How Gifts Affect Estate Tax in Illinois
Gifts have approximately the same effect on the Illinois estate tax as they do on the federal estate tax. If you take as your rule of thumb that one dollar of gift over the annual exclusion amount (and for this purpose Illinois looks to the federal annual exclusion amounts) uses up one dollar of your Illinois estate tax exemption, you will not be too far off. In fact, one dollar of gift over the annual exclusion may use up less than a dollar of the Illinois exemption. The relation (between the amount of gift over the exclusion and the amount of exemption that is used up) is not linear, and a careful description of the relation goes beyond the bounds of the present discussion.
Here are some examples: The Illinois estate tax exemption in 2016 is $4,000,000. If I die in 2016 with property worth $4,000,000 and having made no gifts during my lifetime above the annual exclusion amount, I would owe no estate tax. If I die in 2016 with property worth zero, but having made $4,000,000 of gifts over the annual exclusion amounts during my lifetime (to take the extreme case in which I have given away all my property), I would owe no estate tax. (The rule of thumb is working.) Now imagine that I die in 2016 with property worth $5,000,000. I would owe Illinois estate tax of $285,714. If instead I die with property worth zero but having made $5,000,000 of gifts, I would owe no Illinois estate tax (instead of what the rule of thumb suggests, that I would owe $285,714). So for Illinois estate tax purposes reducing the amount of your tax estate by giving lifetime gifts can lead to tax savings.
The moral of this story is that when your level of assets plus significant lifetime gifts starts getting anywhere near the estate tax exemption amount using the rule of thumb, you should see a lawyer and do some estate planning—unless you are comfortable with your assets going to the taxing authorities rather than to your family and friends.