- Marital Trust Allocation Formulas Should Be Updated Now in Illinois and Minnesota
- December 13, 2013
- Law Firm: Hinshaw Culbertson LLP - Chicago Office
Because the federal estate tax tax-free amount exceeds the Illinois and Minnesota estate tax exemption amounts, the decoupling of Illinois and Minnesota estate taxes from the federal estate tax has created significant complexities in the estate plans of married couples residing in those states.
Historically, married couples in Illinois used A/B trust provisions to ensure that no estate taxes would be due on the death of the first spouse. A credit shelter trust (i.e., the “B” trust) would receive the federal tax-free amount (i.e., the basic exclusion amount in today’s nomenclature) and a marital trust (i.e., the “A” trust) would receive the balance. Power of appointment marital trusts were often used in first marriage situations. Wills or trusts that still use these traditional approaches may need to be updated because there may be unintended Illinois and Minnesota estate tax consequences upon the death of the first spouse and/or the second spouse.
Beginning in 2013, the historical approach to allocating value between a credit shelter trust and a marital trust based solely on the federal estate tax tax-free amount may cause unnecessary Illinois estate taxes upon the death of a second spouse whenever the combined family assets (including life insurance) exceed $4 million. The same is true in Minnesota whenever the combined family assets (including life insurance) exceed $1 million.
Because Illinois allows an “Illinois-only” marital deduction for QTIP (qualified terminable interest property) marital trusts, the discord caused by the difference between the federal estate tax tax-free amount and the Illinois exemption amount can emitigated. However, the executor or trustee must timely make the necessary special election on the Illinois estate tax return. Note that Illinois only allows a marital deduction for QTIP marital trusts, not power of appointment marital trusts. Therefore, no “Illinois-only” QTIP election is available for a power of appointment marital trust. This may result in the unnecessary imposition of Illinois estate taxes in some circumstances unless the operative will or trust instrument is updated to address the Illinois tax law changes.
Minnesota does not have a “Minnesota-only” QTIP deduction, so planning for state estate taxes in Minnesota is particularly difficult. Fortunately, the federal estate tax portability provisions will help mitigate this issue significantly in most estates.