Illinois Estate Tax Planning Tax Alert October 2009

Chicago, Illinois 120 South Riverside Plaza, Suite 1200 Chicago, IL 60606 312.876.7100 phone • 312.876.0288 fax Springfield, Illinois 808 South Second Street Springfield, Illinois 62704 217.789.7959 phone • 312.876.6215 fax Boca Raton, Florida 433 Plaza Real, Suite 275 Boca Raton, FL 33432 954.713.7600 phone • 954.713.7700 fax Coral Gables, Florida 201 Alhambra Circle, Suite 601 (SunTrust Plaza) Coral Gables, Florida 33134 305.357.1001 phone • 305.357.1002 fax Fort Lauderdale, Florida 200 East Las Olas Boulevard, Suite 1700 Fort Lauderdale, Florida 33301 954.713.7600 phone • 954.713.7700 fax Miami, Florida 200 South Biscayne Boulevard, Suite 3600 Miami, FL 33131 305.374.3330 phone • 305.374.4744 fax Tampa, Florida Two Harbour Place 302 Knights Run Avenue, Suite 1100 Tampa, Florida 33602 813.254.1400 phone • 813.254.5324 fax West Palm Beach, Florida 515 North Flagler Drive, Suite 600 West Palm Beach, FL 33401 561.833.9800 phone • 561.655.5551 fax Hoffman Estates, Illinois 2800 West Higgins Road, Suite 425 Hoffman Estates, IL 60169 847.843.2900 phone • 847.843.3355 fax

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October 2009 Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax exemption amount increased from $2 million to $3.5 million beginning in 2009.1 However, the Illinois estate tax exemption amount remains at $2 million. The fact that the federal estate tax exemption now exceeds the Illinois estate tax exemption has ramifications for estate plans involving married Illinois residents. Under the terms of most traditional estate planning documents for a married Illinois resident, his or her will or revocable (or living) trust contains a formula funding clause under which an amount up to, but not exceeding, the federal exemption amount is placed in a separate trust (the “family trust”) that is included in the taxable estate of the first spouse to die but excluded from the surviving spouse’s taxable estate.2 For a 2009 decedent, the family trust will typically be funded with up to $3.5 million in assets because the trust funding formula is pegged to the federal exemption. Use of a $3.5 million family trust triggers $0 federal estate tax in 2009, but it triggers Illinois estate tax on the difference between the two exemption amounts. The Illinois estate tax due on a $1.5 million taxable estate in 2009 is $209,124. To avoid paying estate tax any earlier than is absolutely necessary, each Illinois couple may modify the funding formula in their wills or revocable (or living) trusts as follows: up to $2 million passes to the family trust and the amount by which the federal exemption exceeds the Illinois exemption passes into a separate trust at death.3 This allows the executor to choose whether to subject the separate trust to estate tax. If avoiding Illinois estate tax is more advantageous than fully funding the family trust, the executor can elect to qualify the trust as a “QTIP trust” and qualify it for the unlimited marital deduction so that no Illinois estate tax is paid at the first death; however, this option “wastes” part of the federal exemption amount. If, on the other hand, the benefit of a larger family trust outweighs the burden of paying Illinois estate tax, then the executor can opt out of QTIP treatment altogether and pay the Illinois estate tax. 1 Presently, the federal estate tax is set to disappear for 2010 only and reappear in 2011 with a $1 million exemption amount unless Congress takes further action. Many commentators believe that Congress will avoid estate tax repeal and extend the 2009 estate tax exemption and tax rate (45%) through 2010 and 2011. 2 Typically, any remaining assets pass outright or in trust to the surviving spouse, and these assets will qualify for the unlimited marital deduction. 3 Typically, any assets in excess of $3.5 million will still pass outright or in trust to the surviving spouse.

On September 8, 2009, Governor Quinn signed into law an amendment to the Illinois Estate and Generation-Skipping Transfer Tax Act,4 which now allows a decedent’s executor to elect QTIP treatment for Illinois estate tax purposes only, but opt out of QTIP treatment for federal estate tax purposes. For many Illinois couples, this gives their executor the ability to elect the best of both worlds – that is, a larger family trust (up to $3.5 million) for federal estate tax purposes and no Illinois estate tax at the first death. Any Illinois estate tax attributable to the $1.5 million spread between the federal and Illinois exemptions is deferred until the surviving spouse’s death. To take advantage of the planning opportunity available under this new legislation, each married Illinois couple may need to update their current estate plan documents and revise their current funding formula. If you have any questions, comments or require any assistance in implementing or updating your comprehensive estate plan, please contact one of the experienced estate planning attorneys at Arnstein & Lehr LLP to assist you.

TAX NOTICE: Pursuant to Internal Revenue Service guidance, be advised that any federal tax advice contained in this written or electronic communication, including any attachments or enclosures, is not intended or written to be used and it cannot be used by any person or entity for the purpose of (i) avoiding any tax penalties that may be imposed by the Internal Revenue Service or any other U.S. Federal taxing authority or agency or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 4 Public Act 96-0789. Although Public Act 96-0789 only applies to decedents dying before December 31, 2009, it is anticipated that the Illinois legislature will extend the state QTIP election provision for as long as the federal estate tax exemption amount exceeds the Illinois estate tax exemption amount.