On January 13th, Illinois Governor Pat Quinn signed into law the Taxpayer Accountability and Budget Stabilization Act (the “Act”)—legislation that received significant national attention due to the 66% increase in state income tax. However, the Act also addressed the lingering question of how Illinois would react to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, signed into law by President Obama in December, which increased the Federal Estate and Gift Tax exemptions to $5 million for decedents dying in 2011.
The Act reinstates the Illinois Estate Tax as of January 1, 2011, with an exemption of only $2 million, continuing the conflict that Illinois estates have had to address since 2005, but with greater consequences.
Prior to the one-year lapse in the Federal Estate Tax in 2010, Illinois had decoupled from the Federal Estate Tax and provided an exemption of $2 million while the Federal exemption was $3.5 million. Upon the death of the first spouse, Illinois estates exceeding $2 million were forced to determine whether to (a) apply the full Federal exemption and pay some state tax, (b) apply the state exemption and lose the remaining $1.5 million of Federal exemption, or (c) if the Estate Planning documents permit, apply the state exemption and place the remaining $1.5 million into a Qualified Terminable Interest Property (QTIP) Trust. Of course, having the opportunity to choose one of these options is dependent upon the flexibility provided by the language of the Trust.
With the Illinois Estate Tax exemption remaining at $2 million while the Federal exemption is increased to $5 million, building flexibility into an individual’s Estate Planning documents becomes even more important, as the QTIP Trust could hold as much as $3 million in assets in order to defer any Estate Tax due on those assets until the second spouse’s death. It is crucial to confirm that your Estate Planning Attorney understands the issues involved and that the flexibility required to deal with changes in the law is included in your documents.