Illinois Death Tax Gotcha: New QTIP Estate Planning Device Available

Those planning their estates in Illinois should be aware that since 2005, Illinois has had its own death tax. This tax is in addition to the existing federal estate tax and is due nine months after death. Unlike the federal tax, there is no postponement until the death of the surviving spouse. A new law recently passed by the Illinois legislature makes available an estate planning technique with the potential to save Illinois residents hundreds of thousands of dollars in tax.

Prior to the enactment of this new law, Illinois residents faced the problem of planning for both the Illinois and federal inheritance tax. At the time of death, joint tenancies, retirement plans, insurance policies, and other assets owned by a decedent are subject to estate tax. In 2009, the Federal inheritance tax exemption amount was increased to $3.5 million, but the exemption amount remained at $2 million for the Illinois inheritance tax. Consequently, those using traditional tax planning were forced to choose between paying the Illinois tax or not fully utilizing the Federal tax exemption.

Under the new Illinois law, which is effective immediately, the spouse of a decedent can elect to treat property as qualified terminable interest property (“QTIP”) for Illinois estate tax purposes, while still preserving the decedent’s full $3.5 million Federal tax exemption. This estate planning technique, commonly referred to an “ABC Trust Plan,” would, for example, allow a surviving spouse to defer the payment of Illinois and federal estate taxes until after his or her death. Such a plan would save an estate of $3.5 million approximately $209,000 in Illinois tax at the death of the first spouse.

Illinois residents considering an estate plan or who already have a plan in place should review their estate plan now.