Death taxes, like the name says, can be triggered at death. How much you owe depends on the value of your estate. Also, death taxes can happen at the federal level and at the state level, and although the exemption against death taxes was raised on the federal level a few years back as part of the Trump tax reform bill, at the state level it was unchanged.
At the federal level, every taxpayer gets a giant tax deduction against the federal death tax, which is $12,920,000 - and if you’re married, you get to double that. This means when you die, as long as your estate is valued less than $12,920,000 for a single person, or $25,840,000 for a couple, you won’t pay any death taxes at the federal level.
Now, at the state level, in Illinois, it’s different. Illinois taxpayers owe death taxes when they go over $4,000,000. Another difference is a married couple cannot automatically combine their $4,000,000 exclusions like you can on the federal level. In other words, whether you’re single or married, in Illinois, you only get a $4,000,000 exclusion, unless you do some planning.
Say you’re a married couple living in Illinois worth $6,000,000, and you have no estate plan. At the death of the first spouse, the $6,000,000 transfers to the surviving spouse. But, when the second spouse dies, because the estate is over $4,000,000, Illinois will tax the entire $6,000,000 at a 6% tax rate. On $6,000,000, Illinois death taxes would cost your beneficiaries approximately $360,000 in most cases.
Here’s the point: with proper estate planning, the $360,000 in Illinois death taxes can be avoided. By using the right type of trusts, which are legal estate planning documents, this couple could save their children $360,000 in Illinois death tax, while still achieving their financial goals.
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