois-sited property transferred by nonresidents. The tax is imposed and administered independently of the federal estate and generation-skipping transfer tax, although the computation of the Illinois tax does require a calculation of a hypothetical federal tax even in cases where no federal tax is payable and no federal return is required to be filed.
However, many intersections between the federal and Illinois taxes remain. It is impossible to calculate the Illinois tax without first calculating a modified federal estate tax. The Illinois estate tax is equal to (1) what the state death tax credit that existed on December 31, 2001 would have been (2) if it had been applied to the federal taxable estate calculated as of the death of the decedent but (3) further modified as if the federal applicable exclusion amount is only $4 million. One further modification to the federal taxable estate could be a special Illinois marital deduction, which is discussed in §5.8 of ESTATE ADMINISTRATION: BUSINESS AND TAX-RELATED ISSUES.
It is only the state death tax rate schedule that is frozen in the form as it existed in 2001. The calculation of federal taxable estate and the resulting estate tax, with a deduction rather than a credit for that very same Illinois estate tax and an inclusion of prior taxable gifts in the calculation, is made according to the law applicable on the date of the decedent’s death. That calculation is then further modified by a hypothetical unified credit based on an exclusion amount of $4 million that is related neither to 2001 (when that amount was $1 million) nor the date of the decedent’s death (which would be $11.4 million if that death occurred in 2019). This hypothetical exclusion amount results in a unified credit under Internal Revenue Code §2010 of $1,545,800 which is the tax calculated under Code §2001 on a taxable estate of $4 million.
The larger federal exclusion amount of $10 million indexed for inflation, which is applicable through 2025, creates planning opportunities for transferring substantial amounts of assets by gift free of tax, and it is anticipated that many clients will take advantage of this opportunity. Such gift transfers will also be free of any Illinois tax because Illinois does not impose a gift tax. While no Illinois tax is imposed at the time of transfer, such transfers may, nevertheless, affect the later calculation of Illinois estate tax at the death of the donor. Thus, an understanding of how the Illinois and federal estate tax are related becomes useful for planning purposes long before the calculation of tax on a return is required.
As long as the federal basic exclusion amount under Code §2011(c) was $5 million, and thus fairly close to the Illinois assumed federal exclusion amount of $4 million, relatively few Illinois estates were subject to Illinois estate tax that were not also subject to federal estate tax. However, with the larger federal exclusion amount applicable through 2025, more and more Illinois estates will be subject to Illinois estate tax without being liable for any federal tax.
While it is common to advise clients by using a simple statement that “Illinois does not tax estates of less than $4 million,” it cannot be assumed that an estate of $4 million or less will generate no Illinois estate tax. Although Illinois does not impose a gift tax, prior taxable gifts can affect the calculation of the “phantom” state death tax credit on which the Illinois estate tax is based. See §5.4 of ESTATE ADMINISTRATION: BUSINESS AND TAX-RELATED ISSUES.
The following provisions of this chapter have two objectives: (1) provide an understanding of how the Illinois estate tax works, which is particularly useful in planning an estate, and (2) address the issues that arise in the preparation of an Illinois estate tax or generation-skipping tax return.
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