For the years 2011 and 2012, Congress has increased the exemption amount for federal estate tax purposes to $5,000,000, however the Illinois estate tax returned this year recognizing an exemption amount of only $2,000,000. Because the goal of estate tax planning for married couples is often to defer any tax liability until the death of the surviving spouse, this disparity requires additional considerations in order to craft the most tax efficient plans for married couples to transfer wealth upon death.

For married couples with modest estates, one option is to fund the credit-shelter portion of the decedent spouse’s estate (the portion of the estate that qualifies for tax-free treatment) with the smallest pecuniary amount that qualifies for both the Federal and Illinois exemption amounts, currently $2,000,000. The remainder of the decedent spouse’s estate could be left outright to the surviving spouse. As the federal law stands today, the unused portion of a married person’s exemption is portable between spouses. That is, provided certain legal formalities are followed, the surviving spouse may claim the unused portion of her spouse’s federal exemption amount in addition to her own federal exemption amount upon her death. The portability feature (and the Federal $5,000,000 exemption amount) is set to expire at the end of 2012, however if the law as it stands today is renewed, a couple can pass up to $10,000,000 to their children without a federal estate tax liability and defer any Illinois Estate tax liability until the death of the surviving spouse. Assuming that after 2012 the Federal law remains unchanged, this method allows the surviving spouse complete unrestricted access to a greater portion of the decedent spouse’s estate.

Another strategy for married couples involves the election of a QTIP (Qualified Terminable Interest Property) for Illinois estate tax purposes. The decedent spouse may fund the credit-shelter portion of his estate with an amount equal to the full Federal exemption amount, currently $5,000,000 and the decedent spouse’s executor may elect QTIP treatment on the decedent spouse’s Illinois Estate Tax Return for Illinois estate tax purposes for the $3,000,000 spread between the Illinois exemption amount and the Federal exemption amount. In effect, the decedent spouse would utilize his entire Federal exemption amount upon his death and defer any liability for Illinois estate taxes until the death of the surviving spouse (the $3,000,000 and any attributed appreciation will be included in the surviving spouse’s estate upon her death for Illinois estate tax purposes). The state of Illinois has adopted the Internal Revenue Code’s definition of a QTIP and the part of the credit shelter portion the executor elects should conform to that definition. In short, the surviving spouse must be paid all income from the property at least annually, and no one other than the surviving spouse may be entitled to any part of the property. This method allows for the decedent spouse to take full advantage of both the Federal and Illinois state exemption amounts at his death.