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Taking advantage of estate tax portability

| Apr 5, 2021 | Estate Planning |

Past posts on this blog touched upon the fact that, should Illinois residents utilizing a gifting strategy as part of their estate plans, they may protect as much as $23.4 million from federal taxes. Yet what are the specifics details of such a strategy?

Optimizing tax avoidance strategies is not an automatic process, meaning that one must know exactly what steps they must take in order to do it. A failure to do so may actually end up leaving one actual owing taxes that might otherwise would not have. Thus, understanding how to take full advantage of federal estate benefits is key to preserving assets for one’s beneficiaries.

Estate tax portability

The ability to preserve $23.4 million from estate tax taxes is due to estate tax portability. The federal estate tax exemption keeps estates whose total taxable value is below the exemption threshold from being subject to taxes. Per the Internal Revenue Service, the exemption threshold for 2021 is $11.7 million.

Portability allows one to claim the unused portion of their deceased spouse’s exemption. Should their spouse leave them their entire estate upon their death, those assets pass tax-free thanks to the unlimited marital deduction. Utilizing this tax benefit preserves one’s estate tax exemption. The surviving spouse can then claim that entire $11.7 exemption and combine it with their own. They do this by filing an estate tax return within nine months of their spouse’s death (one may extend that deadline by six months if necessary).

Illinois’ stance on portability

Illinois imposes a local estate tax on its residents (with its exemption threshold being $4 million). However, according to the website SmartAsset.com, a married couple can only apply one of their estate tax exemptions for the total amount of their shared assets.