Estate taxes are the sums paid to state and federal government when a person dies. They seem to be simple, in concept, but having a clear understanding of how state and federal taxes apply and interact, and how they impact your financial legacy is critical.
An experienced estate planning attorney can help you understand how estate taxes work, as well as what you can do to preserve more of your wealth for your heirs by reducing tax liabilities.
What You Need to Know to Make Your Estate Plan
Your estate consists of assets that you pass down to your heirs upon your death. The federal government (IRS) may collect a portion of your estate if it exceeds a specific dollar amount. The State of Illinois also imposes an estate tax, but at a lower threshold. More estates pay Illinois estate taxes than federal estate taxes.
There are important thresholds to be aware of and terms to understand before you begin making your estate plan.
The federal threshold for estate tax, gift tax, and generation-skipping transfer tax starting Jan. 1, 2026 is $15 million for individuals and $30 million for couples. That means the IRS does not collect the above-mentioned taxes unless the estate’s value surpasses those figures. Estates valued above these thresholds may pay up to 40% in taxes.
The Illinois estate threshold is only $4 million. If an estate is valued at more than $4 million, estate taxes must be paid upon the death of the estate holder.
Terms to know include:
- Portability: When one spouse dies, the survivor may use their unused federal exemption, potentially doubling what is shielded from federal taxation. This is true for federal estate taxes but not for state taxes on Illinois estates. Illinois does not allow portability.
- Gifting: Gifting sums of money to family members, charities, and friends each year reduces the taxable assets. Tax-free gift limits are $19,000 per person, per year.
- Generation-Skipping Transfer Taxes are imposed on money transfers to grandchildren or others more than 37.5 years younger, if they exceed the federal exemption threshold (in 2026 it’s $15 million per individual and $30 million per couple).
- The Cliff Effect: In Illinois, estates valued at or above the $4 million individual threshold pay taxes on the entire estate, not just the portion above the $4 million exemption.
- State filing deadline: If an estate in Illinois exceeds the taxable threshold, a tax return is due within nine months of the person’s death, even if no federal taxes are paid.
Careful planning is called for to protect your assets from excessive taxation. Oftentimes, property value unexpectedly tips the scales, pushing the total Illinois estate valuation above the $4 million threshold. This often results in lower-than-expected payouts to heirs, unexpected tax bills for the estate executor to handle, and, if a family business is involved, a big tax bill can undermine long-term viability.
With the assistance of a professional estate planner, you can shield some of your assets from taxation so that more of your financial legacy is enjoyed by your heirs. Things to consider include:
- Use trusts or lifetime gifts to reduce taxable estate value.
- Evaluate whether gifting or other strategies make sense before death.
- Coordinate federal and state planning to minimize overall tax exposure.
A Coordinated Approach to Estate Planning
A qualified, experienced estate planning professional from Legacy & Life Law Firm can explain the interplay of state and federal taxes as applied to your assets. Knowing how to value an estate and which investment and trust tools will help construct a comprehensive tax avoidance strategy are critical to preserving your financial legacy. Call for a consultation. Your heirs will thank you.