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Federal estate tax to decline in 2004-but not Illinois's estate tax

November 23, 2010
Financial planners are all giving similar advice to affluent clients: Stay alive until Jan. 1. That's because estate taxes-dubbed death taxes by critics-fall sharply next year. In 2004 the amount excluded from the federal estate levy soars to $1.5 million, 50 percent over this year's $1 million exclusion. In other words, the first $1.5 million of an estate would escape taxation. In addition, the estate-tax rate falls above that amount, inching down to 48 percent from the 2003 rate of 49 percent. The increased exclusion and lower rates are followed by more whittling down in coming years. The exclusion stays $1.5 million in 2005. It rises to $2 million in 2006 through 2008. In 2009, it climbs to $3.5 million. In 2010, the federal estate tax is suspended entirely. Also, the top rate on the taxable portion of an estate keeps falling. It slips to 47 percent in 2005, to 46 percent in 2006 and to 45 percent in '07 through '09. In 2010, it is 0 percent. But in 2011, after disappearing for one year, both the exclusion and rates rise from the dead. The exclusion will revert to $1 million, and the largest estates will be hit with a 55 percent rate. Even while the federal estate-tax bite declines between 2004 and 2010, many states will depart from a long-standing practice and break the link between their own estate levies and the federal tax. They don't want their estate-tax revenue to fall as the federal haul declines. "We've gone through a sluggish economic period, in which states have seen their revenues from a variety of sources fall," said Martin Nissenbaum, national director of personal income tax planning for Ernst & Young. "They are desperate for income. And they don't want to give up this source of revenue." States have suffered budget deficits totaling $190 billion the past three years, according to the Center for Budget and Policy Priorities. Eighteen states, including Illinois, have decoupled, as the process is called. Most basically froze their estate tax calculations at what they were before the federal cutbacks were passed in 2001.