Successful families want their heirs to share their good fortune. Some financial tools allow families to pass along wealth to generations far in the future, but the size of the estate can trigger significant state and federal taxes.
Rather than losing large sums to taxes, it’s advisable to make a plan with an experienced estate and tax attorney who can recommend ways to keep the inheritance intact.
Understanding and Avoiding Estate Taxes and GSTT
Families typically leave inheritances for their children, but there are options for contributing to the success of future generations too. Called generation skipping trusts, these are financial instruments that provide for grandchildren and others.
Recipients of trusts don’t have to be related to the grantor. In the case of generation skipping trusts, the beneficiary can be anyone who is at least 37.5 years younger than the grantor.
Trusts are taxed both on annual income generated and estate or transfer taxes when the assets are distributed. The IRS imposes an estate tax on individual estates that exceed $13.6 million (2025) or $27.2 million for a couple. Illinois’s threshold for estate taxes is much lower at $4 million. Generation Skipping Transfer Taxes (GSTT), both federal and state, are in addition to estate and gift taxes.
Federal GSTT taxes are the highest levied in the country at 40 percent. The state of Illinois piggybacks on that, but uses different thresholds. The federal 40 percent tax applies to estates above a $13.6 million exemption (for an individual) and Illinois’ GSTT ranges of .8 percent to 16 percent on estates of more than $4 million. These taxes are usually paid by the trust not the recipients.
Proper allocation of your federal GST exemption can ensure that assets in a GST trust pass to grandchildren or great-grandchildren without incurring additional transfer taxes.
Because federal estate taxes are so high, people use a variety of methods to minimize or avoid them. Plan carefully to avoid paying GSTT such as:
- Giving financial gifts each year allows an estate to spend down some of its value. The maximum gift allowed to each family member (and to non-family members too) is $19,000 per year (as of 2025) without the donor or recipient incurring a gift tax. There is a cap on gifts over a lifetime, set at $13.6 million for an individual, or about $27 million for a couple.
- A Credit Shelter Trust, (Bypass Trust), allows a couple to shelter up to the $4 million Illinois exemption value for each person. When the first of the spouses dies, $4 million of their estate enters the trust. The surviving spouse can be supported with payouts from the trust, and when they die, both estates, valued at up to $4 million each, pass to beneficiaries. This way, each spouse shelters $4 million from Illinois estate taxes.
- Creating a GRAT, (Grantor Retained Annuity Trust) allows the grantor to transfer appreciating assets to heirs at a reduced gift-tax cost. During the GRAT’s term, the grantor receives fixed annuity payments, and any growth above the IRS’s assumed interest rate passes to heirs tax-free if the grantor survives the term. Normal Illinois income taxes and federal taxes apply.
Set Up and Manage Trusts With Professional Help
The options available for generation-skipping trusts must dovetail with your existing estate plan for coherence and maximum tax savings. Talk to a professional tax and estate planning attorney at Legacy & Life Law Firm for an accurate interpretation of your current and future tax exposures. You can pass this estate planning wisdom along with the bulk of your assets, and your grandchildren will thank you.