April 10–The Illinois Legislature is currently considering an lllinois only qualified terminable interest property (QTIP) provision (HB0255) that would allow an estate to make a QTIP election for state death tax only. Why is this important?
With the decoupling of Illinois from the Federal estate tax exemption, Illinois’ exemption is at $2 million while the Federal exemption increased on January 1, 2009, to $3.5 million. Therefore, if an estate wishes to defer paying any inheritance tax, it may only utilize $2 million of the Federal exemption. If the estate wishes to use the full $3.5 million Federal exemption, it will owe Illinois death tax on the $1.5 million by which the Illinois exemption is exceeded.
However, the state-only QTIP, which has been implemented by several states already, offers a solution. By electing QTIP treatment for Illinois death tax purposes only, the full $3.5 million can pass under the Federal exemption, while $2 million of that property is exempt from Illinois death tax and the other $1.5 million (QTIP) passes free of Illinois tax courtesy of the marital deduction. Upon the second death, the full $3.5 million will be outside of the surviving spouse’s estate for Federal estate tax purposes. For Illinois death tax purposes, $2 million will be outside of the surviving spouse’s estate, while $1.5 million will be included in the surviving spouse’s estate.
Needless to say, this could be a very useful tool for estate planners in the state of Illinois.
See the full text of the proposed legislation here. The legislation passed the House on March 24, 2009, by a vote of 112-001-000.