Since 2010, the federal estate tax laws have included a benefit called "portability." If one member of a married couple dies without fully utilizing his or her federal estate tax exemption, the unused amount can be "ported" to the surviving spouse by filing a federal estate tax return for the estate of the deceased spouse. The federal estate tax exemptions of a married couple can thus be combined, so that in 2020, a married couple can effectively transfer up to $23.16 million free of federal transfer tax (although clients should note that the federal estate tax exemption is slated to be reduced by 50 percent in 2026, and could be reduced earlier by Congress). The Illinois estate tax, however, does not allow for portability. Thus, if one spouse dies without fully utilizing his or her $4 million Illinois estate tax exemption, the unused amount is forever lost.
The impact of the lost Illinois estate tax exemption can be substantial. Consider, for example, a married couple with a total net worth of $8 million, all of which is owned by "Spouse B" and none of which is owned by "Spouse A." If Spouse A predeceases Spouse B, all of Spouse A's Illinois estate tax exemption will be lost. Upon Spouse B's death, the Illinois estate tax due on Spouse B's $8 million estate would be $680,634. The result would be the same if all of the couple's assets were owned by the two spouses jointly with rights of survivorship, as upon the death of Spouse A all of the couple's assets would pass to Spouse B outright, leaving Spouse B with a taxable estate of $8 million.
The solution to this problem requires 1) basic "credit shelter trust" planning and 2) equalizing assets between spouses. Estate plans for married couples commonly provide that when the first spouse dies, a "credit shelter trust" or "family trust" is created and funded with the maximum amount that would not result in or increase any estate taxes due on the death of the first spouse to die, with the remainder passing to a "marital trust" that is eligible for the estate tax marital deduction. The "credit shelter trust" is structured so that its assets will not be includible in the taxable estate of the surviving spouse upon his or her death.
Taking the example above, Spouse A and Spouse B could establish a credit shelter trust plan and split their $8 million of assets so that $4 million is owned by Spouse A and $4 million is owned by Spouse B (or their respective revocable trusts). Then, on the death of Spouse A, a credit shelter trust would be created for the benefit of Spouse B and funded with $4 million. If properly structured and administered, this $4 million trust would not be included in Spouse B's estate. Spouse B would then have a taxable estate of only $4 million – and no estate tax would be due upon his or her death.
There are, of course, other considerations besides estate taxes when considering equalizing assets. The impact on a potential divorce proceeding should always be considered, as should planning for protection from creditors. However, from an estate tax perspective, many families could see substantial Illinois estate tax savings from undertaking credit shelter trust planning and equalizing their assets.