Some people refer to estate taxes as death taxes. While it is true that these taxes occur after someone dies, what the government taxes isn’t the act of dying so much as it is the transfer of assets that someone leaves behind to their loved ones.
Once your total possessions have a certain value, they could potentially be subject to both state and federal estate taxes. Without proper estate planning, that could mean the substantial reduction of what you leave behind for the people you love.
You can pay up to 16% of your estate value just in state taxes
Estate taxes aren’t just a negligible tax that only takes a fraction of a percent of your estate’s total value. Instead, estate taxes are significant and progressive. The greater the value of your estate, the higher the total rate of tax you pay.
In Illinois, estates worth $4 million or more are subject to estate taxes. The larger the estate, the higher the tax rate, up to the maximum tax rate of 16%. Careful planning can reduce how much of your estate is actually at risk of taxation.
Those with very large estates may also have to pay federal taxes
If you don’t have to worry about Illinois estate taxes, you probably don’t have to worry about federal estate taxes. The 2020 federal estate tax exemption is $11.58 million.
Like the state tax, the federal estate tax is progressive, which means that the greater the value of the items that make up the estate, the higher the rate of taxation. Unlike Illinois, however, the lowest tax rate isn’t a fraction of a percent. The federal estate tax starts at 18% of the taxable amount and goes up to as much as 40% plus a large, flat amount of the estate.
Substantial holdings like real estate, investment accounts or business ownership could all lead to major tax liabilities for your loved ones if you don’t start planning ahead now. Strategic gifts, trusts and certain kinds of immediate transfers at the time of your death could help reduce the taxable value of your estate.