Illinois Estate Tax

Even if an estate isn't big enough to owe federal estate tax, it might still owe a separate Illinois estate tax. Here are the rules.

Which Estates Must File

The exempt amount in Illinois is in flux. For deaths in 2011, estates with an estimated gross value of more than $2 million must file an estate tax return. For deaths in 2012, the figure is $3.5 million, and for 2013, $4 million. (Like the federal estate tax, the Illinois estate tax disappeared for just one year, in 2010.) The estate might not actually owe any tax—numerous tax deductions are available, which may reduce the amount of tax owed to zero. But the return is still required.

Illinois estate tax is assessed on all property of Illinois residents. The estate of a nonresident may owe Illinois estate tax if the person owned real estate or other property situated in the state.

Calculating the Value of the Gross Estate

The gross estate includes all the assets you would expect it to:

• All kinds of bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Real estate
• Vehicles and other personal property
• Life insurance proceeds from policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (whether the business was a sole proprietorship, limited liability company, or small corporation)

If any of these assets was owned with someone else, only the value of the deceased person’s share is counted. For example, if a husband and wife owned a house together, and the husband dies, half of the value of the house is included in his estate. (One exception: if property is owned in joint tenancy with someone else, then all of it is included in the estate except for funds that the other person contributed.)

Other assets that need to be included in the estate aren’t so obvious:

• Taxable gifts made during the deceased person’s lifetime. If the deceased person made large gifts (more than the annual exclusion amount, which is currently $13,000 but was lower in the past, to one recipient in one year), then the taxable amount of those gifts must be added to the value of the estate.
• Some transfers made in the three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, the value of the policy must also be included in the estate.
• Assets held in trust. Assets held in a revocable living trust and other trusts the deceased person controlled are included in the taxable estate.

Forms to File

If the estate may owe Illinois estate tax, you must file both an Illinois estate tax return, Form 700. You must also file a federal estate tax return (IRS Form 706), with the state—even though you do not have to file it with the IRS. And it must include all the schedules, appraisals, wills, trusts, and other attachments that are normally required.

How Much Tax Will Be Due?

The Illinois Attorney General provides an online calculator that you can use to compute the amount of tax due. 

No ‘Portability’ for State Tax

 A new feature of federal estate tax that took effect in 2011 is the ability of a husband and wife to share their individual estate tax exemptions. If the first spouse to die doesn’t use up all of his or her $5 million federal estate tax exemption, then after the second spouse dies, his or her estate can use anything that was left over by the first spouse. This is called “portability” of exemptions.

Illinois, however, does not allow spouses to share their exemptions. If the first spouse to die doesn't use up all of his or her exemption, whatever is not used is lost.

Getting Expert Help

Preparing an estate tax return, whether for a state taxing authority or the IRS, is not a do-it-yourself job. Most experts charge several thousand dollars to prepare a federal estate tax return, which should tell you how much work it is.

Even if you’re comfortable with tax returns, you’ll need to get help from someone—a lawyer or CPA—who has experience with these very complicated returns. Don’t rely on your regular income tax preparer.