When someone dies, both the federal and state government impose a tax on the value of the property that passes to his or her heirs. This is called an estate tax. Generally, governments assess the value of one’s estate based on the current market value of the property at the time of death, not the purchase price paid by the one who died.
The property that can be included in the one’s estate for taxation purposes includes real property, bank accounts, insurance and annuities, business interests and other tangible property like jewelry or artwork.
The total value of one’s property at the time of death is called the gross estate. However, there are a variety of deductions that can be made to lower the amount ultimately taxed. Allowable deductions can include any debts, including mortgages, that are part of the estate, operating expenses for businesses, estate administration expenses, certain types of property that pass to a spouse and certain charitable donations. The gross estate minus all the allowable deductions results in the taxable estate.
Estate Tax Rates for the Taxable Estate
Smaller estates with a relatively low taxable estate value don’t necessarily need to file federal and/or state tax returns for the estate. Both the federal and state, including Illinois, legislatures have been amending estate tax laws with great frequency. Therefore, one should consult an expert in estate taxes to determine what the current minimum taxable estate limits and taxation rates are. It’s important to note that real property held in other states may be subject to estate taxation in that state as well. For example, Illinois requires tax filings for an estate that includes real property located in Illinois by a non-resident.
- Minimum Taxable Estate Level
If one’s taxable estate falls below the minimum taxable estate level, then no estate taxes are owed. The federal and state minimums are likely different. In Illinois, the legislature has consistently been moving the taxable estate exemption amount higher while Congress is pushing the exemption level in a downward trajectory. Therefore, even if one’s taxable estate amount is exempt from Illinois estate taxes, it might not be exempt from federal taxes.
- Tax Rates
As with income tax brackets, the actual tax rate imposed on an estate increases with the value of the taxable estate. In Illinois, the current tax rates on estates ranges from 5.6 percent through 16 percent. These tax rates apply to amounts above specified levels in each tax bracket. This results in an effective tax rate range on estates in Illinois from zero to 11.5 percent.
Avoiding Taxes on One’s Estate
If heirs do pay state tax on the estate, they may be able to deduct this from any federal taxes owed.
There are also numerous legal ways one can arrange his or her estate that will help heirs avoid paying any taxes on the estate, such as living trusts or automatic transfers upon death. However, these are mechanisms that must be in place before one has died and therefore require some estate planning while one is still alive.