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There is a federal tax on estates and gifts. Some states also have taxes. Before 2003 Illinois taxed estates only if there was a federal tax. The Illinois tax was the amount of the federal credit for state taxes so there was no increase over the federal tax without a state tax. However, the federal tax credit for state taxes is being lowered so Illinois now imposes an estate tax in the amount the federal credit used to be. The federal tax is a single tax on all transfers either during life (gifts) or at death. It is progressive and starts at 18% on the first $10,000 of transfers and goes up to 50% after transfers exceed $2.5 million. It is cumulative so each gift adds to the amount to be taxed. Give a non-exempt gift of up to $10,000 this year and the tax is 18%. Give a non-exempt gift of $10,000 next year and you are in the $10,000 - $20,000 bracket where the tax is 20%. If you then die with a taxable estate of $1,000,000 the top tax rate is 41% because now you are in the bracket applicable to $1,020,000. Or to put it another way - if you give away $1 million of taxable gifts during life and die with a taxable estate of $1 million your remaining $1 million is subject to the marginal tax rate for $2 million estates.
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Chicago Estate
Planning Attorney Donald M. Thompson
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