Estate tax can quietly erode the legacy you’ve worked so hard to build if you don’t plan carefully. Many families assume that leaving everything to a spouse will protect them, but really, you are exposing them to state estate taxes.
In reality, these oversights can trigger unnecessary costs. In this blog, we’ll uncover hidden estate tax traps that could cost your loved ones thousands and show you how to avoid them.
Most married couples want to make sure the surviving spouse has enough money to last for as long as they live. So, they leave everything to each other through their Wills, joint ownership, and beneficiary designations on such things as insurance and IRAs. But there are some problems with leaving everything to your spouse. Here are some to consider.
It can cause you to pay too much in estate taxes. You may have heard that you can currently leave an unlimited amount to your surviving spouse when you die, so there will be no estate taxes when the first spouse dies. This is called the Unlimited Marital Deduction. But doing this can also cause you to pay too much in estate taxes. Here's why.
Under current tax law, if the net value of your estate when you die is more than $13 million (this amount may increase or decrease with future legislation), federal estate taxes will have to be paid. The State of Illinois current exemption amount is $4 million per person, and the amount may also increase or decrease with future legislation.
We expect that everyone will have a $4 million exemption from Illinois and a $13 million exemption from Federal estate taxes. But when you leave everything to your spouse, the first spouse to die forfeits their State exemption. So, when the second spouse dies, only one exemption, the second spouse's, is available to use.
This means that everything over $4 million will be subject to Illinois estate taxes (under current law). For Illinois estate tax, the rate ranges from a low of 8% to the top bracket of 16%. The Illinois tax is assessed on your entire estate, not just the amount in excess $4 million, as in the Federal estate tax calculation.
AB Living Trusts lets you use both of the estate tax exemptions, yours and your spouse's. When you set up the AB Living Trusts, you transfer your assets into them. Then, when one of you dies, the assets are owned by two separate trusts, one that uses the deceased spouse's estate tax exemption and one that uses the surviving spouse's tax exemption. Since Illinois does not have a "Portability" statute, married couples over $4 million, still require two AB Trusts. The result? Up to $8 million (under Illinois law) can now go to your children completely free of estate taxes.
With AB Living Trusts, you can still provide for your surviving spouse for as long as they live. If you die first, your spouse will have full control over the assets in their trust. Plus, your spouse can receive all the income from your Trust, and even receive principal from it if needed for health, education, maintenance, and support. In effect, you can have and eat your cake, but it won't get taxed.
If you leave all of your assets to your spouse, they could be lost to bad investments or careless spending. Some surviving spouses are not capable of handling large amounts of assets or may be too easily influenced by others. With AB Living Trusts, only the assets in the spouse's Trust belong to the surviving spouse. You can specify who will manage the assets in your trust. It could be your spouse, or possibly your spouse and another party as Co-managers, which could require the consent and agreement of both co-managers. This often works well in second marriages when you might want to preserve the assets for the benefit of your children from your first marriage.
Leaving all your assets to your spouse can cause you to disinherit your own children, especially those from a previous marriage. That's because you have no control over what your spouse does with the assets. With AB Living Trusts, you and your spouse can name separate beneficiaries for your own Trusts. So, even if you die first, you can be sure your children will receive the assets in your Trust.
Takeaway: A properly structured AB Living Trust splits your estate into two trusts, preserving both spouses’ exemptions, providing lifetime income support, appointing co-trustees if desired, and guaranteeing your children receive their inheritance tax-free.
There are two systems of taxation in this country, one for the informed and one for the uninformed.
America's richest families can afford the best legal minds in the country to help them reduce taxes and protect their assets. But there is no reason the rest of us should pay any more in taxes than necessary. In fact, there are so many legal, proven, tax-reducing strategies available today that no one should pay any more in estate taxes than they have to pay.
But don't expect the IRS or many professionals to take you by the hand and show you how to reduce your taxes. You must take responsibility for your own security and that of your family. By reading this, you are on your way to becoming one of the informed.
Don't forget to consider the current and future value of your assets. Many people don't do any tax planning and pay too much in estate taxes, simply because they don't realize how much they own. Or they forget that assets can appreciate greatly in value from the time they buy them until they die. And remember, estate taxes are based on current market values when you die.
Do you want your family to have to pay 16% to buy back your assets from the State of Illinois?
Takeaway: Understanding your true estate value can save your heirs hundreds of thousands of dollars. Actionable planning steps (valuation reviews, gifting strategies, and specialized trusts) allow you to preserve your wealth for the people you love.
You’ve worked too hard to let the estate tax strip away your family’s future security. With the right strategies in place, you can protect your wealth, minimize taxes, and ensure your legacy passes smoothly to the next generation.
If you’re ready to explore effective estate tax planning strategies, please call us at (847) 670-8200 or email info@kf-lawgroup.com. Our team is here to guide you.