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Beware of the Illinois Estate Tax: Decoupling from the Federal Estate Tax Exemption
The Basic Problem:
Dying in 2009 may result in Illinois Estate Tax liability for those with an estate worth more than $2 million. In recent years, the Federal Estate Tax exemption amount has equaled the Illinois Estate Tax exemption. Decedents with estates under the Federal exemption amount were also under the Illinois exemption amount, resulting in no Federal or state death taxes due. However, the Illinois legislature has chosen to "decouple" the Illinois estate tax exemption amount from the Federal Estate Tax exemption amount, beginning in 2009.
Example #1: Dying in 2008
John Smith dies in 2008, his estate is worth $2 million. The Federal Estate Tax exemption amount is $2 million. The Illinois Estate Tax exemption amount matches the Federal $2 million exemption amount. No Federal or Illinois Estate Tax is due from the estate.
Example #2: Dying in 2009
Jane Smith dies in 2009, her estate is worth $3.5 million.
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The Federal Estate Tax exemption amount for 2009 will be $3.5 million. However, the Illinois Estate Tax exemption amount remains at $2 million. While no Federal Estate Tax will be due, Illinois Estate Taxes would be due on the difference between the Illinois $2 million exemption and the $3.5 million value of the decedent’s estate. Illinois estate taxes for Jane’s estate would amount to $64,400.00.
The Complicated Problem:
Many estate plans for married couples include the use of a Credit Shelter Trust or Marital/Family Trust or A/B Trust arrangements. These arrangements have been popular to defer estate taxes until the death of the surviving spouse. However, these arrangements, because their language is keyed off of the Federal Estate Tax exemption amount, will not function properly in light of the Illinois Estate Tax decoupling problem discussed above. If the trust arrangement funds the Credit Shelter/Family or "B” Trust with the full amount of the Federal Estate Tax exclusion ($3.5 million), then Illinois Estate Tax
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will be imposed upon the death of the first spouse to die. Alternatively, if the arrangement funds the Credit Shelter/Family or "B" Trust with only $2 million, then, while no Illinois Estate Tax will be due at the death of the first spouse to die, $1.5 million of the first spouse’s Federal Estate Tax exclusion would have been wasted, causing potential estate tax liabilities upon the death of the surviving spouse.
The Solution(s):
There have been proposals for legislation that would allow the surviving spouse-trustee to elect that the Credit Shelter/Family or "B" Trust be treated as a Qualified Terminable Interest Property (QTIP) Trust under Illinois tax law. A Credit Shelter QTIP Trust would offer tax advantages to the non-spouse beneficiaries.
In the absence of state legislation, the solution for many will involve a gifting regime to decrease the value of the taxable estate. For those who have reason to believe that they may die in 2009 with an estate valued at over $2 million, a "death bed" gift may be used as a tax advantaged means of decreasing estate taxes. For others, an Insurance or Charitable Trust may be the answer.
CONTINUED
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We encourage you to monitor the value of your estate and seek appropriate professional advice.
FAIR PAY ACT
Signed into law on January 29, 2009, as the first piece of legislation signed by President Obama, the Lilly Ledbetter Fair Pay Act amends the 1964 Civil Rights Act to extend the time period in which an employee must bring a lawsuit claiming discrimination in pay. Under the previous law an employee must have filed a lawsuit claiming discrimination within 180 days of the company’s original decision to pay that
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worker less than it pays other employees to do the same job. The new law extends the statute of limitation for filing such suit by providing for a different measurement of time. Under the law, every discriminatory paycheck from the employer extends the statute of limitations for an additional 180 days. Employees may now bring suit within 180 days after any allegedly discriminatory paycheck.
This law provides great protection to employees facing discriminatory pay either because of sex, race, religion, national origin, disability or age. There has
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been one consistent limit to the extension of the statute of limitations. Under the old and new laws, the employee can only seek back pay for two years. Thus, the sum of the employee’s two year salary will serve as a limit to the employer’s liability. Employers need to be more mindful of differences in pay, as employees now have additional time to challenge any discrepancy that may appear discriminatory.
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The information herein contained while believed to be accurate at the time of publication, is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.
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