In early December, the State of Illinois was forced to come to grips with the fact that humans are rational creatures.
The real and present threat of Sears and the Chicago Mercantile Exchange (CME) leaving the state in order to avoid the taxes imposed on them by Illinois shook Springfield politicians out of their stupor for long enough to give many Illinoisians an early Christmas gift in the form of a tax cut.
I will go on public record here and admit that I was shocked by this development! After all, it was only 11 months ago that Illinois passed an estate tax on all estates over $2 million. Yes, there had been an estate tax in earlier years, and it disappeared in 2010. But the one imposed in January of 2011 looked like a permanent planning hurdle.
It seems that the 'Chicago wing' of the legislature desperately wanted to give Sears and the CME a tax cut in order to save jobs in their districts and keep at least some of the tax revenue of those two institutions rolling in. Better to reduce the CME and Sears tax revenue than simply lose it entirely—a concept that deserves attention in many other areas of federal, state and local tax policy.
But the downstate legislators—may God truly bless them!—said, in effect, "we won't give you the votes to do that unless you include some estate tax relief for our constituents." A package deal was assembled. On Dec. 12 and 13 the two chambers voted it through by wide margins, and on Dec. 16 it was signed by Governor Quinn.
The most obvious impact on estate planning is the increased estate "exclusion" amount: how much you can leave your heirs that is excluded from Illinois estate tax. The new law says, "recognizing the exclusion amount of only (i) $2 million for persons dying prior to January 1, 2012, (ii) $3.5 million for persons dying on or after January 1, 2012 and prior to January 1, 2013, and (iii) $4 million for persons dying on or after January 1, 2013" (see page 290 and 291 of the bill).
How much difference does this make? For an individual with an estate of $4 million, under the former law your heirs would pay tax of about $254,000. Under the new $4 million exemption, the tax will be zero. For a married couple with coordinated planning to take advantage of both the wife's exclusion amount and the husband's, the family saves over a half a million dollars.
Unlike the temporary "portability" provision of the federal tax code (applicable only for 2011 and 2012) the Illinois exclusion cannot be transferred to the spouse. In other words, you must have a plan in place to use it at the first death, or the couple will lose one exclusion.
Keep in mind that while the federal death tax exemption for 2012 is $5.12 million (and during 2012 one spouse's exemption can be transferred to the surviving spouse without much planning ahead) and the tax rate 35% on everything over that amount, that exemption is set to fall back to $1 million in 2013 unless a new federal tax cut is enacted.
So, if you are keeping score, there has been one major federal estate tax law change and two dramatic state estate tax law changes in the last 12 months, and we are almost certain to see another major change in the federal law within the coming year.
If there is a lesson to take away, it is this: every farm family should commit to a systematic estate plan updating and maintenance program. If you only update your estate plan every 5 or 10 years, it is way out of date!
Ferguson, an attorney, owns The Estate Planning Center in Salem, where he helps families accomplish their planning goals. Learn more at his monthly educational workshops or by visiting his website.