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What You Should Know About Estate Tax in 2020

What You Should Know About Estate Tax in 2020

Dummy facing a TAX word
A dummy standing in front of a big red 3D tax word

Understanding how the state’s estate tax requirements may impact their families and estates upon their deaths may help guide people’s estate planning choices. Whether preparing for their retirement and potential needs as they age or focusing on ensuring their families’ financial security after their passing, people must consider several factors when developing their estate plans. The state’s estate tax requirements may take assets from those whom people wish to inherit from their estates and instead put them into the hands of the state.

What is the Estate Tax?

The Illinois estate tax is a state tax levied upon the assets held by people at the time of their deaths. Should an estate’s taxable holdings exceed the state’s exemption rate of $4 million for 2020, the estate may be responsible for paying taxes on the amount over the exemption threshold. Potential taxable estate assets include bank accounts, investment property, business interests, retirement accounts, vehicles or other personal property, and the life insurance proceeds from policies owned by decedents. Estates required to pay such taxes must do so before the disbursement of assets to any heirs or beneficiaries.

The federal government also has an estate tax which some estates may be subject to. Should the valuation of estates exceed the 2020 federal exemption rate of $11.58 million, the estate may have to pay federal taxes in addition to the state’s estate tax.

What is the Estate Tax Rate?

Illinois taxes estates at graduated rates, up to a maximum rate of 16%. The rate at which estates get taxed varies based on the value of the estate. Federal death taxes also apply at graduated rates up to a maximum of 40%.

How Can You Reduce Your Estate Taxes?

For various reasons, people may want to protect their property from estate taxes. Some of the options people may employ to ensure their assets get spent as they would want, rather than having them go to the government, include the following:

  • Leaving property to qualifying charities
  • Using a trust to shield assets
  • Relocating to a state with more favorable estate and inheritance taxes

Additionally, people may spend their assets prior to their passing or choose to give away part of their estates as gifts to loved ones before their deaths. Several states, Illinois included, do not impose taxes on money, real property, or other assets gifted from one person to another.

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