WILL YOUR ESTATE BY SUBJECT TO

ILLINOIS FEDERAL GIFT AND ESTATE

TAX?

ROBERT N. NASH ILLINOIS ESTATE PLANNING ATTORNEY

“When you sit down to create your comprehensive estate plan you will likely have several goals and objectives in mind that all need to be considered during the creation of your plan.”

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 2

When you sit down to create your comprehensive estate plan you will likely have

several goals and objectives in mind that all need to be considered during the

creation of your plan. The division of your estate at the time of your death may

be the primary goal of your estate plan; however, you may also want to

accomplish additional objectives such as tax avoidance.

If your estate is likely to be subject to federal gift and estate taxes it only makes

sense to try and limit your estate’s tax exposure by including tax avoidance

strategies in your estate plan. First, however, you need to determine if your

estate will, indeed, be subject to gift and estate tax.

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 3

WHAT IS THE GIFT AND ESTATE TAX?

When you die all of your assets must be located and valued during the probate

process. There are several reasons why this is required. One of those reasons is

to ensure that Uncle Sam receives any gift and estate tax due on the estate. Gift

and estate taxes are levied on all qualifying gifts made during your lifetime as

well as on all assets in which

you have an ownership

interest at the time of your

death.

For instance, let’s assume

that you made qualifying

gifts (almost all gifts qualify)

during your lifetime valued

at $3 million and that at the

time of your death your

estate assets were collectively valued at $8 million. The combined value of the

two ($11 million) is potentially subject to federal gift and estate taxes at the rate

of 40 percent after your death. That means that your family and loved ones

could lose a staggering $4.4 million if you fail to plan ahead and incorporate tax

avoidance strategies into your estate plan.

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 4

THE LIFETIME EXEMPTION

Fortunately, you will not owe gift and estate taxes on the entire $11 million

though because each taxpayer is entitled to exempt the value of assets up to the

lifetime exemption limit. In the past, both the lifetime exemption limit and the

gift and estate tax rate fluctuated wildly and regularly. Thanks to the American

Taxpayer Relief Act of 2013

(ATRA), however, the lifetime

exemption limit and tax rate

were made permanent. The

exemption limit was set at $5

million; however, a provision in

ATRA calls for the limit to be

increased each year to account

for inflation.

Therefore, the limit for 2015 will

be $5.43 million. Also, the gift and estate tax rate was permanently set at 40

percent. Therefore, you would be entitled to deduct $5.43 million from the $11

million estate, leaving $5.57 million subject to gift and estate taxes. Your estate,

therefore, would stand to lose $2,228,000 to gift and estate taxes instead of $4.4

million – still a staggering sum of money to lose to taxes.

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 5

THE VALUE OF YOUR ESTATE – DO YOU KNOW WHAT YOU

ARE WORTH?

If asked whether you know how much you are worth you would likely answer in

the affirmative; however, the truth is that most people really do not know the

value of their estate. For example, do you know the current value of your home?

What about your 401(k)? Have you actually sat down and added up the value of

all your estate assets? Although the lifetime exemption has permanently been

set at $5 million, you might be surprised at how easy it is for the average

taxpayer’s estate to exceed that amount.

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 6

WAYS TO AVOID INCURRING GIFT AND ESTATE TAXES

If you have worked hard all your life, saved regularly, and invested wisely you

undoubtedly want the benefits of all that to go to your loved ones, not to Uncle

Sam, when you die. To ensure that is what happens you need to work with your

estate planning attorney to incorporate tax avoidance strategies into your estate

plan. Although every estate plan is unique, some commonly used tax avoidance

strategies include:

Marital Deduction-– the marital deduction allows most taxpayer’s to

leave an unlimited amount of assets to a spouse tax-free. While this does

eliminate any gift and estate tax exposure for your estate when you die, it

can easily over-fund your spouse’s estate. Assume that your estate claimed

your lifetime

exemption of $5.43

million and the

remaining $5.57

million was gifted to

your spouse. Your

estate would owe

nothing in gift and

estate taxes pursuant

to the unlimited

marital deduction;

however, your spouse’s estate is already over-funded before even taking

any additional assets into account. Imagine, for example, that you spouse

owns assets valued at $7 million. Every penny of the $5.57 million gifted to

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 7

your spouse is now subject to gift and estate taxes should your spouse die

because he/she now has an estate valued at $12.57 million.

Trusts – When the proper type of trust agreement is chosen, you may be

able to transfer a significant portion of your wealth into the trust, thereby

avoiding, or at least limiting, the gift and estate exposure those assets

have. Once assets are transferred into an irrevocable trust, for example,

they are no longer part of your estate and, therefore, are not included in

the valuation of your estate for tax purposes.

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 8

Annual Exclusion – the annual exclusion allows you to make gifts valued

at up to $14,000 per year to as many beneficiaries as you wish tax-free. If

you are married, you and your spouse may use “gift-splitting” to combine

your gifts and gift assets valued at up to $28,000 per year tax-free. The

annual exclusion is often combined with a trust to further shelter assets. By

way of illustration, imagine that you and your spouse gifted the maximum

allowable value each year, for ten years, to your four children and six

grandchildren. Each year you should transfer 280,000 in assets tax-free.

After ten years you will have transferred $2.8 million in assets tax-free.

Moreover, gifts made pursuant to the annual exclusion are not counted

toward your lifetime exemption amount for gift and estate tax purposes.

If you wish to be certain that your hard earned assets are not lost to gift and

estate taxes when you die be sure to sit down with your Illinois estate planning

attorney and work on ways to incorporate tax avoidance strategies into your

estate plan.

IRS, Estate and Gift Taxes

Bankrate, Estate Tax and Gift Tax Amounts

Forbes, IRS Raises Limit on Tax-Free Lifetime Gifts for 2015

Will Your Estate By Subject to Illinois Federal Gift and Estate Tax? www.nashbeanford.com 9

About the Author

Robert N. Nash

Robert N. Nash is a partner in the law firm of Nash Nash Bean & Ford, LLP. The law firm has

offices in Geneseo and Moline, Illinois and conference facilities available throughout

Northwestern Illinois. Mr. Nash chose the estate and business planning arena because he

believes it provides a positive force in his clients’ lives. He practices preventative, rather

than remedial law. Robert Nash focuses on all aspects of estate planning, including estate,

gift and income taxes, trust and probate administration, real estate, and business.

Nash Nash Bean & Ford, LLP

www.nashbeanford.com

Geneseo 445 US Highway 6 East

Geneseo, IL 61254 Phone: (309) 944-2188

Fax: (309) 944-3960

Moline 5030 38th Avenue, Suite 2

Moline, IL 61265 Phone: (309) 762-9368

Fax: (309) 944-3960