Taxation & Estate Planning

The QTIP, Part 3

By Joel A. Schoenmeyer

(This is the third and final post in a series. Links: part 1 and part 2.)

As I said at the end of my post in part 2, we have a problem when the federal exemption amount and the Illinois exemption amount are different. That is the case right now, where the federal exemption amount is $3.5 million and the Illinois exemption amount is $2 million. To take the example I referenced (of a $5 million estate):

$3.5 million to family trust (no estate tax on this, ever, because it equals the exemption amount)

$1.5 million to marital trust (no estate tax on this because of marital deduction; will be taxable in surviving spouse's estate)

But if you set up your trusts like this, then you will owe Illinois estate tax, since $3.5 million exceeds the Illinois exclusion amount ($2 million).

The solution? The Illinois QTIP, which was added by Public Act 96-0789, which is here. In a sense, this allows you to bifurcate the Family Trust, so that we have three pots instead of two:

Family Trust #1: Holding $2 million ? free from federal and Illinois estate tax forever

Family Trust #2: Holding $1.5 million ? free from federal estate tax forever; free from Illinois estate tax at the death of the first spouse (but includable in the estate of the second spouse for Illinois estate tax purposes)

Marital Trust: Holding $1.5 million ? free from federal and Illinois estate tax at the death of the first spouse (but includable in the estate of the estate of the second spouse for federal and Illinois estate tax purposes).

Full post as published by Death and Taxes Blog on November 11, 2009 (boomark / email).