Federal and Illinois Taxes on Asset Transfers

When transferring valuable assets like a home, stocks, or a business, it’s essential to understand the federal and Illinois state tax implications. Both tax systems have specific rules about what taxes may apply, depending on the asset type and the transfer situation. Here’s a breakdown of key points for each asset type.

1. Transferring a House or Real Property

• Federal Estate Tax: The federal government taxes large estates based on the total value of property owned at death. In 2024, estates worth more than $13.61 million may owe estate tax. For homes, this means the property value is added to the gross estate. However, there are strategies, like passing the home to a spouse, to reduce the taxable amount using the “marital deduction.”

• Illinois Estate Tax: Illinois has its own estate tax with a much lower exemption limit than the federal government. For Illinois, estates over $4 million are taxable. This means that even if a property transfer does not trigger a federal estate tax, it might still result in a state estate tax.

• Special Deductions: Both federal and Illinois tax laws provide deductions if the property is passed to a spouse or charity. This reduces the amount subject to estate tax. Illinois does not allow spouses to combine their estate tax exemptions, meaning each individual has their own limit.

2. Transferring Stocks, Bonds and Other Financial Market Investments

• Federal Gift and Estate Tax: Stocks and other investments are subject to gift and estate taxes if their total value exceeds the federal exemption. Giving stocks as gifts during life can reduce estate taxes, but any transfer exceeding $18,000 per recipient in 2024 requires filing a federal gift tax return. Stocks included in the estate get a “step-up in basis,” meaning their value is recalculated at the time of the owner’s death, which may reduce capital gains tax for beneficiaries.

• Illinois Estate Tax: Similar to real property, Illinois estate tax applies if an estate’s value, including investments, exceeds $4 million. Illinois requires lifetime gifts to be added to the estate’s total value to determine the tax owed, meaning high-value stock gifts could still increase Illinois estate taxes.

• Income Tax for Beneficiaries: Generally, inheriting stocks doesn’t trigger immediate income tax for the recipient. However, income generated by the stocks (like dividends) after the stock is transferred is taxable.

3. Transferring Business Ownership

• Federal Estate Tax: Business ownership can be one of the most complex assets to transfer. The value of the business is added to the estate’s total and is subject to federal estate tax if the estate exceeds the exemption. If the business is family-owned, special federal provisions allow the estate to pay the tax over 15 years, easing the burden on heirs who may wish to keep the business running.

• Illinois Estate Tax: Illinois taxes business ownership transfers if the combined estate exceeds $4 million. Business valuation for estate purposes considers factors like market trends and management, making it essential to conduct a formal appraisal.

• Lifetime Gifts and Business Interest: Both federal and Illinois laws allow business owners to gift parts of the business over time. If certain limits are followed, these gifts may not be taxed immediately, and the gradual transfer can reduce the estate’s taxable value.

Ways to Lower Your Estate Taxes

You may not be able to avoid estate taxes entirely, but here are some ways to lower them:

1. Gifting While Alive

• You can give away part of your estate while you’re alive. In 2021, each person can give up to $15,000 per year to anyone without paying gift taxes. Married couples can give up to $30,000 together.

• You can also pay for someone’s school or medical bills directly, and it won’t count toward the yearly limit.

2. Revocable Trusts and Estate Planning 

• Putting your assets in a revocable trust means you no longer own them, so they won’t be taxed as part of your estate. The trust holds the assets and eventually passes them to your beneficiaries.

3. Charitable Donations

• Giving to charity while you’re alive or in your will reduces your estate’s taxable value. Plus, it helps causes you believe in.

4. Life Insurance

• Life insurance payouts are usually tax-free for beneficiaries. It can help them pay estate taxes or replace assets you left to charity.

Key Takeaways

• Estate Taxes Are Based on Total Asset Value: Both federal and Illinois taxes apply to estates that exceed certain value thresholds. Illinois has a lower limit, so state taxes may apply even if there’s no federal tax.

• Minimizing Estate Taxes: One of the most effective methods available to Illinois residents is creating a revocable trust and transferring assets under the trust. Transferring an asset into a trust means it is not included in your taxable estate because the trust owns the asset instead.

Understanding the tax rules for each type of asset is crucial for effective estate planning. Proper planning can help families preserve more of their wealth for future generations. By understanding the tax laws in Illinois and implementing strategies to minimize estate taxes, you can ensure that your loved ones are taken care of and your assets are protected. It’s important to work with an experienced estate planning attorney who can help you navigate the complexities of estate planning and ensure that your wishes are carried out. Contact AGandhi Law today.