Illinois Estate Tax and How to Plan for It with Life Insurance Trusts

When you think of Illinois, your mind might immediately turn to Chicago and the young professionals who live there to enjoy the city life. But that’s not all there is to Illinois. It’s also a popular destination for families and retirees alike due to its low cost of housing and overall low cost of living. Retirees especially can enjoy the fact that the state doesn’t levy a tax on any kind of retirement income. Unfortunately, that low cost of living ends at death because Illinois is one of the states that has a death tax.

The tax charged in Illinois is charged on individuals who live there, as well as those who own anything physically located in the state. It has a lower threshold for estate taxes than the federal government and charges a pretty high tax rate as well. While it’s not the worst place for estate taxes in the United States, it’s still an expensive place to settle an estate.

What You Need to Know About Illinois Estate Taxes

Currently, the Illinois estate tax is levied on estates that exceed $4 million in value. Tax rates can go as high as 16% and the state tax forms and payments are due nine months after the death. When estates are valued, the following items are all considered part of your estate, whether or not they have to go through probate:

  • Bank accounts and CDs
  • Retirement accounts
  • Stocks, bonds, and investment accounts
  • Vehicles
  • Real estate
  • Personal property
  • Life insurance proceeds if the policies were owned by the decedent
  • Business interests

Illinois has some benefits when it comes to estate taxes. If you pass property on to a surviving spouse, it’s not taxable at the time of your death, though the state tax return will need to be filed. Also, unlike the federal government, Illinois recognizes civil unions and treats them as marriages under tax laws, so a partner in a civil union can also take advantage of the spousal transfer of property.

But when that second spouse dies, or when property is being transferred to someone other than a spouse, those estate taxes are going to add up and take a big chunk out of your legacy. If you’ve built up a big retirement nest egg and have chosen to retire in Illinois, then when you die, your heirs are going to have to deal with a large burden. This is why we recommend that Illinois residents, and especially retirees, come up with an estate plan in advance.

Using ILITs to Protect Your Nest Egg in Illinois

If you’re a retiree living in Illinois, or just a resident who wants to protect your estate, then you might want to consider an irrevocable life insurance trust (ILIT). This type of trust allows you to shelter your estate from a heavy tax burden so you can ensure your legacy lives on. Here are some benefits to using an ILIT:

  • The wealth in an IRA can be multiplied by gifting after tax distributions into an ILIT to create an income and estate-tax-free death benefits. Using distributions from funds within an investment or IRA account can buy coverage that will exceed the initial premium several times over.
  • Life insurance policies in a trust are not part of your estate.
  • Transferring your wealth into an ILIT reduces your overall taxable estate, potentially putting you in a lower estate tax bracket or eliminating estate tax entirely.
  • ILITs can manage the inheritances of several beneficiaries at once, allowing you to secure your entire family’s future from one pool of funding.

One of the first things we recommend when a person from Illinois comes to us looking for estate tax planning is transferring wealth out of IRAs through systematic distributions into life insurance policies within an ILIT. This lowers potential estate tax later because gifting into the trust diminishes the size of the taxable estate, while also helping the retiree to avoid larger required minimum distributions (RMD) later.

Life insurance policies don’t have RMDs, and they pay a large death benefit in contrast to the premiums paid. This leverage creates greater wealth and an enhanced legacy compared to passing with a large IRA account balance alone, which is taxable and often subject to investment losses.

At Howard Kaye, this is a tactic that we leverage for people by matching up the estate planning strategies with the right insurance policies. We work with a wide range of insurance companies to find the best insurance policies to fund ILITs and reduce overall estate tax. For more information on using this method, contact a Howard Kaye advisor at 800-DIE-RICH.