It’s common for Illinois families to preserve the family home or other real estate assets as their legacy. But passing property to heirs can be a major pitfall for estate planning.
An experienced estate planning attorney can help you avoid common mistakes that can result in your family paying higher-than-necessary taxes on their inheritances.
7 Common Errors to Avoid in Estate Planning
Trying to preserve the family home for a new generation to inhabit often triggers errors in estate planning, as specific procedures and tools must be used. It’s key to have an estate planning professional assess and design a complete plan that considers best use of the tools available. According to experts, these are some of the things to avoid:
1. Misunderstanding the Step-Up in Basis
The benefit of inheriting real estate is amplified when the “step-up in basis” is applied. That means the cost basis of the property, which is what the original owner paid for it, is “stepped up” to fair market value as an inherited asset. If the heirs sell soon after inheriting the property they avoid most or all capital gains taxes.
However, the property must be included in the taxable estate appropriately to take advantage of this potential benefit. Special attention must be paid to properly titling the asset and the structure of the trust. A simple mistake can result in much higher taxes when the property is sold by the heirs.
2. Incomplete Transfer of Property into Trusts
Trusts are a common estate planning tool, but too many property owners fail to complete a crucial step: moving the title of their real property into the trust. This requires recording a new deed with the county recorder change ownership on the title. If this step is missed, the property may be probated, which is a much longer process that can include higher administrative fees along with potential public scrutiny.
3. Disregarding Illinois’s High Estate Tax
If you focus completely on federal tax burdens it’s easy to overlook Illinois’ estate tax. The $4 million individual exemption allowed by Illinois is also not “portable” between spouses as federal exemptions are. That means if one spouse dies, the other cannot claim the unused portion of the deceased’s exemption.
4. Not Claiming Federal Portability
The current federal estate exemption is $13.99 million per individual, but if one spouse dies, the survivor can claim any unused portion of their exemption. Failing to claim this tax exemption, or making errors in doing so, can cost a family significantly.
5. Misunderstanding Asset Appreciation
Lifetime trusts or gifting are two ways to avoid huge estate taxes, but people commonly misunderstand how quickly real estate appreciates. Failing to account for high appreciation and future growth can lead to significant and unexpected tax burdens for heirs.
6. Not Planning for Liquidity
Inheriting property costs money in taxes, maintenance, insurance fees, and more, which is easily overlooked by grantors of estates. That’s why estate plans should provide some liquidity to help heirs. Estate taxes and other costs that accompany inheriting real estate can prompt heirs to sell at a discount to avoid prolonged financial pain. This can be avoided by providing a life insurance policy or cash equivalent assets in trusts.
7. Skipping Regular Updates
Buying or selling property, taking advantage of beneficial tax laws, and memorializing changes in family all require reviewing and updating your estate plan. Periodic reviews should catch issues like mis-titled property, newly inherited accounts, or newly acquired assets that are not captured in the original plan, or the future care of additions to the family. Failing to keep trusts and other documents updated can expose portions of your estate to higher taxes and probate proceedings.
Work With an Illinois Professional for Best Results
Knowledge of Illinois estate planning laws is key to preserving the value of your estate for your heirs. Planning through Legacy & Life Law Firm can be your safeguard against common missteps that cost your estate and shortchange your heirs. Call for a consultation today to discuss your unique estate planning needs.